The Importance of Integrating Tactical and Strategic Wealth Management

As currently structured, the wealth management industry provides tactical wealth management services to the clients it serves. Families of significant resources often employ wealth management teams comprising some combination of attorneys for estate planning, entity formation, and tax planning; accountants for recordkeeping, tax planning, and tax compliance; financial planners for cash flow, investment management, tax planning, and insurance; investment managers for portfolio management, asset allocation, security selection, and performance reporting; insurance agents/brokers for life, health, property, and casualty insurance planning and product selection; and bankers for advice on banking, lending, and deposits.

Law firms, accounting firms, registered investment advisors, banks, and insurance companies that provide wealth management and wealth preservation services for well‐to‐do clients spend 90 to 95 percent of their resources on the tactical products and solutions mentioned in the previous paragraph.

These services are indispensable for helping families manage and sustain their resources. However, the professionals who staff these firms generally have little understanding or expertise in dealing with the strategic challenges that can arise when attempting to serve an ultra‐high‐net‐worth family made up of multiple units and often including three, four, or five generations. The families may have multiple legal entities; passive investments and operating businesses; and competing and contrasting interests, viewpoints, and opinions. It's possible they don't agree on such issues as how to use the resources of the family, how to determine the role each family member should play, how to communicate effectively among various family groups, and how the family enterprise should be managed—and while traditional wealth managers have expertise in overseeing and transferring the assets, the intricacies of family relationships, family organizational styles, structures, responsibilities, and communication mechanisms are generally beyond their scope and training.

In addition, the fee and compensation models of traditional wealth managers focus on tactical planning and performance in the short run, not strategic planning to support family continuity and long‐term wealth sustainability.

When wealth owners realize that they need help with strategic planning as well as tactical execution, they may investigate firms that offer the consulting services traditional wealth management neglects: identifying independent and shared family values, mission, and vision planning; role definition and clarification; leadership growth and family wealth education; communication planning; and family governance, to name a few.

These specialized firms often are staffed with experts whose backgrounds are in psychology, leadership development, or business and management consulting. Although they provide valuable and much‐needed services to the families they work with, these people normally do not have a strong understanding of the tactical issues and solutions required by ultra‐high‐net‐worth families.

These two service models exist at opposite ends of the wealth management spectrum. Standing alone, they deliver incomplete and fragmented service to the families who call upon them for assistance and support.

The lack of integration puts the responsibility on the families to align their strategic and tactical planning and avoid the “shirtsleeves to shirtsleeves” phenomenon. Families must integrate both strategic and tactical planning to ensure effective management of the current resources, continued wealth creation, long‐term sustainability, continuity, and family harmony as they navigate the myriad issues of shared wealth. The family may not have the capacity to manage both halves of the equation, or indeed, either one.

Ultra‐high‐net‐worth families often don't begin to think deeply about wealth management until they experience a liquidity event or another transitional situation such as the retirement or death of a significant family owner. Suddenly, the family is either dealing with an inflow of cash or a requirement to raise cash—perhaps multiple millions of dollars—and family members are forced to address the present situation and to think about the future: How do they protect what they have and make it grow, both to benefit their families and to create the legacy they want to leave? Often surprised and overwhelmed by the host of opportunities and risks they are facing, they review their current advisory team and perhaps add new advisors.

They may choose this somewhat inchoate group of advisors based on the recommendations of friends or other advisors. They also might conduct a somewhat random research process and end up handing over important aspects of their lives to relative strangers.

As Rogers, Budge, and Lambergs mentioned, “Family decision‐making processes are sometimes not only opaque to advisors, but also aren't clear among family members themselves.”1

Without a well‐articulated process for making decisions about advisors, “families end up frustrated by meeting a large number of advisory organizations . . . and . . . floundering due to an inability to respond to the volume of polarized views and conflicts that arise.”2

Close questioning of potential advisors is vital because ultra‐high‐net‐worth families have special needs and often bring a large number of family members and considerable complexity to the table.

