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THE DETAIL YOU DEMAND

Our system allows your whole family or any subgroup or individual decision-makers to access consolidated reporting for everything from strategic overviews to fine-detail analyses.

If you are using the Stonehage Fleming Dealing & Treasury platform or our core banks, data accumulation is automatic. You get up-to-date reporting on all your assets whether they are financial or non-financial.

The reports include liabilities to add another dimension to your planning capability.

We can work with you and your investment advisers to identify benchmarks or other performance criteria and implement monitoring across any asset class and for any asset or portfolio. Standard benchmarks or appropriate composites can be applied wherever required.

 

THE SECURITY YOU WOULD EXPECT

​We have drawn on over forty years’ experience serving wealthy families to hone our reporting systems into what we believe are uniquely useful financial management tools.

And it should go without saying that the privacy and security of our clients’ data is paramount. Rigorous internal procedures are in place to ensure the proper and secure storage and distribution of all your most sensitive information.

ONLINE AND MOBILE REPORTING

​We offer an array of online and mobile reporting solutions specifically catering to the individual needs of our clients. Whether the focus is purely on investments or on the broader consolidation of wealth, we have the appropriate solution. The offering can also be enhanced by loading additional third party managed investment mandates and non-bankable or personal assets.

In addition we offer highly customisable online wealth analytics to clients that require a more complex reporting solution.

The user experience has been designed to be simple and intuitive making it easy for our clients to access their information wherever they are.

 

View from the CIO: Markets are getting wise to Trump’s rhetoric

​Over the last quarter, it felt like some of the concerns around the US/China trade war had started to subside somewhat. There were signs of a little ground-giving on both sides as Presidents Xi and Trump began to realise it is in everyone’s interests to reach some sort of agreement. Or perhaps the Chinese - like the markets - were simply wising up to Trump’s bluster.

Trump still seems determined to bolster his domestic image and his electoral prospects for 2020 by bashing China, essentially. Only last week, the US blacklisted 28 Chinese organisations for their alleged involvement in abuses against ethnic Uighurs in China’s Xinjiang province. But he also realises that going too far could result in a significant slowdown in the global economy. This would have a knock-on effect on the US stock market, which in turn would upset his election prospects. So he has to tread carefully.

The market, for its part, has cottoned on. The style that President Trump has adopted over the last couple of years has been to delve into things, put in place various red lines and non-negotiables, cry wolf on the ensuing crisis, retreat, wait a while, remove the very thing that created the crisis, then swoop in and ‘save’ the day.

This pattern is characteristic of his foreign policy, including, his current dealings with the Chinese. Initially spooked by the bouts of volatility it created in the past, the markets now appear to ‘understand’ the US President’s modus operandi and seem less affected by the potentially corrosive fallouts, safe in the knowledge they may never actually happen.

One result is that, despite increased volatility, the stock market has continued to be very strong over recent months. The idea that it will just continue with the pace and enthusiasm seen in previous years, though, is taking on less and less probability.

It might not be a bad time to take a pause from the market, to reduce some risk and selectively allocate it to long short equity managers - those able to both take advantage of stocks which they think have good long-term prospects while ‘shorting’ or borrowing stocks whose prognosis is negative. In this way, we think that portfolios will be better positioned to handle any volatility that may come our way.



Disclaimer: This article has been prepared for information only. The opinions and views expressed on any third party are for information purposes only, and are subject to change without notice. It is not intended as promotional material, an offer to sell nor a solicitation to buy investments or services. We do not intend for this information to constitute advice and it should not be relied on as such to enter into a transaction or for any investment decision. Whilst every effort is made to ensure that the information provided is accurate and up to date, some of the information may be rendered inaccurate in the future due to any changes. © Copyright Stonehage Fleming Investment Management 2019. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without prior written permission.

