Founding Partner, CEO & Head of Wealth Planning
By: Neale Ellis, CFA
Founding Partner, Co-Chief Investment Officer
Generational wealth starts with the person(s) who created the wealth. When strategic estate planning and investment decisions are made together and in concert, there is a greater chance that this generational wealth can blossom well into the future—think generation four and beyond. Of course, nothing can ever go perfectly to plan or be planned to perfection.
With the generation that created the wealth, estate planning and investment questions are more straightforward and there are fewer people to consult (or consider). Starting at the third generation, family dynamics are at play and there are more cooks in the kitchen—different values, different family constructs, different needs, and different objectives. The investment and planning decisions change as the family’s needs and demographics change.
A popular investing question is whether generational wealth should be pooled or kept separately. We discuss what we’ve encountered in our decades helping these families and what you should consider in the following Q&A on how to manage generational wealth.
Responses from an interview with Rick Simonetti, CEO and Head of Wealth Planning (and a former CPA), and Neale Ellis, CFA, Co-Chief Investment Officer.
Is generational wealth typically pooled or kept separate? Which is more popular?
Neale Ellis: It really covers the continuum. We’ve seen the assets be very segmented, then on the other side, we’ve seen where everything is pooled. Both instances are on the fringe. You tend to see a mixture of the two to account for family growth and other factors.How do you manage generational wealth? How does managing generational wealth need to evolve over time?
Rick Simonetti: It’s typically not difficult to coordinate and manage investments early on in the creation of the wealth. As you get to generation three and four, the investment landscape has likely changed massively. Just think about what is available today versus what was available 20 years ago— private markets, the number of public companies, Bitcoin.You have to create a set up that allows for changes in governance, which is easy in the early days of this wealth but harder as it goes on. You end up with very disparate needs later when there are 50-60 people benefiting. Some have kids, others do not. In short, needs differ. The structure needs to accommodate the variety of needs to sustain the wealth over generations.
Neale Ellis: If you think about preserving wealth for generations, it means we want everyone from all future generations to have the ability to access a certain level of wealth and maintain it at a constant level.
Not only does the wealth need to beat inflation and spending, but it also needs to cover the population growth component. It’s not that the investing needs to be very aggressive, but there needs to be a different income stream. If the goal is to have the wealth in perpetuity, population growth is a meaningful hurdle and the investment objectives have to reflect that.
There is also a bit of an agency problem early on. There are family members of the same mindset early on, very close to the entity that created the wealth. As you get into later generations, there are different ways of doing things and different family styles. The goal is to maintain wealth and pass it on for people to have the agency to do with it as they wish. It’s a social issue but very important to address.
Managing generational wealth is harder at the fourth and fifth generations. Do you think family offices adjust their investments enough?
Rick Simonetti: I think the tendency early on is to defer to the creator of the wealth. Unless there is a decision to divert the decision making, things tend to stay the same.Neale Ellis: In many cases, we are dealing with the founders of the wealth and respecting their decision, which drives the process, to Rick’s point. We’re helping them envision what happens in the future when they aren’t here and that demands strong consideration.
Some family offices try to be more institutional about it—there’s thought about governance and following the governance. If governance isn’t followed, it’s very easy to have constraints on how family offices think about the investments. The short answer is that investment advisors think it is important to review investments very frequently to be proactive and stay on point.
‘Family office’ is a really popular term in wealth management today. What is a family office? How do people know what to look for?
Neale Ellis: The ‘family office’ term is overused and somewhat of a marketing tool today. Wealth managers use it to mean many different things. For example, some family offices only have an accountant and outsource the other components. This makes it difficult to know whether you’re actually talking to a family office. The people who use the term are mainly operating in an advisory role.In order to provide true family office service, you need niche tax, planning and investment experience that gets brought together in an integrated way. All of these arms inform the others. It has to be very integrated, it isn’t a one-off.
