We live in a VUCA world – volatile, uncertain, complex, and ambiguous. What lessons have been learned during the 2020s to help owning families grow wealth for current and future generations amidst the turbulence ahead? The 2020s are forecast to be a highly turbulent decade. They wasted no time in gaining this reputation, ushering in one of the greatest global shocks in generations, Covid-19. The pandemic and its ripple effects – as well as political upheavals, economic shocks, and climate disasters – have been a litmus test of enterprising families’ ability to financially endure unforeseen disruptions.
Many family enterprises stumbled and lost ground during the pandemic, wiping out years of profitable growth and reducing their capital strength. Adapting to fast- and ever-changing conditions, surviving setbacks, and seizing opportunities have been major challenges for enterprising families.
Still, some families grew their financial wealth and shored up new opportunities for the future growth of their family enterprise. They were prepared for disruption without knowing in what form it would emerge, and they acted swiftly and strategically. What can we learn from them?
Wealth Strategies for Turbulent Times
The Covid-19 pandemic is one example of the many interconnected forces disrupting the world today (eg, environmental, technological, globalization, and socio-politico-economic). They are dramatically changing the economic landscape for business families around the world, and the pace of change is accelerating.
With continued instability ahead, families need a playbook to weather future shocks and position themselves to be strong and flourish. Multigenerational families who play the long game know that large and small setbacks are inevitable and get ready for them. But the turbulence in our current era will occur at a velocity that even the most experienced families are unpracticed at withstanding.
The new playbook for family wealth takes a total family wealth perspective and offers a three-part formula for managing wealth in turbulent times. Putting these strategies in place will be a key determinant of families’ ability to regenerate their wealth and success for decades to come.
A total family wealth perspective A critical first step is for owners to view their wealth from the right vantage point. Two key changes in perspective will be required: gaining altitude to comprehensively view – as a portfolio – all of your family’s wealth; and understanding how wealth travels through your family enterprise.
Your Total Family Wealth Portfolio
Family wealth can refer to many different kinds of value, viewed and managed as a portfolio of assets that collectively, make up your total family wealth. A family’s values, culture, talent, and reputation are at the heart of its wealth portfolio, anchoring and driving the family’s pursuit of wealth for current and future generations. The family’s total wealth encompasses its entire portfolio of assets, including intangible assets (eg, know-how) and economic wealth.
Your family’s economic wealth includes all of your jointly-owned financial assets, which can be divided into five broad categories:
- Operating businesses and investments, such as legacy businesses, other operating companies, direct investing, and intellectual property;
- Liquid assets and investments, including cash, investment portfolio, funds and hedge funds, and alternatives (eg, crypto);
- Real estate investments, including commercial, retail, and residential real estate, as well as investments in land;
- Socially responsible investments, such as impact investing, social ventures, and strategic philanthropy; and
- Tangible family assets include homes, aircraft, lifestyle investments, heirlooms, art, and collectibles.
Traditionally, families have focused on growing and transferring their operating business(es) to the next generation while accumulating financial assets on the side from profits generated by the business. Often, the family takes a strong, visible leadership role on the business side while taking a passive role on the financial side. Investment management is frequently delegated to non-family wealth managers, sometimes with little oversight and rarely with coordination between the two sides of the house.
In today’s world, owners must take a more active, comprehensive, and integrated approach to their wealth. The focus should be on managing not just a particular business or asset, independently from the others, but on long-term total wealth. This requires that families transition from ‘business managers’ (with an operator mindset) to ‘wealth managers’ (with an owner mindset).
Join us next week when we look at stability in today’s world, including a framework to use and case studies to learn from.
For more in this series:
- Family Wealth: A New Playbook for Turbulent Times, Part 2
- Family Wealth: A New Playbook for Turbulent Times, Part 3
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