Family Wealth Planning – Creating the Family Bank

Growing up, we lived in a very culturally diverse neighbourhood.

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We had a Greek family on one side, Asian on the other, Italians behind us and Lebanese across the street. Each became close friends of ours.

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Many weekends involved a choice between which fence to jump, guided by the aroma of whatever delicious feast each family would be cooking.

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One thing each of these families shared, was a Saturday or Sunday cooking ritual – bringing friends and family together over good food.

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This sense of community and collective was something that, so it seemed, was built into their culture.

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They went out of their way to share, to bring people together, and that flowed through to broader aspects of their life. It was how they networked in business; it was how they built relationships and they always gave priority to family and friends when deciding who to give work to.

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Our house was a family of four – Mum, dad, my brother and me.

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By comparison, our neighbors were larger. Normally a family of 8 or 10. Aunties, uncles, and grandparents also lived in their homes.

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It wasn’t until later years that I reflected on the benefit of doing so. Yes, there was the communal aspect, but these families also lived together to get ahead sooner. All adults, in the household contributed to their mortgage. This meant they paid down debt sooner. When the house had enough debt paid, they used the equity and then purchased another home for family members, such as the grandparents (who moved down the street).

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While the idea of living in the same household as your adult brother, sister, parents, or other relatives may not appeal to you, the idea of collective investing (or family wealth management) has always stuck with me.

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I believe, when structured correctly, families that work together can achieve more financially.

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Not only that, but families who make decisions together, are often closer, communicate more regularly and have better relationships with each other.

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What is family wealth planning?

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When we are talking about family wealth planning, we are really talking about investing in a way that supports the shared interests of that family.

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As opposed to thinking about, as an example, a couple’s needs – it’s also thinking and engaging with your parents to understand what they want, where they would like to retire and what support they might need.

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What your children wish to do for their working career, and expenses or areas of support that might get them ahead sooner.

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What shared interests you may have with your brother, sister or cousins and if that can be commercialised. Or how, if you have achieved commercial success, you can utilise and protect that wealth, so it provides financial security for future generations.

Families in business

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A familiar version of this is with regards to families in business together. They may start a business with shared capital, a shared understanding of what they will do and why they are doing into that business.

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By investing collectively into a business, it means the upfront capital expense is less per individual, which reduces the risk burden of each owner.

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It also opens the opportunity of available investment, given more owners typically mean more capital. More capital means more options in terms of how you run that business and the resources availability.

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More than one owner can mean you get different opinions, which can be a good thing in terms of thought diversity. It means you have more than one owner to protect the family’s interest if something happens to the other.

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Often, families that are, or have, already been in business together are the ones that commonly go on to start a family investment vehicle.

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They know they can work together successfully and manage disagreement, because they have already experienced this.

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It may be the case that they have sold a family business or asset, creating substantial liquidity event on exit – and multiple family members apart of that exit then collectively face the question of what to do next.

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The Family Bank or Family Office

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You may or may not have heard the concept of a ‘family bank.’

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The idea is that instead of just leaving your children or other relatives’ wealth; you create a vehicle that instills values in them; that has the resources to protect and educate them; and to provide opportunities for them, but in a way that does so in a more responsible way.

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Those that create a ‘family bank’ do so by allocating excess cashflow (savings) and accumulated wealth outside of their immediate expenditure requirements into a trust or similar vehicle. These assets then get invested and the income produced is used to provide for its beneficiaries. This enables the income earned, rather than the principal to provide for the next generation; or allow members to pursue a new business idea or venture.

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In some ways, it can also be thought of as an insurance policy, giving some income security to members in the event of sickness, unemployment or to reduce the risk of leaving their career or current job to pursue a passion or new business.

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The concept of a ‘family bank’ or ‘family office’ isn’t new.

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In Ancient Rome, advisors served large family houses to manage land and financial holdings of wealthy families through trusts and a form of estate planning to ensure intergenerational continuity of family interests.

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During the industrial revolution, JP Morgan and JD Rockefeller built their own private banking model and office to manage their own enormous assets. The teams that helped these families included professional and administrative staff that handled everything from wealth management, treasury, to security, travel and healthcare.

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Today, there are thousands of family offices globally. This term typically describes high net worth ($100M+) families that internalise professionals to advise their family.

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However, this concept continues to evolve. We are beginning to see the next evolution of the family office, as technology enables greater efficiency in legal, accounting, investment and administrative services, democratizing wealth management and family offices services.

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Families with $5M or more in investible assets can now access many institutional level products and services.