The Beginning: Questions and Answers about Strategic and Tactical Wealth Planning

Families who want to work with firms that (1) provide an integrated approach to wealth management and (2) have a deep understanding of the unique strategic and tactical issues that accompany significant shared wealth should ask the following questions:

  • How many clients do you have that fit our profile with regard to net worth, family composition, business enterprise, and particular needs? If the firm predominately manages affluent clients with only a few who are truly ultra‐high‐net‐worth, the advisory team may not have sufficient understanding of the unique issues and intricacies of a family group with at least $30 million in investable assets, which is the benchmark that Investopedia uses to define this group of individuals and families.3 Credit Suisse sets the benchmark at $50 million, but whatever the definition, those who fall into this category are a distinctive group of clients with unique needs.
  • How many clients does your firm, advisor, or team manage in total? If it's hundreds of families, the ultra‐high‐net‐worth family may not receive the attention required to manage the multiple details that go into making important decisions.
  • What is the client‐to–team member ratio? How many teams are designated to ultra‐high‐net‐worth families? Because of the formidable nature of these families' needs, the ratio should be small enough to serve them effectively. Depending on the team or advisor structure, one senior relationship manager can comfortably manage about six to ten clients. An advisory team can effectively support roughly twenty families, but probably not more.
  • What is the composition of the team servicing our relationship? What are the educational backgrounds, business and professional experiences, and tenure of the practitioners working with the family? To effectively serve the family on both a strategic and tactical level, the group of advisors must have backgrounds in law, accounting, investment management, tax planning, risk management, and organizational management. In addition, how long have the team members been working with their current firms? Continuity and consistency of the advisors is important, so the team knows the family as it evolves. A revolving door of new advisors who must be constantly retrained about the family's circumstances and objectives is of little use.

    Not all the team members have to be with one company. In fact, since several different disciplines are necessary, it's likely the advisors will come from several firms. For example, only practicing attorneys may give legal advice and draft legal documents. Therefore, families will require a competent law firm for this aspect of their wealth management. What is most important is that the family has a well‐orchestrated team with all the appropriate disciplines represented.

  • Does the firm have the resources, expertise, and business model to support the family in strategic as well as tactical wealth management? Will it assist in developing a family mission statement that reflects the family's values? If so, what process will it use? Will the firm or team of advisors help the family develop a family educational program that will identify future leaders and teach them to manage wealth? Do the people who will be involved have the expertise and experience to support the family in creating a decision‐making process or framework for family governance? How will family communications be handled initially and on an ongoing basis?

    How will the advisors integrate the strategic and tactical issues for the benefit of the family? Can they share examples or references of how they have integrated these key elements for other clients?

  • How are team members compensated? On product sales? Do they have goals for loans, deposits, or assets under management? Do they earn fees on basis points for asset management? Is the firm compensated hourly or by project? Does it work on retainer? Are the team members on commission, salary, or a combination of both? Does the firm offer a team‐based compensation program, or is each team member paid on individual performance metrics? How is success defined for the team?

    These details are important. Families want to be certain that the advisors they select are aligned with the family goals for long‐term wealth management and sustainability. They also want to ensure that their advisors are not at cross‐purposes with one another. The family may have strong preferences about wealth management, and those preferences must be taken into account so that all the relationships—both inside and outside the family—work smoothly.

  • What is the total fee arrangement? Does the firm have any hidden fees or other sources of revenue? Do the advisors accept any kind of compensation from any product providers? If yes, it's possible the family may be steered into products that provide revenue for the firm, but perhaps are not best for the client. Money talks. How does the firm handle potential conflicts of interest in fee structures and advisor compensation?
  • What is the standard client experience? How often and under what circumstances can the family expect to hear from its advisors? Are there regular family meetings or retreats? If a family has current advisors they like, how will the firm communicate with those advisors, and who will take the leadership role? Will clients have immediate online access to their accounts, reports, and other information so they don't have to call the firm and wait for critical data? How is confidential information protected? Does the family have an opportunity to meet and network with other similar and like‐minded families?
  • What role does the firm envision the family will play in coordinating the advisory team and the family? It's important that the family divides roles and responsibilities among family members and family office employees, if any, to ensure accountability, coordination, and streamlined operation without duplicative efforts. Every member of the family also must feel that his or her interests are fairly represented.

When all these questions are answered, there's yet one more. How comfortable does the family feel with the people who will comprise their advisory team? As one family member put it, “I looked for assistance almost immediately after the merger of our company. I spoke with one highly regarded advisor who would be backed by a team of other experts. Technically, this man might have been superb, but he was condescending and treated me as if I couldn't possibly know anything about business. I didn't like that, and neither did my husband.

