Building a comprehensive advisory team: generational wealth – part three

When the time comes to create a generational legacy, the families that have been most successful have incorporated an additional element into their advisor teams beyond wealth management and tax mitigation. Family governance advisors have been quite effective in facilitating the transfer of generational wealth. In the third part of our generational wealth podcast series, Tom Rogerson, President and CEO of GenLeg Consulting and SVB Private’s Jason Cain share the impact governance advisors can have on your family legacy.


Jason: Hello, and welcome to "Boston Private Perspectives." I'm Jason Cain, Chief Wealth Strategist and Co-Head at the Center for Wealth Planning Excellence at Boston Private, an SVB company. Thank you for joining us today as we discuss building the right advisory team to help manage generational wealth. I'm excited by this topic we're going to cover day and the expert who has joined me. Hello, Tom. How are you?

Tom: I am doing great. Thank you, Jason. Nice to be with you.

Jason: You bet. Tom Rogerson is the president and CEO of GenLeg Consulting, a firm that helps families understand the pitfalls of creating a generational legacy and assist those families with implementing best practices to avoid those pitfalls. I've known Tom for quite some time. We've had the opportunity to work on a number of different family scenarios together, and it's going to be my pleasure to get to sit down with you, Tom, and dig into this topic of building teams around wealthy families.

First off, let me ask you a question. How often do you see integrated teams of advisors really working together thoughtfully in a collaborative method? Is that common? Is it uncommon with the families that you work with?

Tom: Oh, it's a great question, and it's very uncommon, unfortunately. And I think there are many reasons for that, but one of the bigger reasons is that oftentimes when an advisor has a higher-net-worth family or client, it's a very important relationship to them, and they're often quite nervous of losing that relationship. I'm speaking of those attorneys, or accountants, or insurance providers that are out there oftentimes. There are smaller RIAs that may not have full capabilities and all.

And they can end up being defensive, meaning that they are uncomfortable bringing in other people because it might make them look like they don't know everything that the client needs. And I find that to be very problematic. And that has historically been the case. Unfortunately, my experience is it continues to be the case to a large degree.

Jason: And I would absolutely concur. Even within institutions, you'll find that bringing in thought leaders to help manage the complexities of larger client situations can be daunting and challenging. That being said, I think what I found is the DNA of advisors who work with more complex, larger families... a big part of their DNA is this kind of realization that no one person can have all the answers.

And I think I use my experiences in a single-family office and working with a single-family office, that the role of recognizing that and bringing together a multidisciplinary team to help advance the causes of the family really became part of what we did on a day-to-day basis. And particularly for families who aren't at that single-family office level. That can be a challenge, as you mentioned, with advisors and something that certainly is important. When you think about building an advisory team, who are the key players in that? What does a family, a complex family, need? Who do they need wrapped around them?

Ensuring your advisor team is complete

Tom: Well, interesting, there've been a number of studies on this as well over the years, and I think our findings with clients matches that. The typical client thinks of their primary advisors as whoever's working with them on the capital deployment aspect of things or wealth manager and the like, their tax mitigation experts, primarily in the estate planning area when they think big picture long-term plan, but also in the income tax planning with their accountant.

And those three, sometimes with an added insurance provider for some of the insurance work needed, I'm finding, are usually who the client thinks of as their key advisors.

And that's one thing. So there's a missing component of the family legacy advisor in that mix. Because many times these advisors, when the client asks a question, they go back to what I refer to as they go back to mama, they go back to their education, their upbringing, what they're schooled in every day.

They answer from the perspective of a capital deployment person, a tax mitigation person, an insurance, you know, placement person as opposed to a, "Wait a minute, what's the goal of the family? What's the purpose of the family? And are we keeping that in front and center as we go forward in the plan?" Not just the parent's perspective, but the overall family perspective.

And I'm finding that many times, most of the people that we work with, I'm saying 75% or so, are first-generation wealth creators. And oftentimes the wealth creator is still working with some advisors in those areas I just described that they started working with early on.

The only reason I mentioned that is sometimes these clients have grown past the ability of some of these advisors. However, they don't know how to change them because they're trusted people that they like and they know. And that's really where I find the biggest opportunity, is how do we bring in new people to join the team, not replace necessarily, but join the team, and not threaten these people, but help pull it together in a more coordinated fashion becomes more and more important as the wealth and the complexity goes up.

Jason: You've hit two really core areas that are part of how we approach working with clients. The first of which you just mentioned is oftentimes, it's adding to the advisory team, not subtracting from it. I think there's a great deal of benefit to having a long-term advisor that has history with the family, that understands some of the nuances as the family accumulated their wealth and built that wealth and understands that there are subtleties that only history and time can weed out when you're working with a family.