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Total Wealth Management for Business Owners and Entrepreneurs

SUCCESSFULLY NAVIGATING A CONFLICT OF PHILOSOPHIES

The term ‘wealth management’ implies more than just the management of an investment portfolio, and most wealth managers claim to add value across the whole spectrum of their clients’ affairs. comprehensive understanding of an individual’s total wealth may be plausible for clients whose affairs are relatively straightforward, and who have the bulk of their assets in cash and marketable investments. however, this becomes more complex and challenging when a substantial proportion of an individual or family’s wealth is tied up in a family business and perhaps a number of other directly held investments.

It is not uncommon for a founding entrepreneur to have amassed a significant portfolio of specialist investments aside from their core business. these active, self-directed investors, who have been heavily reliant on their own knowledge and expertise, may invest for many years largely without the need for a conventional investment manager.

Typically, this type of entrepreneur only begins to consider professional investment advisers when they start thinking about succession, especially where their children or other successors simply do not have their specialist knowledge, influence and contacts, or do not share their interest in business.

Often, an entrepreneur will only then seek an investment adviser who can help manage the transition to the next generation:

  • To provide expert support to the family in managing the legacy investments
  • Probably to exit at least some of these investments and re-invest in a more balanced portfolio

Finding such a manager or adviser is, however, no easy matter:

  • Most investment managers are trained to manage wealth within a process and framework that does not match the mind-set of the successful entrepreneur
  • In particular, entrepreneurs have an approach to risk management that sometimes differs quite fundamentally from that of a professional investment manager
  • The impact of this is that the portfolio is likely to be confined to one or two sectors, far from the well spread portfolio advocated by investment professionals
  • Many entrepreneurs do not readily place their trust in investment professionals
  • These doubts have been compounded by the events of the last decade, which have substantially reduced trust in the financial services industry

DIFFERENT PERCEPTIONS OF RISK

The professional investment manager reduces risk through diversification across the whole spectrum of asset classes, whereas the entrepreneur tends to invest only in sectors which he understands and with people whom he knows, often resulting in a very concentrated portfolio. Risk is highly subjective and neither view is either right or wrong: they are just fundamentally different, and these differences have to be reconciled to begin developing a coherent investment strategy.

A multi-asset investment manager will typically espouse the benefits of diversification, built from the tenets of Modern Portfolio Theory and the work of a generation of Nobel prize-winning academics. In practice this means investing in a range of investments across asset classes, such that the overall portfolio sits at the required point of the risk/reward trade off.

The entrepreneur’s view is often far more personal than the investment manager’s because, rather than taking a holistic view, starting with analysis of the global marketplace, the entrepreneur sees risk and opportunity through the prism of his own practical experience. He or she has built a business relying on their own hard work and judgment, and has considerable belief in his or her ability to judge a business proposition.

In the early stages of the business venture, the priority is survival rather than the management of an asset. After a period, the successful business begins to provide a comfortable living, and eventually acquires significant capital value.

At the stage where there is significant value in the business, the theorist would argue the case for diversification, but the entrepreneur sees a growing business with increasing market share and decreasing risk of failure. As surplus cash is generated, some entrepreneurs may indeed seek to diversify by investing in a professionally managed portfolio. Others however, perhaps fuelled by the self-belief that is central to their own success, are more inclined to back their own judgment than hand money over to professional investment managers. An entrepreneur will often back individuals whose abilities he respects, as a result of first-hand knowledge, especially from past business relationships.

With the exception of property, which is a special case, most entrepreneurs do not invest outside their range of perceived expertise and are not often inclined to trust the ability of people with whom they have no direct experience.

The validity of this approach to risk management can be debated, and it can be argued that successful entrepreneurs may sometimes underestimate the risks in applying their undoubted business skills to investments in other ventures which they do not control. Their self-belief can be reinforced by mixing with other similarly successful businessmen, who have all generated much better returns over many years, than professional investment managers.

Often it is only when the core business matures, and/or when the entrepreneur begins to contemplate retirement and succession, that a more devolved form of investment management becomes an attractive option. For the reasons touched upon above, such individuals are likely to need convincing that a wealth manager possesses competencies which can genuinely add value. The wealth manager has no hope of gaining their trust unless he or she addresses and reconciles the fundamental differences of perspective in the management of risk.