“Apparently, this potential advisor hadn't acquainted himself with the fact that my husband and I built the business together. My husband was the big‐picture guy, and I handled the details. I must have done it well because the due diligence people from the company who bought us out said it was a very smooth process because of my painstaking recordkeeping over the past twenty years. But I was treated like an idiot with no understanding of anything this man might recommend.

“If he'd done his due diligence about his potential client, he would have known that I was an officer and key decision maker in the company. He didn't get the job, and my husband and I found a female advisor who was equally qualified. We're both very satisfied with her.”

Whether it is an ultra‐high‐net‐worth family who has inherited for generations or an entrepreneur who has created great wealth, it's essential to have a high‐quality advisory team that can manage the family's integrated wealth management requirements. For some families the best choice may be to set up a family office, but such an arrangement comes with challenges and can be very expensive to structure and maintain. Chapter 5 will discuss the risks and opportunities of setting up a single or multifamily office.

Entrepreneurs who have given their lives to building a family business may be surprisingly unsophisticated about the best courses of action to take following a liquidity event. Although they might have been quite adept at running the business, they sometimes feel at sea after the business is gone and that they are drowning in a tidal wave of new responsibilities and reporting requirements.

Often they see wealth management simply as a set of tactics that must be implemented and maintained. Once their advisors have been chosen, documents drawn, and investments made, they may feel that their wealth‐planning project has been completed. Although they understand that the program will need to be monitored and adjusted occasionally, for them the major part of the process is over. However, the fact is that their work is only partially finished. If the family has neglected the strategic dimensions of wealth management, it will likely not achieve long‐term success.

For example, ten years ago, Dan Randal* sold his family farm in South Dakota for nearly $100 million to an energy syndicate. Dan's father had established the farm, and Dan had added to it meticulously over several decades.

At the time of the sale, Dan set up a family investment partnership for his wife and children, made investments including the purchase of a small jet that he piloted, and set off with his wife, Trish,* to see parts of the world they'd always wanted to visit. The farm had taken virtually all his time until it was sold, and Dan and his wife were having a wonderful adventure, enjoying what his constant efforts had made possible. “The kids were taken care of, I'd worked all my life, and this was our time. We loved every second of it.”

Dan's son, Rick,* who was eighteen at the time of the sale, was now a twenty‐eight‐year‐old pediatrician in a large group practice in another city. His daughter, Grace,* was a talented, though struggling, twenty‐four‐year‐old jewelry designer, living across the country with a young man who was making a name as a portrait painter. Much of the children's money was managed in the family partnership. The children were happy in their lives, and Dan and Trish had more than enough money to continue their odyssey of discovery throughout the world.

Everything was going well for the family until Rick announced he wanted to marry Emily, an anesthesiologist he'd met in medical school. Neither family was surprised. Rick and Emily had been together for several years and had shared holidays and other special occasions with both his family and hers. Everyone was pleased and excited.

Dan's attorney, Harold Whitely,* a member of the law firm that had advised Dan on the sale of the farm, suggested to Dan that Rick and Emily should enter into a prenuptial agreement since Rick had substantial assets as a result of his interest in the family partnership. When Dan and Harold presented the idea to Rick, he was not in favor of it. In all the time he and Emily were together, he never discussed this idea with her. Now that they were engaged, Rick felt it was the wrong time to spring it on her.

However, at his father's urging, he agreed to mention the prenup to her. Emily was taken aback, then hurt, then furious. She felt that Rick's family, with whom she had been so close, now didn't trust her and considered her a golddigger, even though she had never known the extent of Rick's fortune.

Rick, too, was angry, feeling that he and Emily had been sandbagged. Nonetheless, he now realized just how wealthy he was, and he saw the wisdom of protecting his unexpectedly substantial fortune. He tried to convince Emily that the prenup also included safeguards for her, but she refused to sign. “I feel as if they're telling me that the only family that matters is the blood family. If I'm not blood, then I'm not really family. I might be an extension of the family, and my children would be members of the family, but I am and will always be an outlier. That's not acceptable to me at all. If I marry into a family, then I am a member of the family, not an interloper.” Her relationship with the entire family, including Rick, soured, and she broke the engagement.

Although the pain was visited on Rick and Emily, the mistake was Dan's. He had not spent the time and resources necessary to prepare and educate his children about the risks, responsibilities, and challenges that come with wealth. He never communicated his values or preferences. He had not planned for the issues that wealth would create, nor had he given any attention to the prospect of in‐law children or grandchildren and the potentially exponential growth of the family.

