Series on Business Succession 7 A Family Wealth Management Story



Family wealth creation does not stop at the first generation. The creation of a second fortune through successful management of the wealth once created is an opportunity to grow wealth which may result in exceeding the wealth created by the founder of the family business.

In the previous issue we have addressed the importance of preventing leakages and protecting family wealth by using risk transfer tools such as insurance from commercial insurers or setting up your own captive insurance, depend- ing on the quantum of the insurance premium paid.

To complete the family wealth management process which aims to protect and grow family wealth, besides managing the family business, there lies a need to invest the family’s financial assets in a prudent, disciplined and profitable manner.

Of course staying rich and growing wealth successfully over an extended time frame is not an easy task. In setting up the approach for success- ful management of financial assets, besides learning from other wealthy families, it would be beneficial to refer to the endowment funds,

institutions and managers who have a multi-decade track record of successful investment. Let’s look at one of the well managed endowment funds as an illustration on the importance of establishing an investment philosophy for managing family wealth.


The Yale University Endowment Fund totaling $19.3 billion on June 30, 2012, contains thousands of funds with a variety of purposes and restrictions.

During the decade ending June 30, 2012, Yale’s investment program added $7.3 billion to the endowment fund. The University’s twenty-year returns showed a market-leading return of 13.7 percent per annum, produced $17.3 billion in relative value added to support Yale’s mission of teaching and research. Sensible long-term investment policies using an asset allocation approach developed by Nobel laureates James Tobin and Harry Markowitz which believes that diversification laid a solid foundation for the University’s investment success. Figure 7.1 below showed the asset allocation as at June 2012 for Yale University Endowment Fund.


Structuring an investment process to suit a family’s situation may require changing the resources allocated,

rebalancing of the direct and indirect investment portfolios and involving members of different generations in understanding the family investment strategies.

Due to the complexity involved in the wealth management process, a family investment guide which describes clearly each step of the investment process will be handy. Such a guide provides a step-by-step approach describing the objectives, showing examples for reference, highlighting the requirements and provides templates for each stage. The content of the investment guide may consist of the following:

a) Family vision and values

b) Investment risk profile and objectives

c) Investment process

d) Investment variables and parameters, including risks and opportunities

e) Investment selection filtering process

f) Investment short listing and simulation

g) Due diligence procedures for different type of investments

h) Final decision-making procedures

i)  Regular review, reporting and control

j)  Criteria for sale or liquidation of an investment



An investment committee is one of the most valuable elements in a good investment process. It can add elements of objectivity, professional- ism and serve as a watchdog in responding to any investment proposal, especially when family members are being approached by friends offering unattractive invest- ment schemes.

The establishment of an investment committee can also facilitate the review and asset allocation process, to select investment managers or investments, to track performance, to exit investments on an unbiased basis.

As a conclusion to the wealth succession series, the whole structure can be summarised as below:

Most business owners are not prepared to deal with the stressful circumstances associated with managing their accumulated wealth. However one of the biggest high- stress events goes to those who receive wealth as a result of the sudden death of a parent. In order not to leave the family in misery, a business owner should, during his lifetime, carefully consider and plan how to continue to manage and grow his wealth, at the same time groom- ing his next generation and help his family to flourish and to manage a multi-generational legacy of strong human and economic capital.

Therefore a strategic family wealth succession plan is a comprehensive approach to wealth management that focuses on the entire family welfare. Figure 7.4 shows that family wealth management requires a clear and shared family strategy and objective, a strong wealth creation mechanism and an effective risk and leakages management system.

The family’s leadership, operating within the family governance struc- ture, is responsible for developing, communicating, and advancing the family’s purpose. This is the begin- ning of family wealth succession planning, where the founder decides on which asset structure to use for distribution and consolidation of all his assets. Examples of those structures are private foundations and different types of trusts.

Since the family strategy and objectives support commitments such as to adapt and evolve the family’s culture and values over time, maximising the human potential of each family member, identify and invest in things that bring family members together and build a sense of shared identity, e.g. philanthropy, a comprehensive family constitution is essential to serve as a guide or manual for how the family affairs, the family wealth generating assets and the risk of financial leakage be managed.

Whatever decision makes for the family, whether for wealth creation or preventing leakage, there is a need to align the family objectives, vision, values and mission with the approach taken in these areas.


The future lifestyle of the founder as well as his beneficiaries is fundamen- tally linked to the strength of the family business, the management of the financial assets as well as the career of each family member. Careers generate additional income and reduce the family member dependence on the family’s wealth for his or her lifestyle. Therefore the more risk a family wealth can collectively afford to take, the more potential for the family wealth to prosper for generations to come.

Besides payment for insurance premiums, dividend payments, taxes, inflation and other expenses, there are inevitable leakages to family’s wealth especially if they were not well-managed. The larger the leakages are, the greater the risk to the family wealth in terms of sustain- ability. With good leakage manage- ment even a small reduction in the rate of leakage can have large consequences over ten, thirty, or fifty years.


The old saying of “riches to rags in three generations” makes people wonder why family wealth does not last. Maybe some business owners failed to realise that business succession is not just about the money! Effective governance of the key areas of family wealth manage- ment – family shared objectives, wealth creation mechanism, and the control of leakages is the lifeblood of the family wealth.

If the family is executing well in all three areas, prudent long-term investment decisions for the family core business can be made; family’s financial assets are professionally managed and invested for long-term apprecia- tion, contributing to family’s continu- ing economic vitality; and family members are being supported to realise their individual potential while strengthening family ties, and encouraging them to thrive and contribute to an evolving, forward- looking family culture, hence a virtuous cycle is being built.

In doing so, a business owner is stewarding his fortune and nurturing his valuable business, family culture and values, human and financial resources, and thus laying the groundwork for a multi-generational family legacy!