Caption: Scott family-owned Provincial Insurance at the Royal Lancashire Agricultural Show c.1912

Vision, strategy and pragmatism play a pivotal role in the creation of wealth.  These same strengths will determine how those assets are protected and nurtured into the future.

In my personal and professional life, I spend much of my time thinking about stewardship.  The company I formed twenty years ago was created because my own family were intent on stewardship with a generational perspective and we recognised that a family office would enable us to achieve that.   That company now provides those same family office services to numerous other families.  In addition to the prerequisite of sound asset growth over the long term, successful stewards show consistent behaviours and those of us with the same objectives can adopt them for ourselves and our clients.

The bedrock of successful stewardship is straightforward to outline but very difficult to deliver consistently.  The challenge is enormous because we face the usual professional challenges of asset growth, risk management and future-proofing, overlaid by the very personal challenges represented by family dynamics.  This intertwining of love, power and money makes for a potent and fascinating mix.  It is no surprise that the best intentions regularly come to naught. Nevertheless, there are some straightforward building blocks for those with serious assets and a serious intent:

  • Recognise that stewardship is difficult
  • Don’t spend too much
  • Develop appropriate skills within the family to create a rich pool of multiple talents
  • Put in place a process for appointing the right leaders, deal sensitively with the less able
  • Be strategic and take a long-term perspective
  • Appoint the best professional advisers who understand that family success is different to professional success

Stewards are both inheritors and protectors of a legacy.  It’s hard to carry off both roles and most people faced with this unusual opportunity fail.  An interest in and commitment to stewardship recognises that our time on earth is subject to a limit.  Stewards want to leave something behind, something better.  Immediate hedonistic temptations are resisted by good stewards as they recognise that the best guardians of future generations are themselves.

The most successful stewards I have witnessed exhibit an attitude of humility rather than hubris.  They recognise the difficulty of their task and know that many inheritors will fail to leave behind something at least as good as that which they inherited.  It follows that families and individuals who are good stewards are so because of their behaviour in the context of their wealth, not in spite of it.  Why is behaviour so important? Because there are elements of personal and professional behaviour that combine as powerful determinants of the process of successful stewardship.

Don’t spend too much

For those who wish to pursue stewardship, what behaviours are appropriate? On the personal front, I would offer a simple direction: don’t spend too much.  If one spends at a rate that denudes residual assets of the capacity to generate growth at a rate that exceeds inflation (however calculated) then one is not acting as a steward.  Experience and long-range data suggest that inheritors should expend no more than 2% of their capital as income.

It is axiomatic that this culture, this understanding of the link between enduring legacy and personal restraint is part of the behavioural characteristics of current and ensuing generations.  There is no point curtailing personal expenses in one generation if the next is set on extravagance.  Parental values and examples are of fundamental importance, as are the creation of structures that can impose restraint on inappropriate expenditure.

It is appropriate in this context to mention two other issues that will have dramatic influence: divorce and the number of offspring produced. The impact of both is clear.

Nurture talent and manage expectations

Families who endure over generations are effective at building a rich ‘balance sheet’ of wealth, of which financial resources are only a part: educational, artistic and philanthropic achievements are all part of the makeup of successful stewards.  Such families recognise that the opportunity brought by the existence of capital and unearned income is both precious and rare.  They have an opportunity to explore their personal potential in any field, whether remunerative or not and exhibit the humility to recognise how lucky they are.

Whilst it is important to empower each generation to pursue their own path to success and happiness by developing their own talents and enthusiasms, it is also important that the overall family strategy remains coherent and is expertly and carefully communicated.  People must know where they stand: what (if anything) is expected of them and when and how to act.  In this way, they can both manage their own lives (rather than endure the frustration of their future being in the hands of others in the family) and their own expectations can be managed by the senior generation.  The capacity to communicate effectively in this context is a rare skill, seldom exhibited in families.  It might sound vulgar, but families do need to sit down and talk about the money!

