Four Pillars of Capital for the Twenty First Century

Executive Summary

In December 2013 Fleming Family & Partners (FF&P) published “The World in 2043: Wealth Strategies for Intergenerational Success.” In January 2015 FF&P merged with Stonehage to form one of the world’s leading independently owned family offices represented in eight jurisdictions, offering a wide range of investment and family office services. This follow-on report contains the input from a survey conducted during 2015, which benefited from 85 responses from 78 families and advisers; 22 of the respondents were from the “Next Generation” (aged 18-25).

Since the financial crisis in 2008, there has been increased scrutiny of the rich and of the perceived widening of the gap between he “haves” and “have nots”. There have been moves by various governments to increase tax revenues and what might previously have been considered efficient tax planning is now regarded with suspicion and even opprobrium. In light of this public and political sentiment, families have a renewed focus on their responsibilities as stewards of capital. The findings of our new report show the majority of Ultra High Net Worth (UHNW) families are seeking to strike a balance between preserving and growing the assets they are able to hand on to members of their own family and ensuring that they do this in a socially responsible manner. Giving back to society and local communities is important to these families.

In this context, we find there have been subtle but highly significant shifts in attitudes, which suggest a change in the way families approach the long-term management of their wealth and their legacies. A substantial majority of respondents believe quite strongly that great wealth can only be preserved across generations if it has a defined purpose and is used not only to benefit those who inherit, but also to make a positive contribution to the community in which they live and to the wider society. They also believe wealth is only sustainable if the family has the skills and experience to respond to the challenges and opportunities of an uncertain environment. These views were even more strongly held by the Next Generation, suggesting they will become more central to the management of family wealth.

The impact of this change of emphasis is likely to be:

A greater desire for active participation in direct investment opportunities,
An expansion of philanthropic activities which play a key role in the development of family culture; and
More focus on passing down the intangible aspects of the legacy, the experience and values of the founders.

From the many responses, concerns and ideas from the families that we spoke to for this survey we have tried to group these themes around four “pillars of capital”. In addition to the purely financial pillar, we identified these as intellectual, social and cultural. As the report will show, these Four Pillars all support a family’s success and its legacy; reliance on any one, or a reluctance to embrace the benefits of all four could conversely be detrimental to a family’s long-term interests. The four can be defined as follows:

FINANCIAL CAPITAL

Financial Capital comprises those tangible assets, business and intellectual property of the family which have quantifiable financial value.

INTELLECTUAL CAPITAL

The Intellectual Capital of the family is its accumulated skill, knowledge, experience and wisdom, which it can apply to the management of its wealth, its contribution to society, the individual fulfilment of family members and the collective wellbeing of the family.

SOCIAL CAPITAL

This is the way in which the family relates to and engages with the society and the communities in which it lives and operates. It includes social positions and the networks which help the family to use its wealth and other assets to the benefit of society and the good of the family.

CULTURAL CAPITAL

A family culture brings the family together by identifying shared perspectives and themes in the way family members conduct their lives, their approach to business, the way they treat others, the way they contribute to society, their attitude to wealth and the things they value.

In our research for our “The World in 2043” report we spoke to families still reeling from the aftermath of the global financial crash and, as such, found that their primary focus was a protective, conservative one of preserving their Financial Capital. Our research for this follow-on report has taken place against a background of economies beginning to recover from the global downturn and return to growth (albeit at far lower levels than seen before the crash), and the focus of families has shifted with this growth. Despite the obvious risks in the current environment, families are now taking a longer term view and there is greater emphasis on growing capital as opposed to merely preserving it. We are beginning to see that UHNW families are becoming more entrepreneurial and willing to accept a degree of risk, where the opportunity merits it. There is also some indication that wealthy families will accept higher taxes, provided that tax rates do not create a disincentive to wealth creation.

Beyond the Four Pillars, the principal findings of our new report are:

71% of respondents listed capital preservation as the greatest concern but capital growth and succession planning ranked joint second at 57%, amongst the respondents to the main questionnaire.
Concern about income varied significantly between the Next Generation respondents and the main respondents (57% versus 34%), suggesting that the future stewards of family wealth are more anxious than their parents about income provision.
Family disputes and breakup were seen as the principal risks to long-term wealth, along with lack of planning. Poor investment management was the top concern of the Next Generation, though only 21% of core respondents cited it as a top three concern.
82% of all respondents believe that there is a link between preserving wealth and benefiting society. This has major implications for business, investment strategy and philanthropy and has required families to be more structured in passing down their values.
65% of Next Generation respondents thought the financial crisis had changed attitudes to the wealthy and wanted to ensure there was a balance between having wealth and contributing to society.
Private foundations and direct giving are the most common form of philanthropy but impact investing, and microfinancing are popular alternatives.
Many felt that their family had a defined set of values; this contrasted with 56% of the Next Generation who did not believe this to be the case for their family. According to our survey, only 6% of the Next Generation felt involved in developing their family’s code of conduct.
Real Estate remains the asset class of choice for wealthy families to hold for intergenerational wealth preservation and growth with Equities and Private Equity deemed to be the next most interesting asset classes.
The question that produced an intense and stimulating debate was “has your family agreed the purpose of wealth?” and much of the content of this report was generated through discussions on this topic.

We are grateful to all the contributors to this report for the time and insight they have given us.

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