Managing the Transition

As an entrepreneur approaches retirement, the need for succession planning becomes more immediate. Where there are family members ready and able to take over, there may be no need for a fundamental change of approach. However, in many circumstances the next generation do not have the desire or expertise of the founder, thus necessitating either significant changes in strategy, or bringing on board external expertise. Ideally there will be a transition period during which the founder will gradually hand over control, but this process is far from easy.

After forty or more years of taking all the decisions in successfully building up a valuable core business and a variety of other assets, the difficulties involved in a transfer of authority must be obvious:

  • The sheer habit of independent decision making is ingrained
  • A long track record of success has convinced the individual that their judgment is usually best
  • There is inevitably a strong emotional commitment to the core business and possibly other investments
  • There may be a need to ‘own up to’ some past failures
  • If a fundamental change of investment philosophy is required, there will be a serious conflict with the founder’s entrenched instincts, which can rarely be resolved overnight
  • There are usually family complications which add to the difficulty of decision making

The first and most obvious decision is whether the core business should continue under family ownership and management. This is a massive decision, which requires extensive planning, preferably over many years. It is the subject of a separate paper by Stonehage Fleming (Selling the Family Business).

As stated above, many successful entrepreneurs approaching retirement have invested in a variety of businesses, operating in similar sectors to the core business. In addition, there may be other substantial holdings including property, leisure assets and increasingly, valuable art collections. Unless the next generation is ready and willing to step into the founder’s shoes in each of these areas, the eventual loss of his knowledge, expertise, contacts and business skills may make some of these investments vulnerable.

It is highly unlikely that any founding entrepreneur will dispose of all such assets overnight and reinvest in the sort of balanced portfolio favoured by the investment industry. It will typically be a process in which the entrepreneur begins to adapt gradually to a new approach, and will need to be convinced every step of the way of the merits of the new philosophy. He or she will also need to be convinced of the ability of prospective advisers to add value in eventually stepping into his or her shoes, and providing the support and understanding they want for their family after they have gone.

The requirement therefore is to develop a transition plan which probably includes:

  1. Exit strategy for investments which depend too heavily on the founder’s knowledge and influence
  2. Phased reduction in exposure to concentrated sectors
  3. Some level of constraint on further investment in specialist, entrepreneur-led opportunities
  4. Full risk management strategy across the entire asset base, which will include mitigation of sector specific risks and illiquidity during the transition
  5. Clear protocols for handing over decision making and consulting other family members (family governance)
  6. Definition of role of advisers / wealth managers in implementing the transition and in supporting the family, both during the process and thereafter

The plan must of course have a clear timetable with milestones, which will act as an important discipline and will only be modified with good reason, in the light of changing circumstances. It therefore goes without saying that the prospective wealth manager must have experience and capabilities which extend across the whole of the asset base, as it stands at the start of the process.

The ‘legacy’ positions present two particular challenges to new advisers.

The first is to ‘get under the bonnet’ of each company, understand its business model, and assess the strengths and weaknesses. The second is to negotiate an exit strategy, which can be an emotive process because of the long relationship between the client and the investment. It is key to the adviser’s role to understand these nuances, and provide an exit program that makes sense from both a personal and portfolio perspective.

Even the most astute entrepreneurs can be unfamiliar with the complexities of negotiating the exit of a position that may not have obvious market comparables. Consideration should be given to the length of time required to dispose of the position, whether it is tradable in the market, the degree of influence or voting rights in decision making, whether there are any lock-up periods and the relative importance of the investment to the entrepreneur personally (friends, partners or family who are involved in the business may be affected).

While legacy assets can be considered a hindrance from an adviser’s perspective, the client may be reluctant to dispose of them for very valid personal reasons.

