Is Family Governance Necessary for High Net Worth Families?
4 factors that wealth managers and estate advisors should consider for their clients
Estimated read time: 4 mins
Family governance, in its simplest form, is a structured process for making decisions together as a family. It provides a forum for families to discuss strategic issues like succession planning, financial choices, risks, and more. Governance can be formal, with organized meetings and documents like a family constitution, or informal with casual meetings or a phone call. However, formal family governance is not necessary for every family. We’ve outlined four factors to consider before suggesting formal family governance to your clients.
Size of the family
Start by identifying who’s in the family. How many family members are actively involved in decision-making? If it’s a small number, like a family of 5, their decision-making process may not need formal structure. If the family is larger and involves distant relatives, cousins, and spouses, it can be more difficult to get everyone on the same page. For these larger families, more formal governance may be needed to achieve alignment and efficient decision-making. However, it’s important to note that each family works differently. For example, some of our client families function as an autocracy where the patriarch or matriarch of the family is in control and makes all of the decisions. This strategy works well for some families and they may have no appetite for change at the present time, so developing formal governance wouldn’t be of interest to them and may actually trigger conflict. For others, especially those anticipating a general transition, there may be a need or desire to get input from a broader range of family members. In this case, setting up a process to discuss and make upcoming decisions may be desired on an ‘as needed’ basis. As mentioned earlier, family governance is not wanted and/or needed in all families and should only be suggested when there is a clear current or future benefit.
Complexity of shared assets
Families with complex shared assets can benefit from a more organized decision-making process. This complexity not only refers to the level of wealth in the family, but also how their assets are structured. For example, assets become complex when there are several people listed as beneficiaries of the same trusts, or if illiquid real estate or business shares are involved. Imagine, for example, a shared trust where some beneficiaries rely on distributions to fund their lifestyle while others earn enough income to pay their expenses and want income reinvested for growth. For families with a high level of complexity, more structured meetings may be necessary for decision-making.
Relationship structures and family history
Family dynamics and the family’s relationship structure is telling of whether or not family governance is beneficial. If they are a close, tight-knit family with a deep concern for each other, decision-making may be simple and straightforward. These family members typically are willing to compromise or commit to change for the sake of the family. If, on the other hand, there are long-standing disputes or competition among siblings or branches, they may not be able to simply make decisions without fighting for their individual interests. For families that are connected only by assets and are not close, a formal structure for their decision-making may be useful.
Where are they going?
Just as the family history and current relationships are important to consider, so is the family’s future. Is there an upcoming liquidity event? Is the family planning to sell where they’ll need to adjust their thinking towards shared wealth instead of a business? Understanding a family’s current situation and what their future plans are is important in deciding whether or not formal family governance is something they could benefit from.
How We Can Help
Continuity works with advisors regarding family governance in a number of ways. Firstly, we can evaluate and assess whether or not your client would benefit from formal family governance, taking these four factors into account.
In addition to assessments, we offer the resources and training needed for advisors to understand what family governance is and when and how it should be implemented. These trainings teach advisors how to talk about family governance with their clients, how they can better help their clients navigate complex decision-making, how they can educate the next generation about family governance, and how client families can integrate wealth into their lives successfully through generations.
Additionally, we understand that advisors may be looking for resources to deliver this education and training to their clients. In this case, we can work directly with your client families to customize the proper training and information necessary to accomplish their goals.