Why You Should Manage Your Wealth Like A Business

The number of high-net-worth and ultra-high-net-worth individuals (UHNWI) is growing. A considerable percentage of these populations is made up of entrepreneurial families who’ve created wealth by developing their businesses. For the majority, there is a distinct contrast between how they manage their business versus how they manage their wealth.

What’s perplexing is that the very entrepreneurs who’ve spent years tirelessly professionalizing their businesses and generating wealth, often pay considerably less attention to ensuring that their personal wealth is protected and productive once their businesses are sold.

Numerous factors, both internal and external, can play a role in the erosion of family wealth. These include lack of strategic planning and long-term multi-generational vision and purpose development, fragmentation of inheritance, excessive risk-taking and bad investment decisions, unresolved family disputes and division, inflation, taxation, a failure to develop an entrepreneurial spirit across generations, as well as an insufficient separation between business and personal wealth.

Despite the widely-held “Three-Generation Wealth Rule” axiom, a total loss of wealth by the third generation doesn’t have to be inevitable. However, if family wealth is to continue to grow and survive across generations, it should be managed like a business.

What does managing wealth like a business mean?

Families that own large businesses are usually extremely engaged in these operations, both physically and emotionally. Once these businesses are sold, familial wealth, in real numbers, remains the same. The only difference is that instead of owning physical businesses worth specific monetary values, the families hold the same values within their bank accounts. Still, according to Jan van Bueren, Co-founder and managing director of UBP’s FOSS Family Office Advisory, how the proceeds are engaged with is often physically and emotionally different from that of a real business.

Unlike the actual family businesses, no direct history is associated with the accumulated liquidity, no processes and procedures have been developed over extended periods to manage it, and the owners’ physical presence is not required to oversee daily operations. As such, a mindset shift from business orientation to ‘let’s enjoy after decades of hard work’ often occurs and the management of the proceeds is worlds apart from how the physical business was operated. Even when wealthy families do decide to manage their wealth actively, public and private investment knowledge and know-how are often lacking. So, what are these families to do?

The answer lies in families approaching wealth management in the same way that they once ran their physical businesses. According to van Bueren, a similar dedication and structured approach, replicating some processes that were used in their business, can be beneficial in this respect. These activities include, but are not limited to, defining clear objectives, organizing proper budgeting, devising strategies, holding regular meetings, obtaining advice from high-quality advisors, professionally monitoring performance and maintaining control over various aspects of wealth management.

While the outcomes of such processes differ from those of actual business outcomes, the results are comparable.

When should the management of personal or family wealth be professionalized?

Most people believe that the professionalization of wealth management is only required when their wealth reaches magnitudes worthy of single-family office establishment. However, van Bueren thinks that “This starts at a much lower level of wealth.”

To get started on this journey, van Bueren recommends that families allocate more time to this topic and define their family wealth objectives. He adds that “Defining the purpose of the family’s wealth and the family’s objectives and drafting an investment policy statement (IPS) are good examples of a more structured business-like approach that families who hold relatively smaller amounts of wealth can implement and benefit from.” He continues, “For every wealth owner it makes sense to invest time in understanding the basics of investing and gain a level of control over his or her situation.”

For every wealth owner it makes sense to invest time in understanding the basics of investing and gain a level of control over his or her situation.

Challenges that may arise when managing wealth like a business and how to overcome them

Like running any organization, managing wealth like a business is not without its challenges. While many parallels can be drawn between running a business and managing wealth, the management of liquid wealth requires a different skillset and approach than an actual company. This is independent of the wealth being single-family office size or below.

Most business owners have high levels of insight into every aspect of operation pertaining to their businesses. This includes everything from how the company is insured to what maintenance is required on machines, buildings, or IT networks, as well as the costs associated with these and the cost levels of the entire operation. Every detail is accounted for and planned.

Van Bueren states that when it comes to succession planning, insurance coverage, or even the overall cost of their wealth, however, most families don’t know all the answers. Not knowing can lead to ‘learning by losing’ if one does not follow the right approach.

To overcome these challenges, he recommends that all families of wealth, so, not only the ones considering establishing a single-family office, should take the time to inform themselves about the best practices. Next, they should take a step back and reflect on their own levels of expertise and competency. In doing so, families need to be cognizant of the fact that families (and/or family offices) that manage several dozens or hundreds of million look very different from those that manage billions and that not every wealthy family has the right background and DNA to invest in just any asset class. A good example in this respect is private equity.

Based on the insights gained during these processes, strategies can be developed and the right wealth management decisions can be made. By obtaining an appropriate level of knowledge, implementing a structured approach, practicing discipline, dedicating time and ensuring sound, open communication between family members, learning by losing can be avoided.

Managing wealth like a business is an ongoing process that is continually evolving as improvements are made. For many wealthy families, this remains a challenge as a considerable mindset shift is required to move from family business management to family wealth management successfully. Still, this shift is vital if wealth preservation across generations is to be achieved.