Neglecting the non-financial risks to family wealth could have severe financial consequencesPublished on 14 Jun 2020
Families must address all four pillars of capital to achieve long-term success.
Families should focus more of their efforts on managing non-financial risks to ensure long-term success, according to Johan van Zyl, Chairman of Stonehage Fleming South Africa.
“It is concerning how much time, money and effort families and their advisers spend on monitoring and addressing financial risks compared to non-financial risks,” he told guests at a webinar this week, co-hosted by STEP Cape Town.
His comments challenge current industry practice that focuses predominantly on financial risks when assessing family wealth - something he warns is a significant risk, given the wealth management industry faces what he calls an “unprecedented intergenerational wealth transfer challenge”.
Statistics show that 70% of family wealth will be lost by the second generation and 90% by the third (Four Pillars of Capital – The Next Chapter, 2018). And with private wealth held by families in South Africa estimated at US$650m (NWWealth – South Africa Wealth Report 2019), the need for advisers to play an active role in their clients’ wealth transfer strategies has never been greater.
Citing Stonehage Fleming research, Johan outlined the ‘four pillars’ framework for approaching risk management: financial, intellectual, social and cultural capital. “We are all very familiar with financial capital – the tangible assets that have a quantifiable financial value. Most families and their advisers spend most of their time and energy on this pillar,” he said.
However, the top five risks to family wealth identified in the 2018 research, Johan pointed out, mostly fall outside the financial capital pillar. They include disputes or break-ups, lack of planning, failure to engage the next generation, lack of future leadership and lack of appropriate training for the next generation. “Surprisingly, very few of these speak directly to financial capital. They mostly touch on the other pillars of capital but could all have potentially severe financial consequences,” he said.
Another surprising finding of the research, noted Johan, is that very few families have a formal and structured process to manage risk, with only 6% having a formal risk register. “Given the enormous risk of loss of capital from one generation to the next, this is an area that we as practitioners should really think about. There is a tremendous opportunity for us to really add value to our clients.”