RESPECTING THE CLIENT PERSPECTIVE, WHILE DISCHARGING ADVISORY AND FIDUCIARY RESPONSIBILITIES

Just as it is vital for the potential adviser to understand the client, it is equally important for the client to understand the constraints within which the adviser operates:

  1. The circumstances and portfolio of assets described above are far removed from anything that a typical wealth manager would normally recommend
  2. The adviser has a clear obligation to express his or her opinion, recommend a course of action, and ensure that the client fully understands and accepts the risks involved in taking a different course
  3. The adviser may have responsibilities to other parties including family members, trustees or beneficiaries

This type of client needs an adviser who can provide conventional asset management of the highest quality, but also has the capability, experience, insight and flexibility to deal constructively with the existing portfolio of specialist investments. The adviser needs to be challenging, but able to compromise and to take account of client views, without undermining his objectivity and frankness. Such an adviser will recognise the need for a transition period, where he is effectively operating as co-pilot, alongside the client.

He will also be building his relationship with the next generation and needs to be ready to support, advise and possibly challenge them, should they have both the will and the aptitude to continue the tradition of direct investment, at least for an element of their wealth.

The adviser must be accountable for all outcomes and ensure that his responsibilities are clearly defined, so that he puts up a robust and well informed challenge when required. Some advisers will find this type of relationship very difficult to handle, and will immediately recommend formal ‘text book’ family governance with decision making by committees. However this dilutes the control of the founder entrepreneur, and it is often wiser to recognise that most founding entrepreneurs find it very difficult to let go of the reins, so it sometimes has to be a gradual process.

The solution will lie in finding a balance, but decision making responsibilities need to be very carefully documented and transparent to all relevant parties, including trustees and beneficiaries.

CONCLUSIONS

The financial services industry builds scalability and cost efficiency by selling commoditised products, which are designed for ‘typical clients’. Wealth managers tend to be rather more flexible, but in most cases their business model relies on a relatively standardised approach which meets the needs of their chosen target market. The flip side is that such a model often cannot economically address the requirements of exceptional clients, whose affairs are particularly complex and who have built their wealth by backing their own judgment and making their own decisions.

Wealth management for entrepreneurs and business owners demands a model that is based on listening to each client and delivering genuinely bespoke services, especially in managing the transition to the next generation. It requires significant skill, broadly based knowledge and well defined responsibilities.

The adviser must have the breadth of experience to add value across the entire asset base and to challenge the entrepreneur, even within his or her own areas of expertise. Many entrepreneurs are strong personalities, and questioning their judgement can require courage.

It is not a job for the faint hearted!

On the 15th January 2015 Stonehage Group Holdings Limited completed a merger with Fleming Family & Partners Limited (‘FF&P’), a London-based Multi-Family Office. The combined company is called Stonehage Fleming Family & Partners Limited (‘Stonehage Fleming’) and is the leading independently-owned multi-family office in Europe, Middle East and Africa. Its advisory division provides corporate finance and direct investment advisory services as part of a holistic approach to advising wealthy families.

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Agreeing the Purpose of Family Wealth

The growing trend for wealthy families to discuss and agree the ‘purpose’ of their wealth has been confirmed in numerous surveys in many countries, including the findings of Stonehage Fleming’s own report on family succession, entitled ‘The Four Pillars of Capital’.

This paper explores the practical benefits such an exercise may bring to a family, in particular to those who are beginning to plan the transition to the next generation.

All wealthy individuals are eventually faced with the decision as to how to leave their wealth, to whom and in what form. They also have to consider whether to leave it unconditionally or to leave guidance on how it should be used and managed. It is difficult to leave guidance without addressing the question ‘what is it for?’

Families have widely differing “purposes” for their wealth. At one extreme, there are some entrepreneurs who have left nearly all their money to charity, and at the other extreme, there is a family trying to create a 200 year trust with guidelines for distributions across eight generations.

THE FOUNDER’S PERSPECTIVE

Most of those who create large fortunes do so by building substantial businesses. As the business grows, the assets and revenues often exceed their needs, but the motivation to continue growing rarely abates.

