Transition to Fiduciary Management for Business Wealth*; Old Way vs New Way

*Do you wonder what Fiduciary Wealth Management means?

It is the eventuality of business, private capital, or financial wealth assets or interests with a transfer event that prompts these to be held in trusts.

The transition to fiduciary wealth management may appear simple in benefit for both legal, tax and financial advisors. For most ultra-affluent families, it is clouded in obscure legal language. Many centi-millionaire and billionaire founders wish to continue to hold their original business along with more complex capital and investments acquired over time. Yet they encounter outdated delivery models of ‘command and control’ that were rejected by families of wealth two decades ago when they jumped from institutional firms into family offices. The goal was to seize control over investment decisions and to control trustee decisions over the business asset. Yet the owners and families were unprepared to understand their trusts; the do’s and don’ts by the original owner of this gift. Thus, the role of a trust officer hired to manage these trusts for the family vs the directed role of a public trust company became murkier. We agree with the top 10% of advisers who get these challenges and see the benefit of achieve higher levels of ‘connect and collaborate’. Today, absence of understanding these continues to have an increasingly adverse impact on family success. The complexity of unsolved problems only deepens in a family office that often don’t know what they don’t know, at their own peril. This sea of change is permanent.

Fiduciary Transition Approach; The Old Way

Ø Little formal planning is performed

Ø Increasing complexity of trusts, diverse trustee roles, discretionary authorities, partnership arrangements fell to the business family

Ø Absence of readily identifiable metrics and controls for practices, nor a simplified governance system to fluidly align the family office risks and performance expectations with those of their advisors

Ø A traditional relationship-based approach of Trust companies managing trusts, fell to the wayside, as execution of funding trusts and knowledgeable informed trustee were replaced by Advisory work only and a transactional view of this highly complex relationship, was adopted

Ø The fees for services traditional mindset was replaced by service as an expense mindset

Fiduciary Transition Approach: The New Way (Fees as an investment, services as an annuity that aligns client and advisor goals (skin in the game)

Ø Importance of formal planning is emphasized

Ø A family office is not appropriate at all levels of wealth or in all instances

Ø A best structure plays an instrumental role as does the trust jurisdiction

Ø The best structure for a family wealth management practice begins with what a family office is AND IS NOT.

Ø Assessment begins with family history with wealth, the proposed wealth transfer strategy and its suitability and advisory experience with trusts.

Ø Family members and advisors have differing viewpoints that need to be brought into constructive alignment in order to work well.

Ø Set “value add” client expectations with mission, purpose and values of the structure

Ø Include a valuator earlier in the process to identify bylaws and trust agreement provisions for the business

Ø Family wealth practices are the business of family-driven wealth and need to be understood by all. Being a family member is not a stamp of appropriate knowledge nor is necessary a welcome privilege to be put into roles they don’t understand

Ø Focus is on family dynamics causes and not just symptoms.

A Typical Ultra Affluent Scenario

What a typical scenario may look like: a multi-billion-dollar textile business founder with business valued at more than $7billion and with financial assets of $3.5billion in a family office, was handicapped in the transition to fiduciary wealth management.

Ø A public trust company serves as a directed trustee responsible for only the day-to-day administration of the trusts.

The Hindrances

Ø The trustee on the family office side was a business executive in the business. He was failing to show up for meetings or to understand that his duties were to the trust beneficiaries, not the business owner.

Ø Trust agreements had been copied over and over with only a different name of beneficiary to save on cost. There was no integrated estate or wealth transfer plan in place

Ø Owner had no endgame in mind for his wealth or for his family

The Actions

Ø Introduced modern trust concepts and law through directed trusts/trust protector arrangement with accountability by trusted relationships, all required fiduciary backgrounds

Ø Introduced owner to T&E lawyers for his level of wealth to continue the conversation on modern trust law, to evaluate and offer ways to resolve the trusts already holding business stock into an integrated plan for a private family trust company, then decant the trusts in the new trust jurisdiction and remove the current trustee in favor of the private family trust company, as the Trustee.

Ø Guided owner through multiple conversations and frameworks to develop his endgame for wealth and future of family

Ø Established formalities to support decisions, duties, documentation, due diligence, delegation of duties, self-dealing and adequate resources. This required a data and information sharing system to bring all together with customized access for each

Ø Coached fiduciary teams of trustees, partnership managers, advisors to get on the same page, with consensus building for fiduciary formalities

Ø Guided implementation of trust structures, partnerships and practice support to yield improvements in consensus and understanding of their roles by up to 70% This produced higher quality engagement, information sharing and participation with greater clarity

Ø Provided oversight of the practice(s) as well as guided execution of trusts and partnerships

Ø Improved family member understanding of their trusts, trustee roles, decision roles and control matters. Reduced by more than 60% the mis-steps in their practices. Identified and solved for undermanaged liability risk in partnerships by more than 50%.

I write this for the reason of bringing clarity to fiduciary practices as many family driven wealth practices no longer have their former trusted advisers. This contributes to the Shirt Sleeves to Shirt Sleeves world wide failure to keep wealth intact for at least 3 generations of families. Today far few than 10% of families enjoy this level of success. This means a 3rd or 4th generation who grew up enjoying the comforts of wealth, may now have to get a job and start all over again. You have a choice today!