In his book “Woes of the Rich”, Philippe Weil discusses how successful families deal with financial and non-financial challenges to preserve family wealth and to pass it from generation to generation. Weil was born in Zurich and worked for many years at Julius Bär. In 1996 he emigrated to Israel, where he started a family office in Tel Aviv.
Weil based his book on his vast experience. He worked with many wealthy families in Switzerland, a “capital” of old-world money and traditional family fortunes, and in Israel, a more entrepreneurial setting. Yet despite the apparent differences between old and new wealth, Weil writes that the reason for loosing wealth is often the same: Investing disproportionate capital in one business, that may then fail
Misjudging business outlooks, i.e. not taking proper actions in business cycle positioning
Family members simply spending too much, on things like houses, aircrafts, yachts, and lavish parties
Borrowing too much at a high rate, making it increasingly difficult to pay back the debt
Spending too much of the family’s “energy” on confrontation
Lawsuits that drain the family both emotionally and monetarily, through settlement fees
Weil makes the point that emotions, unfortunately, tend to play a role when it comes to all of these six causes. Such emotionality can make it difficult for families to avoid “throwing good money after the bad”!
Conclusively, the author stresses that it is a matter of family members “connecting” with money, and at the same time, living a comfortable lifestyle. It is a matter of being comfortable with talking about money and wealth, without showing off, of course!
Interestingly, Weil observes a common generational sequence pattern:
The first generation: hard working and innovative. Their personal spending is typically modest.
The second generation: improves on the business that the previous generation has established. They are more sophisticated, and look at expansion and substantial wealth creation.
The third generation: often have a loss of focus. Their rate of additional wealth creation flattens out.
This sequence of generational prototypes represents a “best case”. Often wealth can end up being lost, with the advent of less capable new family members, as we saw earlier.
Weil also discusses how a family office might play a crucial role in liaising with and supporting the owner(s), the family, and management, when it comes to:
Wealth/asset management. Here a family office might take an approach more tailored to the performance of a specific family. As opposed to what a typical portfolio manager might be able to do, a family office may suggest more non-traditional types of assets to focus on and adopting a longer time horizon
Preparing reports and tax returns
Supporting family members with ongoing lifestyle management tasks, including handling of payments, studies, cars, insurance, etc.
Philanthropy and social impact investing
Supporting the transition from one generation to the next
The execution of these tasks depends on the family’s philosophy on wealth. Here, Weil makes a useful distinction between a stewardship approach, which primarily focusses on preserving wealth to be handed over from one generation to the next, versus an ownership approach, where the owner decides, say, to donate considerable amounts to charities. Clearly, a family office will be taking on its tasks differently, depending on whether the main focus is on stewardship or on ownership.
Weil also recommends that the family write a, what he terms, Family Constitution to regulate future decision-making in such ways that family disagreements can be kept to a minimum. Here too, a family constitution will typically differ a lot depending on whether there is a stewardship focus or an ownership focus. In the former case, a family constitution might typically make a lot of sense, and considerable care should be put into drafting and discussing such a document. Where there is an ownership focus, in contrast, the owner will basically decide anyway, and there is probably little need for a family constitution.
The final chapter in the book provides several examples of planning in the family firm. Clearly there is a need for proper strategizing and planning for all firms, whether family firms or not, so as to ensure a business’ potential for solid future earnings. Planning from this perspective is not reviewed in this chapter, rather it looks at planning for a family firm from a stewardship versus ownership approach., Weil points out that there are three types of planning:
Financial planning - How can financial assets be passed on from generation to generation from a stewardship perspective? Taxes, currencies, inheritance fees, etc. play a role here. The ownership perspective also requires financial planning. In what ways and how much funds can be allocated to philanthropic activities?
Physical asset planning - Analogous arguments given above apply here.
Planning for heirs - This is clearly primarily applicable when it comes to stewardship cases. Here Weil draws an appropriate analogue with constitutional monarchies, which indeed represent a good example of stewardship. The key here is when the old boss steps down as a “monarch”, to allow the next generation the benefit of running things, while the old “monarch” may act as a mentor.
Further, the last chapter discusses 12 more case studies, which fall into six areas (nuptial agreement, wills, philanthropy, inheritance, family business, and joint capital management). In each of the cases Weil discusses a problem, recommends a solution, and presents the role of a family office in implementing it. All twelves cases are from Israel.
Overall, I recommend reading this book. It makes an important emphasis on the distinction between family wealth governed by stewardship and family wealth governed by ownership.
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