Entrepreneurs are driven and ambitious and frequently seem to operate in a bubble of “eternal youth”. Only when they begin to consider succession do they think about the impact of wealth on their heirs.

The issues they need to address include the following:

  • How to find a simple basis of “fairness” for dividing assets among their heirs and other potential beneficiaries, identifying particular circumstances or needs which should be considered
  • The importance or otherwise of keeping the family business or other assets in family ownership
  • Any wish to give guidance on the use and management of the wealth, including interests of other stakeholders, such as employees and the wider community
  • Whether to arrange their affairs to encourage family unity and a broader legacy of family values and culture

The answers to these and many other questions are strongly interrelated and difficult to resolve in isolation. Conflicting objectives may need to be prioritised and reconciled around a central philosophy and purpose.

It can be immensely helpful to the next generation if that purpose and philosophy are developed and communicated well before the founder passes on. If not, the decisions made might come as a shock, causing resentment and perhaps dispute in the future with many negative consequences, including wealth destruction.

THE FAMILY PERSPECTIVE

A family will probably include a number of individuals with differing abilities, personalities, interests and aspirations which are not always easily reconciled.

However, they may also have much in common and most people grow up with values, hopes and expectations which have been influenced by their family and their surroundings. Nearly all have a need to be treated fairly, if not equally, and to understand the difference.

Yet gross inequality and unfairness can be accepted, if they are ingrained in the family culture. For example, the English tradition of primogeniture involves large estates passing from eldest son to eldest son, whilst other children may receive relatively modest inheritances.

Underlying this culture is the tacit understanding that the central purpose of the wealth is to preserve the estate in family hands. In such cases, this fundamental objective takes priority over most other considerations, including the needs of individuals.

Some business-owning families may take a similar view in that they have a strong preference to keep the business in family ownership, which may have to be reconciled with the income needs of individual family members. It is well known that a family business can be the glue which holds a large family together, but it can equally be a divisive force which corrodes family unity, sometimes driving the business to insolvency in the process.

In any family dispute, the alleged intentions of the founder will be used by both sides, so clearly stated guidance can help prevent potentially disastrous consequences. Such guidance is no easy matter, as it must allow future decision makers the flexibility to adapt to changing circumstances.

Many families also have to cope with inheriting specialist investments which rely heavily on the skill and experience of the founder or other family members. Some families want to continue the heritage of investing in new ideas and young companies, in which case a carefully crafted statement of purpose will be of enormous assistance, especially if things go wrong.

Cash, quoted investments and some properties may be easily divisible between family members, but an art collection, for example, may benefit from continuing in collective family ownership, thus requiring an agreed strategy, decision-making framework and governance.

The desire to promote family unity is sometimes a factor in agreeing the purpose of wealth. Unity is usually not driven by fairness through equality, but fairness through common understanding. Understanding is driven by communication and leadership. Leadership without a purpose is almost impossible.

HOW TO DEFINE A PURPOSE

If the aim of a “purpose” is to help a family set clear objectives and make better decisions, with a recognisable strategy for their wealth, then it must be clearly articulated. There are numerous conflicting issues to be addressed and reconciled, so a few bland headlines are unlikely to be sufficient. Purpose is much more detailed than a ‘mission statement’.

Families sometimes assume that by bringing up their children properly they will understand the family’s vision through osmosis. This is possible, but not easy, as families are rarely as good at consistent communication as they think. It is not what one generation says that it is important, it is what the other one hears that matters!

Other families therefore opt for a more formal process. It is likely to involve a number of family meetings, possibly assisted by an external facilitator, who will drive the process and make sure all voices are properly heard. The objective will be to arrive at a consensus which is accepted by everyone involved, despite the fact that they may start out with widely differing perspectives.

The need for agreement is greatest when assets such as a family estate, family business or art collection continue to benefit from a degree of common ownership which implies shared decision making. This particularly applies to families who are asset rich, but have insufficient cash flow to support all the needs of a growing number of family members.

