|Wealth Assessment Survey: Governance Policies
|Thoughtful governance policies are essential for achieving consistent management, developing cohesive, integrated actions and providing fully effective guidance, processes and decision-making for your wealth environment. Without proper governance, critically important issues can go unaddressed, key individuals might be left on the sidelines, future generations of leadership (your intellectual and human capital) might be squandered, and suboptimal decisions about your wealth are likely to be made.A discussion of governance is not about dotting the “i’s” and crossing the “t’s.” Rather, it is about fundamental business practices – the practices that will influence your success in managing your wealth environment.Governance consists of several key components. Recognizing that each individual situation is unique and calls for a custom-crafted solution, these key components are essential for developing successful governance, regardless of personal circumstances:
- Organizational Model: The model that you develop is based on your philosophical beliefs and the evolution of your wealth management environment.
- Operational Structure: Consideration should be given to whether you wish to govern from a physical office or avirtual office.
- Advisor Selection: Who do you want to have in your adviser suite?
- Investment Committee: Who should be on your investment committee?
- Generational Planning: What role, if any, will future generations play in governance?
|There are several models to choose from, and there are no right or wrong answers. In selecting the right model for you, it is important to be able to assess your situation candidly, evaluate your philosophy honestly, and communicate your model to everyone involved. Here are four governance models to consider (this list is not exhaustive and you may consider employing a hybrid): Types of Organizational Models
- The Entrepreneurial Model: This model is also referred to as the single decision-maker, or patriarch/matriarch model. This solution does not call for shared decision-making, though “The Decider” (to quote former President George W. Bush) may have a panel of advisers to provide some guidance.
- The Family Participation Model: This model engages the family (which can be defined in a variety of ways) in a collegial multi-party decision-making process.
- The Committee Structure Model: This model includes some (but not likely all) family members and professional advisers in a committee structure. The committee typically operates in a reasonably democratic manner and has regularly scheduled meetings in an open atmosphere.
- The Professional Fiduciary Model: This model does not typically arise until a family office, foundation or charitable trust has been in business for some time and it can operate without in-depth family participation.
There are advantages and disadvantages to each organizational model. The entrepreneurial model for example, allows for the most expeditious and least encumbered decision-making. The committee model on the other hand, brings more perspectives to the table. Further, the professional fiduciary model becomes vital when there are no suitably engaged family members available or interested in governing wealth.
|Operational Structure: Physical vs. Virtual Office
|Determining which operational structure is best for you requires careful thought. Deciding to employ a physical office with W-2 employees is in part driven by scale, and is influenced by personal preference. Some families and foundations feel strongly about bringing services in-house and believe that doing so will improve service quality and confidentiality. Others abhor the idea of managing employees and prefer the flexibility of having a virtual office instead.
Although a virtual office requires careful coordination by the asset owner and their respective service providers, it may be less work than managing a physical office.As an asset owner, you may decide to in-source some operational functions and outsource others. If you are unsure about which operational structure to employ, there are several family office organizations that can help you with your decision. Three well-respected organizations are: the CCC Alliance, the Family Office Exchange and the Institute for Private Investors.
|Suite of Advisers
|Assembling a suite of advisers that is right for you is idiosyncratic. It is influenced by several factors which include (but are not limited to) the scale of your investment resources, the complexity of your investment strategy and asset allocation, total number of family members, whether you have an ongoing operating business, your own background, education and experience in managing investment and personal-use assets and more!With this understanding, it is comforting to know that there are several key experts you can engage to advise you in managing your wealth.
- Legal counsel is a basic necessity for estate planning, structuring investment and personal assets and protecting you against the potential claims of creditors or other litigation. As such, you may employ more than one attorney on your team. For a private foundation or charitable trust, employing a counsel who specializes in working with these types of entities is called for.
- A good tax accountant is typically essential. Particularly one with expertise in return preparation and tax compliance.
- Straightforward bookkeeping, accounting and bill paying services are also commonly needed.
- An investment strategy consultant who focuses on asset allocation, manager selection and performance reporting is often vital; especially if you are building a robust set of asset classes with multiple managers including alternative assets. If you seek to employ an outsourced Chief Investment Officer Cambridge Associates is among the highly respected providers of this service.