I always tell advisors and the families we work with, it's not that we want to replace that, we want to be additive to that. We want to make sure that we have advisors and folks working with the family that are accustomed to and used and working with those families and similar-type families to bring the ideas, and thoughts, and the best practices that large complex families have.

And it's a delicate balancing act. And getting the legacy advisors and the historic advisors to understand that we're not trying to replace them, we're just trying to be additive to them, that's a challenge in and of itself.

Three essential disciplines working in concert

Then the other thing you mentioned, this legacy planning component. I tell every single one of the families that we work with that there are three core areas that successful families navigate as they're building wealth. The first area you hit on is capital deployment, investments, whether it's stocks, bonds, private investments, you know, direct deals. There's a whole myriad of opportunities out there, and families need very good advice on deploying capital. And that's certainly an area that families love to talk about. That's the first area that we routinely see families interested in talking about.

Then the second area is that... I call it tax mitigation. Whether it's just state tax, income tax, asset protection, it's the preservation and protection of the asset base that's been developed out over time. And there are quite a few folks that are very, very good at that. And it is certainly a necessary component as you build complexity, as you build wealth, is having good folks and good advisors in and around that aspect of family wealth.

And then the third component, I call it family governance and legacy planning, with a primary focus on creating thoughtful stewards. As you build up wealth and you get generational wealth, you can do the best anybody could possibly do on deploying that capital and growing that capital. You could have the best folks wrapped around you for mitigating taxes, for preserving assets, protecting those assets, but if you don't, as a family, focus on preparing the heirs of generational wealth for thoughtful stewardship, then what you've done in Areas 1 and 2 is all for naught.

I think that's where most families fail to recognize that they need to spend time, effort, and energy, and that's preparing heirs to be thoughtful stewards. I know that's a big piece of what you do, Tom, so talk to me about how you bring that to the table with families and how you integrate it with the first and the second piece.

Tom: Yes, you're right. I mean, that's really key. And I love the way you worded that, that those three steps, the capital deployment, the tax mitigation, and then the family governance, or as you refer to it, end with the legacy advisor. And I think that family governance is the most accurate term for it, although, when I say the word governance, oftentimes... Go ahead.

Jason: You hit it on there. I think you were going right where I was going to suggest. People don't understand what that means when you say family governance.

Tom: Exactly. And in reality, governance, they think of it meaning a constitution, and some kind of a bylaws, and the set of practices, and Roger's rules, set of rules.

Jason: Very formal.

Defining effective family governance

Tom: They think of something formal, exactly. Governance is the simplest thing you can imagine when you really break it down. It's just group decision-making. If you and I decided when we want to end this call, that's a form of governance. It's just a matter of we as a family decide what we're going to have for dinner. That's governance. Mom decides, dad decides, we all vote.

So governance is group decision-making, and the reason it's so critical in this process is one of the largest studies done on why families fail. First of all, that they do fail at preserving family, let alone their wealth. But the largest study done was done of over now, 3,500 families, by Williams and Preisser, going back decades now. And they found that most families were failing at preserving wealth and more importantly family, but the biggest reason for failure was due to lack of group of trust around group decision-making.

Well, we just said governance is group decision-making. And it wasn't they didn't love each other, it's just that they didn't have practice at making decisions together. And what we are finding, last thing I'll say, but that is that we're finding that these first-generation wealth creators, especially when they all of a sudden have a few shekels to rub together extra, they often use them lovingly and intentionally to allow their family members to have more independence.

That's great, except that if I get too much independence, if I go to summer camp and I don't have to spend time with my family this summer, and I go to private school and I don't have to spend time with my family this winter, and I go to another state for college, and I go to another state to live in, I can in many ways have so much independence, I'm not making almost any decisions with my siblings and my parents.

So the wealth is often used in ways that allow so much independence. They don't make... they never learn how to make decisions together because they never have any practice at it. And that means that high-net-worth families, you know, who've oftentimes have assets that need the next generation to work together, haven't built the ability for the next generation to work together, and that's governance. And that's why we introduce very simple methods of making decisions together to get them in the practice of how to do it.

Jason: So we've got an agreement that this governance function, particularly for families with generational wealth, becomes one of the most important aspects of keeping it intact.

Can I ask you a side note? I've read studies that have suggested that the failure rate of moving generational wealth between first, second, and third generations, anywhere between... I've seen studies as high as 60% of the wealth is gone by the start of that third generation to as high as 95%. Talk to me a little bit about that. And then I'm going to ask you a follow-up question. What are experts out there saying about that shirtsleeves to shirtsleeves?