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Our group, as an example, manages wealth for approximately 150 families with an average $5M account per household. The collective asset base of these families enables us to approach institutions and request custom investment mandates be created, heavily negotiated fees, or new legal structures to be created to suit their needs.

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Similarly, we can approach top-tier accounting or administration firms and negotiate costs due to scale. More recently, we have had a large, global private bank approach us to offer wholesale lending solutions to our clients with more flexible terms and more competitive interest rates than almost any domestic retail bank.

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Family investments

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As far as family wealth planning goes, just as a family in business may have more options, more thought diversity, and greater resource to make their business a success, this also applies to passive investment. In a share portfolio, or superannuation vehicle, the more capital you have, the greater you can diversify.

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Greater diversification means you can spread your risk, reducing the possibility of any one thing impacting your wealth.

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It also opens the opportunity to invest in more sophisticated offerings, such as venture capital, or private equity, which typically have higher minimums.

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It opens the opportunity to invest collectively into things like property or real assets – and assuming each family member has an income – to utilise a sensible level of debt to get ahead sooner.  

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Family tax structures

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Extending on the above, families in business or investing collectively can also use structures in a tax effective way.

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Assuming some family members have different careers and therefore, different levels of income, capital proceeds or earnings from family or business activities can be split among them through a family/discretionary trust.

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This would mean income could be distributed to a family member in a lower marginal tax rate, such as a spouse, reducing the average tax rate across the group.

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Or one family member may have a tax loss that they accrued in their name from a particular venture. They might choose to have trust income distributed to them and offset by a carried forward capital loss; again, reducing the average tax rate across the group. The trust may also allow a mechanism to protect assets and wealth from creditors or non-family members.

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Family Superannuation

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With regards to Superannuation, families can also invest together.

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As of July 2021, Self-Managed Superannuation Funds can now have up to six members, from a previous four.

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Given the administrative costs of a self-managed super fund have some fixed costs, the average cost of running a fund with several members (assuming a higher balance), can reduce the proportionate fee.

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This can create economies of scale, where the operating cost of the fund eventually falls below most industry funds. Meanwhile, the investment choice you have can expand.

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You have greater control and discretion over decision making and you may be eligible for product discounts available to larger, more sophisticated clients.

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Our clients, as an example, often pay 25-50% less than retail versions of the same managed fund.

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They also access it in a tax effective vehicle (SMA).

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Family advisors

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Equally, when the family has a larger asset base, it becomes more viable for the family to access high quality advice.

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This might include a trusted accountant to ensure the family is maximising their after-tax income and ensuring appropriate structures are utilised; a lawyer to ensure that commercial dealing protect the interests of the family; a financial adviser to guide the family on planning, strategy and conduct due diligence on investment opportunities of interest.

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Having a trusted advice network is critical for families to maximise outcomes in their business and commercial dealings. It also encourages harmony, allowing the family to rely on expert opinion where there is uncertainty or a standstill.  

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Family relationships

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Just like the neighbourhood I grew up in, and families coming together over good food, many of the families we work with come together to plan for, discuss and benefit from their shared investments.

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They may host strategy days, either taking a family vacation, allowing for a mix of both business and leisure.

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Part of their trip will be spent enjoying time with each other, allowing their children to connect, but other parts will be to exchange ideas. To present initiatives or ventures that each would be interested in pursuing.

Thoughts are debated, ideas are challenged, and remaining questions are put aside to be talked through with advisers, be it me, their accountant, lawyers, the bank, or specialist consultants when required.

This structure of family decision making is inclusive. It educates members, allows the next generation to listen in or be a part of the thought process and learn skills that many adults don’t usually acquire until their mid-40s.

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In some cases, the younger generations better understand new opportunities. Usually, older generations possess the skills and insight from lived experience, but younger generations often understand current trends in the marketplace better.

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It also facilitates entrepreneurialism.

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It promotes new ideas, allows members to voice problems and encourages the group to think about how to address these.

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The four key activities many families engage in to work together successfully are as follows:

1. They establish a collective vehicle or structure that protects the interests of members, and which can be used to bring excess cashflow (savings) together. This can be termed the ‘family bank.’
   
   
2. Families create a constitution. Something that contains the mission statement of the family, their goals, objectives, values and philosophies. Often this is implied, but not formalised. We have seen this become a step in the estate planning process. It educates the next generation and new members of the family vehicle over time.
   
   
3. They engage trusted, qualified, experienced advisors to help their family make better choices – or to resolve conflicts in decision making. Most typically, this includes their accountant, lawyer and private wealth/investment advisors. Other consultants may also be engaged.
   