Had he done so, he and his advisors would have developed a plan to prepare Rick and Grace at the time the family sold the farm and created the family investment partnership. At sixteen and eighteen years of age, the children would have begun to learn not only how to manage wealth and the responsibilities and opportunities that come with it, but also would have heard the history of the farm and what it meant to Dan. They could have explored their parents' values and shared their own, thus beginning to form a cohesive sense of legacy. Dan, Trish, and their advisors would have involved both children in discussions about the family's future and educated them about how the money they would inherit could be managed and increased to support the family's hopes and dreams, not only in their own generation, but also for several to come.

Rick would have known the details of his assets, holdings, and investments. He would have heard about prenuptial agreements, and the benefits to both him and his fiancée would have been spelled out. He would have been taught how to raise and discuss the issue with a potential spouse.

This constant conversation and training should have been part of his growing up, not sprung on him suddenly, diluting and eventually destroying his relationship with a young woman he loved. His financial trust would not have become an occasion for personal mistrust.

In short, Dan had neglected the strategic dimensions of wealth planning, and the wounds were slow to heal. These kinds of misunderstandings and arguments are, unfortunately, typical when wealth planning includes only tactical issues.

The Elements of Business Planning versus Strategic Wealth Planning

A business generally comprises the management team, the employees, and the shareholders. For the business to run effectively, each constituent group has a specific role to play. Management leads the business, creates the business plan, and oversees execution. Employees are accountable to management and have responsibility for executing the operation of the business plan. Shareholders are the owners of the business, and management is accountable to them for effectively and efficiently running the business and reporting results.

The business of wealth for families who decide to manage their assets collectively has many similarities to a family or closely held operating business. There is generally a patriarch and/or matriarch who are equivalent to the management team. Family or nonfamily members who manage the wealth enterprise day by day are similar to employees while family members who do not work in the management of the wealth but have considerable interest in how it is handled can be roughly equated to shareholders. As in an operating business, these groups are bound by a common purpose and work together, sharing resources such as assets and revenue.

Successful entrepreneurs take part in strategic planning and execution as a necessary component of managing their business. As the following table indicates, the same planning and execution are essential for managing the business of family.

Strategic Plan/Tactics for an Operating Family Business Strategic Plan/Tactics for a Family Wealth Enterprise
Developing a vision and mission for the business Developing the vision and mission for use of the family wealth
Setting goals and objectives that support the vision and mission Setting goals and objectives that advance the vision and mission
Defining roles and responsibilities for employees Defining family members' roles and responsibilities for managing the wealth of the family enterprise
Identifying and educating leaders Identifying current and future family leaders
Planning for succession Creating a succession plan to manage changes in leadership
Training employees Providing wealth management information and education for the family
Initiating comprehensive communication planning Initiating a plan for regular, clear, and useful communication between and among the family members
Setting up the tactical plans that support the business strategy Setting up annual tactical plans and reviews that support the overall strategic plan for the family's wealth

The needs of each constituent group must be attended to and balanced for the family enterprise to run smoothly and with a minimum level of conflict. In his book, James Hughes states that the assets of a family are its individual members.4 If he is right, those assets must be safeguarded, cared for, and kept in good repair if the family enterprise is to grow and thrive beyond the current generation. A strategic scaffold is a must.

If members of a family decide to manage their wealth as a group, they must learn to trust one another, and nothing builds trust like honest, frank, and frequent communication among nuclear family members and the wider family enterprise. No matter how much DNA they share, each family member is different from every other member. A sister may be a risk taker; her brother may be more cautious. One cousin may be a natural networker while another is a lone wolf. Some members of the family are glass‐half‐full thinkers; others are deeply pessimistic. Some are spenders, and some are stewards. The same family may encompass pillars of the church and atheists, introverts and extroverts, and arts lovers and sports fanatics.

Each family may have different ideas about how the wealth should be used. A son may want to invest in new business opportunities that bring jobs and strengthen the economy of a city. His brother would rather support the city through direct philanthropy. Throw in the in‐law children and their children, who can be close friends or unknown to one another, and it becomes evident that family communication webs are complex and rife with opportunities for disagreements.

Nevertheless, it is clearly beneficial for families to incorporate a well‐defined method of communication to sustain wealth and maintain positive and effective family relationships based on trust, clarity, and understanding.





*The examples with an asterisk mentioned in this chapter are composites of cases the author has encountered in his wealth management career. Names and all identifying details have been changed to protect privacy.

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