- If you have one (or potentially several) limited partnership(s) then a qualified partnership accounting provider may be extremely helpful.
- Unless you establish a fully staffed office of your own, you may want to engage an outsourced Chief Executive Officer or Chief Operation Officer to “conduct your orchestra” of professional service providers. Reynolds Group, Private Investment Counselors™ provides just that service.
- You may want to give some thought to including a Protector in your governance planning. Protectors are more traditional in Europe than the United States, but including one on your advisor suite is worth discussing with your legal counsel.
- A private banker can provide valuable expertise in addition to traditional banking and custody services. A private banker can facilitate asset acquisition, sell-down programs for concentrated holdings of marketable securities, performance reporting, make secured loans, offer a line of credit, and bring to bear other advice.
- Insurance advisers are essential for addressing property and casualty issues as well as health and life insurance.
- Depending on internal staffing levels, a private foundation or charitable trust may wish to consult with an outside grants adviser.
|Designing Your Investment Committee
|It might almost go without saying that the design of your investment committee will be heavily influenced by your organizational model. That said, here are some designs worth considering:
- There will typically be at least one family member on your investment committee regardless of your organizational model. This is commonly true with private foundations and charitable trusts as well.
- The one or two senior-most officers of the family office, foundation or trust office, (or outsourced CEO or COO), are typically voting members of the investment committee.
- As with designing most any committee, having more than 5 to 7 voting participants can be unwieldy.
- Advisers to the investment committee may include an investment strategy consultant, legal and tax counsel, and others as may be suitable in the particular situation. The advisers are not typically members of the investment committee, but rather make recommendations to committee members who are responsible for all the decisions. The advisers may be persuasive, and it may be common to follow their advice, but the advisers do not have final authority.
- There may also be investment committee members-in-training who attend meetings, but do not vote. This role can help engage the next generation and maintain continuity to avoid gaps in knowledge. It also gives current investment committee members an opportunity to evaluate the potential long-term contributions of members-in-training based on their participation during this phase.
Lastly, careful consideration should be given to how often the investment committee meets, how long each meeting is, who develops the agenda, and where the meetings take place (meeting locations may vary to be fair to all members).
|Role of the Next Generation
|In the family investment business, the eldest living generation of family members is typically known as Generation One’s, or G-1’s. Their offspring are known as G-2’s, etc. It is common to work with a few G-1’s, more G-2’s,and a larger group of G-3’s. As life spans increase, G-4’sare likely to be present; although it is not common to find four living generations who are all fully competent to (or interested in) governing their family wealth.Thinking through the evolution of the roles of each family member and designing effective trajectories for family members are two of the most important, yet difficult, tasks facing any family. Working through these matters is laden with emotional issues of power, influence, views of self-worth and (dis)enfranchisement. It can be valuable to engage the services of a professional who specializes in helping families think about and plan for, orderly and empowering transitions. Transitions can take place over time and in a constructive way that builds self-confidence and competence as well as family bonds and feelings of closeness and warmth across multiple generations. Achieving that goal is unlikely to occur without a conscious and deliberate approach carried out meticulously over a period of years. Addressing just such matters is at the core of good governance.
|Making the most thoughtful decisions about your set of governance policies can help you facilitate your long-term goals for yourself, your family, private foundation and/or charitable trust. Governance should be treated as a central element of your planning.It is wise to approach the design and implementation of your governance in a business-like manner. It can also be helpful to network with others similarly situated to provoke creative thinking and to use their examples as a reality test for your initial hypotheses.It may also be helpful to make adviser and committee selections in concert with other members so that you construct a fully functional and optimally effective governance team.
Lastly, it is important to make decisions about when, how and in what arenas to begin involving your next generation. These choices will be vital to building the human and intellectual capital that is central to managing your wealth environment long-term.
If you do not have a designated advisor to assist you with the choices you need to make about the wide range of governance issues, and if you would like to discuss these matters with me in more detail, please email me, or give me a ring at (617) 945-5157.