Who is the steward of your family’s wealth?

Jason ShrenskyFamily Wealth, Stewardship

At Complex Interests, we spend a lot of time explaining what stewardship is and why it is a vital component in the preservation of family wealth. In all of this analysis, one theme that should become clear is that stewardship is not that valuable as a concept; it is only truly valuable as a practice. For a family to successfully practice stewardship, someone needs to be the steward. Below we will discuss the different candidates for the role of steward and the pluses and minuses of each selection.

The Wealth Creator

In many ways, the best and most obvious choice for steward of family wealth is the wealth creator him/herself. A key factor in the success of the practice of stewardship is access to information. Who has better access to information concerning the legal and financial relationships that impact the family as well as the decision making involved in the creation of those relationships than the family wealth creator? Between the wealth creator’s brain and email inbox there is a trove of information that is uniquely accessible to only the wealth creator. All the wealth creator needs to do is synthesize that information into a format that would aid current family operations and be a legacy for the next generation.

But there is a catch! First, while the wealth creator is poised to be the perfect steward, s/he is often too busy or lacks interest in performing the administrative task of practicing stewardship. Second, it is possible that the wealth creator is deceased or otherwise unable to execute the function. Thus, for many families, a candidate other than the wealth creator must be identified.

A Family Member

Another obvious candidate for family wealth steward may be someone closely related to the wealth creator such as an adult child of the wealth creator. In taking on the role of steward, the adult child of the wealth creator has good potential. The child is likely to be a financial beneficiary of the family estate and would assume significant decision-making responsibilities upon the death of the wealth creator. For these reasons, the child should be motivated to learn as much as possible about the estate s/he will one day inherit. There seemingly would not be a better way to prepare for the transition of wealth than for the adult child of the wealth creator to take on the role of steward and “get his/her hands dirty” practicing stewardship for the family’s estate.

Unfortunately, there are two potential pitfalls to this plan. First, the family member may not have the interest nor aptitude to perform the role of steward. Second, family dynamics have a knack for scuttling good intentions. For instance, sibling jealousies and rivalries can create strife that would undermine a particular family member assuming the role of steward. Further, in some families the wealth creator is not disposed to work openly on financial matters with his/her adult child. Nonetheless, in the minority of families where these pitfalls are not factors, the family member is often able to serve as steward very successfully.

Trusted Employee

The candidate most likely to serve the role of steward is a trusted aide to the wealth creator. This person likely achieved this “trusted” status over many years working with the wealth creator in the wealth creator’s primary business either in a role of chief financial officer or administrative assistant. As the relationship grew over time, the wealth creator may have instructed this person to handle his/her personal matters in addition to normal company duties. Often, this person may have naturally come to be performing the role of steward for the wealth creator’s family without any formal intention at the outset.

There is no significant downside to the trusted employee taking on the role of steward formally. If anything, the family should be mindful of two considerations. First, as the employee begins to spend more and more time practicing stewardship on behalf of the family, it may become more and more inappropriate for this person to be on the payroll of the company. Rather, the family will have to consider paying the steward directly for his/her service. Second, there may be instances where the trusted employee is of similar age to the wealth creator. As the wealth creator approaches and considers retirement, it is likely that the trusted employee will do the same. In the event that the family faces this situation, it may wish to consider a different candidate for steward, i.e. someone who will be around to work with the next generation for many years to come.

Trusted Advisor

Another foreseeable candidate for the role of family wealth steward is a trusted advisor to the family. This is typically either a family attorney, financial advisor, or accountant. Each is a strong candidate because each has gained invaluable knowledge working for the family over a number of years. Prior to choosing a trusted advisor to serve the role of steward, the family should carefully consider two factors: 1) cost and 2) access to information.

Attorney

Attorneys are typically the most costly of the options because their billable hour rates are often higher than that of other types of advisors. Also, while a family attorney may have the best access and be the most knowledgeable about the family’s estate plan, s/he may not have been brought into the loop concerning investments, loans, and other day to day transactions of the family. To properly fulfill the role of steward, the attorney would need some of this information. Thus, if the family selects the attorney as its steward, the family should be prepared to take on the burden of pushing information to the attorney because the attorney would not have access to this information naturally.

Financial Advisor

Financial advisors seem like an excellent choice. From a cost standpoint it seems like they offer unlimited service for one cost. Financial advisors are typically paid under the Assets Under Management (AUM) scheme, i.e., they get paid a fee equal to a percentage of the dollar value of the investments they manage. But many of the core assets of a complex, high-net-worth family (e.g., family business, real estate, collectibles, loans) are not managed by the financial advisor. Thus, it is unclear whether the financial advisor would be willing to take on the job of being steward over concerns of the family that s/he is not paid to manage.¬†Further, because the financial advisor is typically tasked with the limited scope of investing the family’s excess cash, the financial advisor often does not have good access to information about the broader scope of activities in which the family is engaged. As a result, a family that selects a financial advisor as its steward should expect to take on the burden of actively pushing information to the financial advisor.

Accountant

The family accountant might ultimately be the best choice among the trusted advisors. First, while accountants charge for their services on a billable hour model, their rates are typically less expensive than those of attorneys. Second, in terms of access to information, accountants are in a good position. By the nature of their work as tax preparers for the family, accountants need to pull a great deal of information about each of the family’s income and loss-producing relationships, which is likely a large majority of the family’s total financial relationships. Further, this need to¬†pull information from the family is almost always driven by deadlines (tax filing dates) that occur at least annually. Thus, more than either of the two other types of advisors to the family, the accountant in any given year probably has the most complete picture of the family’s legal and financial relationships in its files. And the only burden to the family in terms of providing information is to do what it would have to do anyway.

 

In sum, when it comes to selecting who the right steward is for your family’s wealth, there are a host of options. Ultimately, as you evaluate the potential candidates you will want to weigh the factors discussed above to determine who will be able to serve consistently and reliably over the long term and be a resource to the family as it transitions from one generation to the next.

If you have any questions about the characteristics of a great steward, feel free to reach out to one of the specialists at Complex Interests.