Morgan Stanley
  • Wealth Management
  • Apr 7, 2016

A New Paradigm for Family Wealth Planning

Ultra-high-net-worth families are using increasingly democratic decision-making structures—and finding improved family relationships.

For some ultra-high-net-worth families, the idea of stewarding the family’s wealth by committee was unheard of two generations ago when decisions were largely made by autocratic family elders.

Now, a new report, Family Decision-Making: North American Family Wealth, suggests that today's ultra-high-net-worth (UHNW) families (those whose wealth exceeds $25MM) are using increasingly democratic decision-making structures—and finding that this formality is actually a positive catalyst for family relationships.

This report from Morgan Stanley Private Wealth Management, in partnership with Campden Wealth Research, surveyed 59 individuals from UHNW families to examine how UHNW families make financial decisions as well as the effect these processes had on family relationships. Forty-four percent of respondents said decision-making about family wealth had a positive impact on their familial relationship. Only 16% said it had some negative impact and 3% said it had a strong negative impact.

A well-organized, democratic decision-making process, it seems, may actually help boost family harmony.

How Families Make Decisions

"We weren't set up for compromise. [For] my father's generation, the golden rule was 'He who makes the gold, rules,'" writes one third-generation member of an UHNW family. But when this survey respondent’s parents died, chaos ruled. Some of the family wanted to keep the money together, but without a figurehead or a history of group decision-making, family members with "incredibly different goals" found themselves mired in conflict.

Eventually, with the help of a professional facilitator, the family set up an office that managed both collective and individual assets, and established a voting system. The family now reports they are generally able to come to consensus-driven decisions.

The report shows that many families are now addressing unique multigenerational challenges in new ways, including investment-policy and mission statements; organizing committees that meet regularly to make both family and financial decisions; consulting professional advisors; and sometimes hiring outside CEOs to run the family office.

An Evolution for Family Decision-Making

David Bokman, Head of Ultra-High Net Worth Resources for Morgan Stanley, has watched this evolution toward formalized decision-making with approval and says it's worth the effort to overcome any initial resistance from family members.

"Formality is often awkward to implement because family relationship issues are often unstated and difficult to acknowledge. Yet formality maximizes the opportunity for success by improving conversations both within the family and between the family and its financial advisors," says Bokman.

One of the most common ways families are formalizing decision-making is to create a family mission statement, which lays out goals and values. Two thirds of UHNW families either have a mission statement or plan to create one. Another popular avenue is an investment policy statement (IPS)—a document laying out parameters such as a family's investment goals and how much risk they are willing to accept. Just over half of families surveyed either have an IPS or plan to create one, and the majority (53%) consult an external advisor when they do so.

When it comes to decision-making structure, the family committee is popular, with nearly six in 10 families using such a group to make decisions about family governance. Family committees are also the most common way to plan philanthropy and family wealth education. The latter, Bokman says, is an area where many UHNW families need to make sure the next generation is ready to take up the mantle.

Family committees can also make financial decisions, such as determining asset allocation or investing in a specific opportunity, but those calls are more likely to be made by professional advisors or a CEO, who may or may not be a family member.

The Family Wealth Advisor Role

The report also found that the single biggest influence on an UHNW family's financial decision-making is the professional advisor. Nine out of 10 families said their Financial Advisor had significant influence in family wealth decisions.

Survey respondents reported that a professional financial advisor was used in 41% of cases for overall asset allocation, and a family advisor or family office executive in 38%. These same non-family members also helped make decisions about specific opportunities in 44% and 35% of cases respectively, and to divest in vehicles or companies 41% each of the time.

Recruiting an outsider to help steer the ship is wise since some UHNW families can fall victim to the same cognitive biases that plague other investors. For example, the study uncovered a common optimism bias, the feeling that one is at less risk of suffering bad outcomes than others. While nearly half of the respondents expect the overall investment climate and global economy to get worse in the year to come, eight out of 10 expected their own household portfolios to improve or stay the same.

Bokman expects this new report will help families and their advisors get the ball rolling on the two-way discussions necessary to preserve intergenerational wealth and harmony.

"Our hope is that the findings in the report provide perspective, contributing to family discussions on setting goals and creating strategies to achieve financial, social and philanthropic ambitions for ultra high net worth families.”

For more information on how a Morgan Stanley Private Wealth Advisor can tailor a wealth management approach that considers all of your family's goals, contact a Private Wealth Advisor today and start the conversation.