Tom: Yes. And it's kind of a moving target, but I would say that the original... some of the original numbers showing 95% gone by the third generation were a little bit off. And I think the reason that some of it was originally off was they were focusing on do they still own the family business. And they may have sold the business but bought something else. Like, maybe they sold their blockbuster distributorship empire, and they now have something new. And that would have been a good idea, by the way, or they'd be out of business. But the number is probably higher than the 60% number you were using at the low end. And I think the biggest reason is what I just said, that they're using wealth to allow separation of family.

The way we put it with the families that we work with is we'll tell families a strong business cannot hold a family together, but a strong family can hold the business together. And if it's not a business, let's say you have a trust that you want to benefit the whole family, a strong trust cannot hold a family together, but a strong family can hold the trust together. Same with a foundation, same with a family office. So no matter what level of wealth you have, building a strong family is a good thing to do. It just becomes more critical for families of significant financial wealth.

Jason: And I think one of the things I've noticed in my career, it becomes much more difficult because of the words you mentioned earlier, they rarely practice how to have those conversations. They really rarely practice how to effectively govern. And part of the reason I feel that and from my observations of doing this for 27 years, part of the reason they don't practice is because they don't know how to practice. Talk to me a little bit about that.

Tom: Yeah, it's interesting, too, because these parents that are... especially those first-generation wealth creators, they're usually really good at playing on teams, building teams, maintaining teams, but what they're thinking about there is their management team. And they're really good at building teams. In fact, oftentimes the teams they built will last a long time. They'll have a CFO and a CEO, whatever, for 20 years in their business. And they'll know these people. They'll have transparency and communication. They'll be honest and all that.

The same people that build those teams at work, go home and, as I said before, they use their wealth to allow separation, which is actually not building team. My own family went through this. My own family had a great fortune. My great grandfather was president of a similar-named company to Boston Private, an SVB company, but he was president of Boston Safe Deposit and Trust Company. Grew to be a large financial institution in Boston, largest by any measure, by the way.

He started a foundation that right now has almost $2 billion in it based in Boston. But the bulk of his wealth was designed to go down to the family. I'm his great-grandson, and it's gone in the family. Not because of bad planning.

One of his sons, one of my grandfather's brothers, was one of the top estate planning attorneys in the country. One of the founding members of a group of attorneys called ACTEC, which you know of, but many clients may not, but it's a very high-end group of estate planning attorneys. He was one of the founding members of it, and his son was president of it for many years, one of my uncles. So there was tremendous planning capability in the family.

And remember, they owned a wealth management organization, Boston Safe, and yet the family money's gone. It wasn't because of bad planning or investing, it was because we didn't pay attention to this notion of building knowledge of each other, working together.

Those team players, when I mentioned... you started off by saying, what's the team of advisors. And that's the attorney, accountant, and investment advisor, insurance person, hopefully, and a legacy advisor like my wife and I play. But there's also the family team. Are the parents building a team in the next generation of children knowing how to work together?

If they really get that idea of building an effective team with their advisors and building effective team of their children and blended families as well, and, you know, whatever their structure of family is, but building a team mentality in the next generation, they really are ahead of the game compared to almost every other client that we see out there that is focusing with their typical advisors on tax mitigation, capital deployment, and isn't that the be all and end all.

Jason: Right. And I would venture to suggest, and, again, it's based upon my experiences, I have not done, you know, extensive research on it, but the families that I have worked with that have been successful in moving generational wealth from first to second, second and third generation, they routinely practice, or, as I would say, they spend time, energy and resources on and around this family governance model.

And that they tend to be... if we say 65% to 75% of families go shirtsleeves to shirtsleeves in three generations, they tend to be those families that do spend that time on creating thoughtful stewards in the family governance side and elevating that third component to just as important as capital deployment and tax mitigation. They tend to be the families that have a significantly higher likelihood of moving well through generations and avoiding that shirtsleeves-to-shirtsleeves potential. Question...

Tom: And knowing each other.

Unifying your advisor team

Jason: Yeah, exactly, exactly. Question, how do we build, how do we get the estate planner, how do we get the investment advisor, how do we get the insurance advisor and the accountants to work thoughtfully together and integrate that third piece, which, I would argue, is pretty straightforward? That that third piece is as important if not even more important. But how do we get those advisors to work together and bring in that governance component when working with these larger, more complex families?

Tom: Well, what we find as is often the case to motivate people, a carrot and a stick is a great combination. The carrot that I'm on... and I speak to a lot of advisors. As you know, I spoke at Heckerling last year on this topic, and I've spoken at many conferences around the country to advisors, largely, on trying to get them motivated towards working together in teaming environments.

