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Crucial among these many challenges must be the notion that helping a family manage its wealth is much more than helping manage its financial assets. This misguided conception of the classical wealth management relationship is illustrated in Figure 1.1.

Figure 1.1 A Misguided Depiction of Family Wealth Management

This first chapter discusses the fundamental truth that family wealth management is broader than simple asset management and the difficulties this injects into the management process. Our point here is not to be comprehensive about these difficulties, as they alone could be the topic of another book. Rather, we mean first to take inventory and second to introduce a few of the alternative approaches which we have seen at work over the last twenty years or so. The serious student of these challenges should dig further.

Multiple Sources of Capital

At some elementary level, it is not hard to understand intuitively that there is more to any family than its bank or brokerage account. After all, if this is so obviously true for the average family, why would it be any different when the only change one makes from the average is to assume that the family is financially wealthy? No family can be simply reduced to its financial assets; if that were the case, why would it have occurred to anyone to create the phrase “from shirtsleeves to shirtsleeves in three generations?”6 Money certainly is a part of what a wealthy family is, but it is only a part, and hopefully not the most important.7

Lisa Gray coined the phrase “authentic assets”8 to refer to the many different sources of wealth that exist within a family; her crucial point is to warn us that financial assets are only a part of the management challenge faced by the wealthy and their families. At a minimum, let's consider just a few: clearly, the wealthy do have financial assets. But human, intellectual, social, emotional, philanthropic, and artistic dimensions cannot be ignored; and there are others. Each has its own definition, which can be generally accepted or hotly debated and many have been studied in the halls of academe for quite a while. Whether a family is indeed financially wealthy or not, it is still a grouping of related individuals who exist within a broader social context. Maximizing their financial wealth is rarely enough for all members of the family to feel duly fulfilled. In many ways, certain families have even adopted a mental framework that is well worth considering: financial wealth is an enabler in that it facilitates family members to seek overall, complete fulfillment, while less wealthy individuals often cannot focus on much more than making financial ends meet.

Expanding on the Corporate Analogy

There is even more to the wealth management challenge than the fact that there are various sources or definitions of capital. Families must deal with a variety of issues that are common across the whole wealth spectrum, although financial wealth or social prominence tend to magnify them somewhat. They must pay taxes on their income and need to meet their ongoing expenses. They must pay transfer taxes when some of the wealth passes from one generation to the next or simply from one individual to another. They must comply with rules and regulations, whether in the management of financial assets or otherwise. They often have important philanthropic intensions that require planning and executing. Last, but not least, they must manage a wide range of risks for which insurance exists in certain cases and not in others, and which wealth can exacerbate, for instance with respect to reputation risk!

Figures 1.2 and 1.3 help put this notion in the proper perspective by drawing on the comparison once suggested by Charlotte Beyer, whom we already met in the Preface. The first step in our logic is to illustrate the broad management problem facing the chief executive officer (CEO) of any corporation. Figure 1.2 provides a graphical depiction of the issue. It is mighty hard to think of the successful CEO of a successful company who only focused on a single dimension of his or her job: the business world is littered with failed companies where the CEO only had time for research, engineering, finance, or marketing – to pick four areas at random. While not a totally inescapable proof, as there must be an exception to any rule, this helps set the simple proposition that a corporation is a complex assemblage of multiple functions and that the person at the top of the ladder must understand both how each of these functions operates individually and how they all work and come together to create the business of the whole firm for which he or she is responsible.

Figure 1.2 The Multiple Dimensions of Corporate Management

Figure 1.3 The Multiple Dimensions of Family Wealth Management

Now, let's apply the same analytical framework to a family, assuming that a family is no different than a corporation. Making this assumption requires us to leave aside a number of important considerations, but the case can simply be made that these are not crucial to our point here. Let's imagine the head of the family as the CEO of his or her family's wealth, a company Charlotte Beyer calls My Wealth, Inc. Just as was the case for a corporation, there are multiple dimensions and the successful high net worth individual must first realize the multiplicity of these dimensions, and, second, be able to deal with all of them. Figure 1.3 illustrates this point and recalls a number of the dimensions we mentioned in the introduction for this chapter.

Just as it would be silly for a corporate CEO to focus on a single aspect of the business, it is equally misguided for an individual to consider just one aspect of the wealth management challenge. And yet, the traditional approach would be exactly that. For years, the industry had us and many of our clients believe that their focus should be solely on managing their financial wealth, their financial assets. This may have made sense when financial wealth was primarily inherited and in the form of stand-alone trust structures; but it certainly no longer applies when these financial assets were created by the current senior or immediately preceding generation.

Multiple Interactions 9

Now, if the challenge was simply to recognize that the problem is more complex and has more dimensions than initially thought, there would be little need to make dramatic change. Yet, just as is the case in a corporation, all these various “divisions” within the family structure do not exist in isolation. They have both their own issues that have to be addressed directly and a variety of tentacles that extend toward and into other dimensions. This is what makes it impractical for any service provider to the wealthy to argue that he or she can serve the family by simply focusing on a single aspect. I vividly remember the time when we first introduced the concept of tax-aware investment management to J.P. Morgan's clients: I could be my own wealthy client if I had a penny for each time I heard people tell me that “the tax tail should not wag the return dog.” Most individuals who were raised in a world where taxes did not matter simply could not understand that there was a need to change the traditional investment process if one was going to focus on maximizing after-tax returns or terminal after-tax wealth at some future point in time.