Mapping the future

A successful investment outcome involves assessing a number of factors, such as time horizons and attitude to risk, then implementing
an appropriate strategy. The family’s broader asset allocation should be addressed carefully, bearing in mind
where their assets and liabilities are
placed, and how the two interact. It
may make sense, for example, to keep
a certain amount of liquid assets in
case the family needs cash urgently.

Taking a flexible approach that enables the family to stay abreast of changes in the financial markets can be advantageous: those who cashed up in early 2008 and did not reinvest over the ensuing 18 months or so missed out on some significant rises in investment markets.

Flexibility is also key when it comes to potential tax and legal developments that could otherwise adversely affect clients. To take a particular example, the Finance Act 2006 introduced changes to the way that trusts are taxed, which meant that innovative structures suffered badly. Those which were more flexibly constructed were at a definite advantage.

HMRC’s increased tax scrutiny has had its desired effect and resulted in less aggressive avoidance and a greater focus on how investments perform. The key thing is both to accept that change is the only constant, and to try to anticipate what those changes are likely to be.

Divorce, long-running family
disputes and tension between generations are just three examples of potential grievances that can lead to very real threats to wealth.

It is not uncommon for the older generation to have misgivings about the younger generation’s abilities to manage the family wealth. The best way to head off this concern is through long-term education and effective communication between the generations.

In particular, a family constitution
can be a useful control mechanism for
the concerned older generation, as well
as a ‘road map’ for future ones.

However, it is also important not to rely too heavily on external assistance when educating the younger generation. Discussing the family’s assets should be
a regular and informal part of family life, rather than something that is examined solely behind closed doors or in the presence of professional advisers.

Equally, the older generations need to practise what they preach and not spend frivolously while instructing their children to take an abstemious approach. It ultimately all comes down to long-term education, and if children see the older generation behaving responsibly, they are more likely to follow suit with their own behaviour.

Consequently, the limitations of
the financial adviser’s influence must
be recognised, even though they have
a key role.

A lack of family control and discipline can result in bad financial mismanagement, although having too much control concentrated in the hands of one family member can be just as unsettling. In this scenario, when the controlling member dies, it can result in long-suppressed issues coming to the fore, with potentially harmful results for the family’s wealth.

Again, having a family constitution can help avoid mismanagement and, as in warding off other potential threats, diversification is key: power, as much as the assets themselves, should be appropriately diversified.

Having trusted advisers is another
key consideration. Good quality, long-term advisers that understand the family’s dynamics can prove invaluable
in spotting and heading off potential threats to wealth. 

Charles Gowlland is investment management partner and FrankAkers-Douglas is private client tax services partner at Smith & Williamson