But the carrot for me is telling these advisors that if you get a family together with a legacy advisor, like, you know, as I said, like my wife and me or others, but if you get the family together with someone really articulating what can and what's possible and get the family involved in coming up with a shared vision and a shared idea of what they'd like the plan to look like, there's more planning work... in every family I've ever worked with, there's more planning work that needs to be done by the advisors than was being done before.

And there's more opportunity for long-term relationships because now those advisors are building relationship with the next generation in a family. They don't have to worry about losing the family when the parent dies. So that's the carrot.

The stick side is, it didn't use to exist, but the stick side is there's now enough talk about the need and the importance of family governance. People like you that have had the experience and seen are starting to talk more and more to clients about the importance of this. There are articles being written, and there's a body of work now that's starting to come out.

So if a family goes to a family office conference or just a wealth management conference, it's quite likely they will start to hear topics about family governance, and advisors are recognizing, "We better have said something about this, or we might lose our client." So there's a combination of carrot and stick that we're often focusing on to get those advisors on board.

Jason: And to your point, what I'm seeing now is some of the leading firms out there, both on the accounting side and the law firm side, and one in particular, Marvin Blum, out of Texas, that I'm sure you're very familiar with and likely have worked with before, is that he is having this legacy component be part of his talking points with families. It is becoming more and more important, and I think professionals are recognizing how important that is, how important it is to collaborate, how important it is to make sure that you're addressing those three core areas.

And let's not kid ourselves, there are many, many sub areas below each of those three, but when we break it down, I think it's easiest to say these three are the key components of what helps make families, what helps them succeed in moving generational wealth from one, to two, to three, to even the fourth generation.

One of the things that I often found in working with families is getting them to sit down and talk about some of these very... the softer topics around preserving wealth around passing wealth is a little bit uncomfortable.

I used an analogy that I often used with my children through their sports careers, is that how you get better at something is learning how to get comfortable being uncomfortable. And that's not to suggest that we're going to create, you know, uncomfortable settings, but when something is new and when you haven't practiced it.

I love that word because we use it in so many other areas of our lives and don't ever think of, "Oh, well, we should practice good governance." But when you practice things, those issues, those concerns, those topics that begin as uncomfortable, the more you practice, then the more comfortable you become in addressing those issues, and in dealing with those concerns, and in just having that dialogue.

An example of family governance in action

I'll share with you a family that I worked with a little tidbit of story that we were coming together for the very first time as a family, 5 adult children, ranging in age from 21 to 32, mom and dad, and mom was terrified. She was the one that created the wealth and had also inherited a significant amount of wealth. And she was terrified about having a dialog and a discussion about how much wealth there was.

What we landed on was that we would talk about a pool of capital, you know, a sizable pool of capital that was in a charitable vehicle that we would get the children involved with making decisions with, but she didn't want to share the number. And in the first meeting that we had together what ended up happening is as she saw her children and her husband begin to dialog and to practice kind of this collective decision-making at the very end, we were going 5 miles an hour, not 95 miles an hour, she became much, much more comfortable throughout the period of the three-and-a-half-hour meeting, and at the end of the meeting, she shared with the children how much there was.

But before she did that, which I found was very interesting, she asked them, how much do you think is in this account? And the numbers were... the closest one was 500% off. But you could see the family, as they began to have that dialog to begin practicing how to make collective decisions, get much more comfortable in those baby steps or, you know, going 5 miles an hour as we began that process of integrating family governance. Really was compelling to mom and dad as they began what will ultimately be a very long journey, but they began, to your point, collective decision-making.

Additional takeaways from client successes

So I know we're running up on time. Can you give me kind of, as we come to closure here, some best practices on integrating these teams for complex families? What have been kind of the top couple of things that you've seen that have worked for families, and what are the pitfalls to avoid as you build out teams?

Tom: Well, there's sort of a line in the sand of what does work on one side and what doesn't work on the other side. And I'm glad you mentioned Marvin Blum because Marvin and I have been collaborating on this very topic for a long time now. Kathy and I are his go-to people on family governance, and actually, on his most recent article about the whole need for family governance within families, he was showcasing what we do with families. But he and I both agree that the line is if you want to succeed, you have to be having intentional family meetings. If you want to fail, don't.

And a family meeting is not where you get together and talk about the money in the business. It's about getting to know the family members much better and in depth.

So we actually, he and I, collaborated and created a trust structure that we call a FAST, which stands for Family Advancement Sustainability Trust, but it's a trust designed to endow the family meeting process. And it gets... typically would be warehoused at a place like Boston Private, and it would be administered for the benefit of continuing to run family meetings long into the future.