Issues to be covered should include the following:

HERITAGE AND BUSINESS ASSETS

For those with landed estates in the family for centuries, the practice of primogeniture will be clearly understood, but may need to be discussed rather than assumed, in the light of changing values in society.

The issue for business-owning families is even more complex. If there is an agreed preference for the business to remain in family ownership, the reasons for this must be clearly stated, with well-designed caveats to provide for changing circumstances.

Similar considerations may apply to other assets where there is a desire to maintain them intact, and which require active management.

MANAGEMENT OF INVESTMENTS

Whilst the main object of investment is usually to preserve and grow the wealth in real terms, changing attitudes and values increasingly emphasise the importance of ‘Socially Responsible Investment’ and ‘Impact Investing’.

Families with a business background may also wish to encourage a continuing culture of entrepreneurialism and participate directly in backing new ideas and talented individuals.

There are numerous issues which need to be discussed in defining the family’s approach, in particular the willingness to adapt investment criteria to meet social and other ‘non-financial’ objectives.

FINANCING THE FAMILY LIFESTYLE

The ongoing income required to support family members will usually be a key factor and the need for income should be debated in some detail, especially where it conflicts with other objectives.

Wealth is only beneficial if it helps family members to lead more fulfilling lives and to explore their potential as human beings. This may lead to certain controls designed to encourage the young to make good use of their own talents, and not rely too heavily on inheritance to make their way in the world.

CONTRIBUTION TO THE COMMUNITY

A strong theme underlying many of the decisions above will be the extent that the family wishes to use its wealth to benefit the wider community. In some cases, the motivation is a balance between genuine altruism and enlightened self-interest.

In many countries, increasingly hostile public attitudes to wealth represent a significant threat, which may be mitigated by demonstrating how that wealth benefits the wider population.

This contribution can be made through the way the family conducts its business and investment activities, creates employment and supports the local community, but many families also dedicate part of their wealth to philanthropy.

There are various ways in which the family can organise charitable giving, often including active involvement by a number of family members, so that it helps to reinforce the unity of the family, working together for the good of the community.

All of the above will benefit from clearly thought out structures and decision-making processes, which can only stem from a detailed and well-articulated statement of purpose. This will often include a set of agreed values which guide individual behaviour and which can be more strongly applied to collective decision making. For some the family ‘brand’ is important.

DEFINING AND MANAGING ‘RISK’

Purpose cannot be discussed without risk, and risk cannot be addressed in the absence of purpose and objectives.

Management of risk is one of the most complex subjects to be considered as risk takes many forms, from the performance of the family business and the volatility of the share portfolio to the more intangible risks such as family reputation or transferring leadership and control to the next generation.

The discussion needs to take place within a structured process, if meaningful results are to be achieved.

FINAL THOUGHTS

Wealthy families and entrepreneurs have relatively few options when considering succession. They may of course prefer to leave it to the next generation to manage the responsibilities and privileges of wealth without guidance, but they are still faced with practical decisions which cannot be ignored.

Most people want to avoid giving excessively prescriptive guidance which ties the hands of their successors, but may still wish to create some form of legacy which is more than just financial.

Those families and entrepreneurs who want to establish parameters for their legacy have three main alternatives:

  • They can trust in osmosis and take the “what if I just bring my children up properly” route
  • The family leaders can set the rules themselves, without family consultation, in the hope that their decisions will be accepted and respected by the next generation; or
  • The family can opt for a more structured, facilitated process which can encompass all generations

Whilst a defined purpose of wealth does not guarantee success, the process of agreeing that purpose can provide families with a clarity and understanding that ensures the plan for the transfer of wealth is understood and not imposed.

There may, however be circumstances in which the differences are unlikely to be bridged by such a process, in which case the terms of the legacy and the parameters for decision making will probably need to be defined in enough detail to avoid ambiguity.

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Approach

Our approach is rooted in a deep and practical understanding of the family, its wealth and wider circumstances. We help families develop and implement their plans to pass on an enduring legacy.