Business

Families still avoid governance structures, says Julius Baer

Ultra-high net worth families are failing to develop governance structures appropriate to the 21stCentury, according to Julius Baer, the Swiss private bank.

Its newly-published Family Barometer survey has collected the views of 800 wealth advisers. They say their clients want to live, and work, in multiple locations, take advantage of modern healthcare, send children to the best schools and invest effectively. 

I was talking to a client for 15 years. They did not change. Then, at a certain stage, they said we should do something. We spent five years working on it. And now it works

According to Baer: “The best way to counter this growing complexity is with a clear framework for how the family operates. Yet our experts say they only see this type of formalised governing body in roughly one out of ten families.

“In every second family, decisions are being made by just one person. The overwhelming majority of specialists primarily engage with the patriarch or matriarch. A family that is united behind a common goal is more likely to enjoy greater success and happiness than one without.”

The lack of unity reflects the reluctance of wealth creators to lose control of the assets they generated. But future generations can argue in favour of firm governance because of the potential size of their inheritance. A rival provider said: “Even if it is impossible for both sides to agree, they need to understand each other’s position.”

Guy Simonius, Baer’s global head of family office services, says governance structures frequently evolve out of meetings between family members, twice a year. 

“I’ve seen shareholder-type agreements. Or families jointly deciding to use a charity. You get a range of structures. 

“What’s important is that you understand what you organise, and how to make decisions so you can decide on elements you should enhance, or outsource.”

Formal governance can develop out of the conversations, but everything takes time: “I was talking to a client for 15 years. They did not change. Then, at a certain stage, they said we should do something. We spent five years working on it. And now it works.” Another adviser agreed that time scales were long, pointing she often found it hard to get decisions out a principal, even by email.

Marc Sharpe of US-based networking forum TFOA says new families are well advised to manage their affairs by putting a smart generalist in charge rather than specialists. Private banking veteran Michael Maslinski, who used to work for Stonehage Fleming, liked to argue there was never a shortage of experts in his sector, but a distinct shortage of generalists.

Advisers watching some of their clients’ struggle with Excel spreadsheets and antiquated trust structures say change can’t happen soon enough. 

One said: “I have come across several difficult situations, including the transfer of money between trusts, which have been hushed up because it’s all so embarrassing.”

This, on its own, provides an excellent reason for wealthy investors to improve their governance. But families also need to raise their game to deal with the disruption to society and investment which is at the heart of their decision to invest in tech-driven VC. 

One issue causing pause for thought relates to the pandemic which has left health has become the top subject for discussion for 19% of clients in Baer’s survey of advisers. Related issues include the extreme old age of many family founders and breakthroughs in life science.

Specialist treatments are not spread evenly across the world and flights from one country continue to be disrupted.  This makes the location, and availability, of healthcare an issue relating to the location of a family office. Decisions by families on where to send children to school are another headache. By locating themselves in the wrong place parents will find it hard to visit them.

Baer concludes: “Family governance is key to ensuring the happiness of families. As the focus shifts towards protection, preservation and preparedness in the wake of the health crisis, we expect to see interest in family governance grow.”

Sustainable investment has also grown in importance, as new generations express doubt – even shame – over the way their families have made money. Their interest in business has hit a 30-year low according to Simonius. Instead, they want to engage in a broad range of ESG opportunities. 

A UK survey by advisers Hargreaves Lansdown found 44% of 18-34-year-olds put corporate responsibility ahead of profits, against 27% of those aged 55-plus.

According to Baer, sustainability has risen up the agenda faster than any other topic for discussion over five years: “There will be potential conflict here, as the views by each generation might be widely divergent.” 

Simonius believes family governance can provide a forum to discuss green issues: “To produce a discussion – to encourage a family journey.”

Private assets have also moved up the agenda, as family offices have ploughed money into ventures which have surged during years of low interest rates. 

As unquoted investments, they do not throw up unwelcome price movements. But this also means that investors find less reason to concentrate on the issues which lie behind their performance. According to one adviser: “I’ve come across family offices talking about returns of 40%. But that’s only based on prices paid during funding rounds. I’ll be interested to see whether their exit values hold up.” 

Austrian entrepreneur Octavian Pilati saw his multi-generational family office hit problems in 2015 and he had to get involved to nurse it through a setback.

Pilati learned from his experience.  He likes to warn of the Dunning-Kruger effect which shows that individuals knowing little about a situation are incredibly sanguine about its future. But the more you learn about the situation the less confident you become until, eventually, you learn enough to move forward – or come to terms with your loss. 

This is in line with research by Israeli psychologist Daniel Kahneman, which shows that we are only too happy to put out faith in snap judgements unless we are presented with reasons to consider issues more deeply. This further alludes to the importance of formal governance, where individuals are charged with the responsibility of organising things correctly, as opposed to making more money. 

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