Scott family wedding 1911

Scott family wedding 1911

Make long-range plans

The most effective families I have come across make long-range strategic plans and take pertinent decisions themselves rather than delegating them entirely to external advisers.  Their capacity to act effectively is often enhanced, particularly in inheriting generations, through acquiring both education and experience and the necessary skills to make strategic decisions.  Nevertheless, they seek to surround themselves with best-in-class advisers on all fronts and base their decisions on the best external advice they can obtain where appropriate.

Successful behaviour involves acquiring and acting upon excellent external advice. Families should not cut corners in this respect because the compounded effect of poor advice can have dramatic negative influence over the long-term.

Pick the right leaders

Effective stewards are also adept at sidelining those family members without the necessary skills to oversee stewardship: sometimes gently, other times less so.  But they take these hard decisions because they are looking beyond the individual and toward the needs of successor generations.  No inheritor wants to be part of a generation which in subsequent years will be pointed to as the ‘ones that lost all the money’, and effective stewards need to be adept at picking the right leaders in each generation.

Facilitating effective succession has been written of as the ‘last test of greatness’ of the wealth creating generation.  Most families fail in the process, which explains why so few manage to create an enduring legacy.  Honest and open communication and the implementation of an objectively fair process can go some way toward engineering an optimal solution but participants must be aware of the damage that can be created by feelings of rejection that can arise when family members are deprived of anticipated roles and responsibilities.

Whilst families will need to make key decisions when planning a succession, the involvement of outside specialists can go a long way toward engineering a successful change of leadership.  As well as helping design the selection process, they can also act as a lightning-rod for angst and dissent, allowing family members to stand by decisions whilst de-personalising the process to some extent.   My own family found the involvement of an external consultancy as being of great value as we put in place our own ‘Protocol’, the purpose of which is to allow us to continue to function effectively as a consortium of cousins.

Scott family group at Ullswater 1934

Scott family group at Ullswater 1934

Pick the right advisers

My own experience as Founder and Chairman of a multi-family office supports the belief that families should seek to act appropriately at both a personal and professional level if they are to give themselves the best chance of enduring success.  We provide professional advice alongside other advisers to enable stewards to succeed on their own terms, but are always conscious that long-term success will ultimately be generated as a result of the behaviours of our clients, rather than ourselves or any other advisers.

Family offices and stewardship

How is the concept of stewardship applicable to the activities of a multi-family office? Both ‘hard’ and ‘soft’ skills are relevant.  By hard skills I mean applying the most robust, risk-aware investment management techniques.  A focus on absolute returns and long-term results drives family office thinking.  They tend to have a conservative approach to markets and opportunities, but are nimble enough to capture opportunities that are ‘of the moment’.  They must ensure that they do not allow any portfolio to become overly dominated by current themes and must be expert generalists.  Their task is to set asset allocations, then employ the best talent they can find on behalf of their clients.  Much as a conductor of an orchestra, family offices need to know what the managers they employ are doing, why they are doing it and whether they are any good at it.  At Sandaire, we collaborate with over 100 external managers on behalf of our clients and are constantly looking for more.

Our clients seek and expect teamwork from all their professional advisers and good family offices enjoy and are adept at working alongside other complementary professionals, each expert in their own field, particularly tax, legal, structures and corporate finance.  In this context, being good team players is a necessity.

On the ‘softer’ front, the effective family office understands that stewardship and successful inheritance are hard to achieve and they ensure that they are attuned both to the strategies that their clients are pursuing (and that means having a senior, experienced team at their service) and also to provide a service that is broader, more supportive and personal than that which they can find elsewhere.  Allied to this empathetic approach is the objective of delivering a service that is long-lived, since family office clients have long-term strategies and wish their advisers to remain in place as long as they remain valuable.  They wish to avoid continual rotation of client-facing people.

Straightforward but difficult

The prime determinant of successful stewardship will be the decisions and behaviours of those who wish to fulfil the role. The behaviours that they adopt can be admired and copied by those of us who wish to emulate their achievement, which, by its very rarity, is remarkable.  The process is straightforward to describe but success will elude many of those who aspire to it. A well-chosen advisory team, amongst which an effective family office can play a key role, can make a crucial contribution toward the achievement of something that is remarkable and rare: enduring wealth.