   
4. An annual family retreat. It doesn’t need to be a lavish holiday per say, just an event that brings the family together, with an intention of talking about finances, family interests, or problems and finding solutions. It is also a great opportunity to bring the family together for social reasons.

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How do we at Emanuel Whybourne manage and advise large families?

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As with any client, the first step is to gain a complete understanding of the family’s goals, needs, values and interests. However, the key difference with a larger family, is that there are multiple stakeholders.

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Many larger families often wouldn’t have formulated collective goals, defined who the key decision-makers are, determined their combined risk and return preferences or any ethical or investment preferences (restricting/excluding) investments.

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As such, we normally meet with each key decision-maker of the family individually, talk through the opportunities, strategies and structures specific to their needs.

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We would then regroup, presenting shared goals, shared concerns, and shared opportunities, formalising a family investment policy that guides how their wealth is managed.  

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An important point to emphasize is that we always provide financial advice specific to each member, individually.

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Family wealth planning does not mean diluting the quality of the advice by broadening it out to the group. It simply means that where there are shared interests, the group can participate in opportunities together; receive the benefits that come with greater capital, including lower or shared costs, greater investment capability, and potential tax benefits.

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Accounts can still be kept segregated if that is a concern for some families. There are various forms of trusts that can allow for a fixed or discretionary forms of ownership depending on what each group want to achieve; and families can choose to use collective vehicles only for specific opportunities if preferred.

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However, almost every family we have come across do have shared interests.

• That could be a shared goal to create a passive income that gives financial security and flexibility to the family and future generations.
• It could be a shared interest to support and care for their parents in later life stages or support the health of all members.
• It could be shared interests in business, or a shared desire to bring their families together each year.
• It could be a shared desire to keep wealth in the family; to pursue philanthropic initiatives or even a shared interest to educate members on the values of the family for generations.

Collective challenges can be solved better with collective solutions.  

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We help larger families by assisting with the following:

1. Navigating a sale or liquidity event: often, we connect with our clients before they have wealth, or at least, before they have liquid wealth.
   
   They have not yet sold their business, or illiquid assets; but they understand the advantage of having an adviser connect them with the right audience to facilitate a sale.
   
   We can leverage our network of accountants, investment bankers, consultants, M&A experts and refer in these transactions dependent on who is best placed to assist the family. This can increase sale outcomes.

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1. Structuring: we have seen business sales structured in various ways, both to support the interests of the family and how they want to exit.
   
   It can also help from a tax standpoint, ensuring the sale and proceeds are received in a way that takes advantage of any available concessions, leading to better after-tax results.

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1. Defining objectives, values and mission: once the family has gone through an exit, working with an adviser to flesh out their needs, objectives and formalise this is a necessary step.
   
   This is particularly vital the larger the family is, and the more stakeholders involved. It takes time but can reduce issues later.

4. Portfolio construction and management: once the sale, structure and objectives have been completed/defined, we can construct an investment portfolio, or multiple portfolios that suit each of the defined objectives.
   
   Often, this may be a bucket type approach, matching short, medium and long-term objectives to a mix of assets that can deliver those outcomes. This ensures the portfolio is taking enough, but not excessive risk to meet their goals.
   
   We invest in all asset classes for our clients, listed, unlisted, domestic, global. Given the nature of our firm, and clients, we are very different to your local financial planner or stockbroker. We create custom mandates with some of the worlds largest and most well-resourced investment firms. We have access to solutions, otherwise unavailable to many other families or investors.

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4. Family reviews and planning: Needs and objectives are not static. They change, as do the opportunities available and the regulation that governs tax, retirement and business or wealth transfer.
   
   By meeting with our clients on a regular basis, we report how we are progressing towards their goals; capture any changes to their personal circumstances; but also advise on any significant changes that we might be able to plan around or improve upon.
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4. Leveraging network: well-networked families often discover opportunity or solutions much more efficiently than others. Especially when that network is filled with many of the most successful family businesses in the country.
   
   Where appropriate, we can facilitate introductions to the benefit of our clients, within our own network and client base. This can be a significant value add.

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Family wealth planning in Australia is still in its infancy.

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Many Australians compete with, rather than leverage their family network.

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Unlike much of their Asian or European counterparts, there is a significant opportunity available for families who can maintain the harmony required to work collectively.

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Those involved in a family business are perhaps best placed to explore this.

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At Emanuel Whybourne, Families in Business is our business.

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We have seen firsthand the outcomes, dedication and advantage that these family businesses have over other businesses when the right structure, incentives and communication is present.

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If you would like to explore how we can help you and your family to achieve more financially, speak to one of our advisers today.

Until next time,

Ryan

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