If you’re talking about a family office that is going to handle everything, you start talking about a very expensive proposition, unless you are a multi-billion family office.
Rick Simonetti: The starting point is asking, “Do we need a family office?” There is introspection required to say, are you ready to manage everything as a family office? Might it make more sense to find somewhere that has built the structure? We know what it takes because we did this, we built a successful multi-family office structure. There’s a lot more to it than people think. That’s why there is a trend of families with meaningful wealth moving to multi-family offices.
What are the pros and cons of pooling assets to invest?
Neale Ellis: Pooling assets creates more efficiency than splitting them out. You have better access and can make larger blocks of investments with reduced fees. In the multi-family pool, you can democratize the investment. Four generations in, these individuals with disparate asset sizes can right-size their investment and participate as a family unit without needing to front the capital necessary if going alone.The cons are loss of some agency and control, the fact that you have differing viewpoints creates social issues. If you have everything pooled together, that is more of an issue.
Rick Simonetti: The other thing that pooling allows is access to investments one might not have if they don’t have the required minimum asset level. This is what is driving the trend around single-family offices and people moving to multi-family offices. The former isn’t as efficient.
For example, a $100 million asset split into two $50 million pools doubles the administrative burden. Those two units require two separate governances and investment structures, and that is inefficient, especially when the investments in those structures are harder to manage, like private markets. You benefit from pooling assets that are difficult to manage. The main consideration is whether everyone’s needs are met in that way. It creates complexity with tax structure too.
Neale Ellis: Part of this is that the single-family office becomes less efficient the further away you get from the initial wealth. Having the pooled assets or entity of size that you can deploy at the single-family office or multi-family office level is very useful from a planning perspective broadly, in terms of optimizing taxes for the family.
When would it make sense to keep assets separate?
Rick Simonetti: This isn’t the norm, but it is possible that pooling is forced. There could be a direct and large investment where, until that investment goes away, there is forced pooling—it isn’t possible for the assets to be separate. A great example is a professional sports team. You can’t just dispose of that. Other examples are a family plane or family real estate across the globe. Four generations down, these are substantially pooled assets.Neale Ellis: I think whether assets stay separate is more socially driven. For example, you are in the third generation, you’re wealthy and grateful but don’t want to ask for money whenever you need it, or you want to pursue different interests.
I think a lot of it comes down to agency. Let’s say there’s this family with two branches—one side is artistic and the other is very business oriented. You can see how, over time, that will create very different interests in how assets should be invested or how the funds should be used.
Rick Simonetti: Part of the governance that needs to be in place is how to deal with conflict. How do you work through those disagreements? Sometimes working through these issues causes separation.
Let’s dig into that. Families have issues, how can governance help?
Rick Simonetti: The main drivers of family dynamics issues are lack of communication, lack of similar vision, lack of preparation for heirs to take over. Ongoing interaction at the family level that opens a venue for free-flowing communication and trust to be built is critical.We’ve seen some scenarios where families are creating pools of money to fund ongoing family meetings. There is money set aside so there is no financial excuse not to attend. The challenge you face is you’re in a position where you may have decades of inequity—think about blended families and step kids—where coming to the table pre-conflict isn’t possible, but you have to come to the table to address it.
How often should the investment structure be reviewed? Should it be put into the governance?
Neale Ellis: I think ‘investment structure’ is a broad term. If ‘investment structure’ is how much of the assets should be handled in a pool with a group of family office people making decisions over other people, that should be a point of discussion every time you get together, several times a year.In terms of the asset structure’s risk tolerance and other considerations, that should be a table discussion multiple times a year. It is easy to come up with a view, but goals and circumstances change. Discussions should be reasonably frequent so nothing becomes a problem that wouldn’t be if you were proactive.
Rick Simonetti: Said another way, the investment structure should absolutely not be reviewed on an ad hoc basis. That means it comes up when there is a problem. You need to let other generations step into roles that they may want to, explaining why certain things are in place today, etc.