But getting families to sit down may seem uncomfortable. We are finding, though, that it provides... and having a third party come in and run a family meeting for a family, totally changed the dynamic. Normally, the parents that we're talking to are thinking, "Oh, I'll get the family together at Thanksgiving for a couple of hours after the dinner, and I'll just tell them all whatever I'm going to tell them." Well, that's not necessarily the healthiest way to start because that's a parent-telling experience, not a team learning experience.

Jason: I will interrupt you for one second and share with you a horrific story. I had a family literally do that at Thanksgiving, and it ended up with an in-law biting off a chunk of the ear of one of the patriarchs. I kid you not. So when you say that's not the way to go about this, I absolutely agree, and I have personal experience to back that up.

Tom: That's a great story. Well, you know, my favorite story about this is that I was doing a family office conference, just to give you an idea how important this is. And after I spoke, I was at lunch, a guy came up to me and said, "Wow, what you do is really important. We and our family spend time, money, and effort on this every year."

And he said, "We have a family meetings," and turns out he's one of the Rothschilds. And he lets me tell this story, but he said, as an example of how important this has been, "I'm starting a business with a couple of my fourth cousins." And I remember when he said that, I thought, "What the heck is a fourth cousin? I mean, how far back do you have to go before you can come forward again to get to a fourth cousin?"

Most families don't know a third cousin, let alone actually know a fourth cousin. He said, "Because of these family meetings, we get an opportunity to get to know each other. And it was through that, that when I was starting a business, I naturally thought of my cousins to potentially help me out because I knew what they're doing and where they were." And if nothing else, even if you didn't have a lot of money, wouldn't you want your family to hold together?

So many families say family's all-important, it's the most important thing, but they don't do anything about it. And they don't spend any capital. There's no capital deployment in asset allocation towards building a family team. A family vacation is not the same thing. There's intentionality of a family meeting, and that's what we find is the world of difference.

And advisors are starting to get that. And this is why I love working with Boston Private because you guys get it. You have the breadth and the capabilities to bring the real focus on all aspects of this, but being able to work with your team really helps out.

Then when there were outside advisors, the whole advisor team usually gets invited. If not all, most of them get invited to the family meeting because the whole family gets to meet them. And it really creates a much better dialog of where are we going and how are we going to get there as a group.

Jason: Yep. And 100% agree there. I use another little tidbit frequently when working with families, and you kind of hit on it, is that every single family I've ever worked with, approaching 30 years now of working with wealthy families, they have a whole host of goals and objectives, and every family has different goals and objectives, but there's two that are common with every family that I've ever worked with.

And that first one is that they don't want wealth to disrupt second, third generational family members from pursuing their passions and from being thoughtful, you know, citizens. That's the first thing. And then the second thing is, I call it, it's the definition of family. They want everybody to come home for Thanksgiving. And that kind of definition of family, really what it means is they want the family to interact and be connected. And so much of family governance and legacy planning is about connecting the family. And what, you know, can start out as, you know, complicated and can start out as uncomfortable, the more you practice it, the more second nature it becomes.

In every single family that I've worked with, I have found that those that spend more time, and effort, and resources on coming together and practicing the governance process, the more successful they are at creating thoughtful stewards, and passing wealth, and maintaining that wealth through generations.

Tom: Well, I'm totally with you on that. And I would say that the practice that we often envision is there are a number of activities we encourage a family to engage in, but ideally, it's better coming from an outsider because then the family can mull it over and choose it, but then they own it.

But family philanthropy, organizing the next agenda for a family meeting, or organizing the next family vacation, or coming up with our family history and how we're gonna archive it and get it out to all family members, what's our family education process. There's a whole bunch of decision-making activities that we can encourage them towards. Whatever they choose, they own it, and then that ends up being the world of difference going forward.

Jason: Fantastic. Well, Tom, as always, this has been incredibly enlightening and helpful, and we're very lucky to have you as a resource and to be able to partner and collaborate with you. I want to encourage all of our clients to reach out to your Boston Private Wealth Advisor to discuss their needs regarding our conversations today. Providing guidance and support as your trusted advisor is our mission here at Boston Private.

You can also read our latest perspectives on wealth planning by visiting bostonprivate.com. And while you're there, you can subscribe to our newsletters if you'd like, with all of this information delivered directly to your inbox. Thank you for tuning in. Thanks for joining me today. And, Tom, as always, it's been my pleasure.

Tom: And same back at you. I really enjoyed it. Thanks very much, Jason.

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