In this conversation the Head of Sales for Enness Global, Toby Johncox, talks to Jordan Williams of Artorius about the 5 most important things to consider when it comes to understanding family wealth and preserving it for future generations:

  1. Understand your investment portfolio
  2. Understand your debt position
  3. What is the right investment strategy?
  4. Thinking about the next generation – wills, life insurance, powers of attorney
  5. Talk to other family members

Toby Johncox

Today we’re discussing what is, I think, a really critical topic for everyone at the moment, which is five things that families should be thinking about regarding their wealth in the current market and putting appropriate plans into place. What are the main things you’re seeing? Or what are the main questions people are asking you?

Jordan Williams

It is possible to summarise the nature of the conversations we’ve been having with a number of the families we look after, and those who we’re in contact with. There’ve been five main themes that should capture the attention of any wealthy family during this current time. And the purpose of this discussion is to allude to those five things, which I think any wealthy family should be thinking about in the current environment.

Starting off, I think the first thing that many families are now thinking about, is whether they actually understand their investment portfolios. Any wealthy family should review their existing wealth management strategy to ensure it’s appropriate to their circumstances, and their risk and return profile. So often, we see the situation where families have no comprehension of how their wealth has been invested, and what specific investments they have actually invested in, let alone understanding how these investments work and the risk associated with them. And it’s, obviously easy when markets are rising and investments performing positively. But as we’ve seen, unfortunately, severe shocks can come without warning. And it’s, therefore, important for families to be aware of the exposures they have within their portfolios, and where their risks are.

And we know that often individuals think they’re achieving diversification by having a number of different managers but often, at no fault of those managers, they’re running similar strategies and in doing so they’re duplicating the number of positions, and thereby creating significant concentrations of risk within their portfolio.

Toby Johncox

An analogy is the old saying, “Don’t put all your eggs in one basket”. But if you put all your eggs in different baskets that are the same type of basket, it’s amounts to the same. And I guess, having a number of wealth managers, if they’re all investing in the same funds, you’re as exposed as you would be if you were with just one. So it’s an interesting point.

Jordan Williams

Absolutely. And as I said, it’s no fault of those investment managers. It’s rare that investment managers will talk to each other and so they have no idea what the other investment managers will be investing in. They’re adhering to a mandate that has been agreed by their client. But it’s often the case that that mandate is very similar, if not the same; running the same strategy and often holding the same securities as the other managers. So that’s definitely been an issue for many people and which many have been looking at. And the other key point within understanding the portfolio is actually understanding debt positions as well.

Many wealthy families will be using debt as part of their overall investment strategy, whether that’s debt in-built into some of the investments and products they’ve invested in, and often debt which is secured against the portfolios that they have built. But again, similar to the investment strategy which these families have, they’re often not aware of how this debt is actually working, what their contractual obligations are with this debt. And, unfortunately, what we saw for many is that when markets fell, the value of their portfolios fell. But obviously, the value of their debt remained the same. And many were concerned about issues such as shortfalls, and funding margin calls, and even the threat of forced sales.

Toby Johncox

Absolutely. I think we’ve seen that in the world of real estate as well, where a number of people end up overexposed on property. And so once an investment manager or wealth manager helps you to understand your general investment portfolio, you’ve got a good feel for what you’ve got in there what do you then do with that cash or whatever other investments you have?

Jordan Williams

I think that’s, obviously, a very personal question. And that’s a second key theme, which is “what is the right strategy for me?”. There are a lot of people sitting on cash, waiting in the side-lines, waiting to see what’s going on out there in the constantly changing world. The looming global recession that’s undoubtedly upon us, and undoubtedly negative effects on earnings, employment or welfare. There are questions about what should you be investing in. And there is undoubtedly a pressure to enter into the market, maybe getting caught in the race to identify and buy cheap stocks.

We think for any family with a long-term investment objective, they should be taking the time to take stock, and actually consider focusing on long term quality assets, rather than heading straight in. They’ve got to think about what’s actually right for them and build a strategy, which is appropriate to their circumstances, importantly, a strategy which is appropriate to their risk profile, their return objectives, led by their liquidity preferences and an investment horizon. And many won’t ever have asked those questions before. Getting the right asset allocation is key to helping them achieve their objectives. And they may not be receiving that guidance about which geographies, which asset classes and sectors may recover the quickest. It is also important to ensure that whatever new strategies have been implemented, they should complement their existing portfolios, rather than duplicate what they’ve already got.

Toby Johncox

I think we’re seeing it a lot on the mortgage side – this once in a lifetime opportunity to invest in some form of asset and we do a lot of capital raising on real estate for people to do so. But I think it’s prudent what you say there. It’s not just about buying something because it’s cheap in this world order. It’s about taking effective action; just because a stocks worth nothing now, doesn’t mean it’s worth buying.

Jordan Williams

And obviously, every family’s situation is different. And there is no one size fits all solution for every family. But, in the main, most families that we look after do have a long-term investment horizon, they’ve got that ability to think long term. They’re not investors for the short term of 1 to 3 years, they’re thinking about 10 plus or 15 plus years – even longer actually. And thinking about investing for the next generation and even the generation after that. So implementing the right strategy, the right asset allocation and not just diving in and buying what appears to be cheap today, but actually what’s going to be sustainable and right for them in the future.

Toby Johncox

And you mentioned that planning for succession, the next generation, not just looking at your initial wealth, what we can do today, but what your family can have in the future. And it moves us nicely onto the next point, which is, what are we suggesting people do once their wealth has been built? How do they protect that for future generations?

Jordan Williams

I would say one of the key discussions that I have, and we as a business have, with our clients, is thinking about the next generation, and how can mum and dad pass their wealth down to their children in the most efficient manner, and even provide for their grandchildren as well, because, a family might have significant amounts of wealth that they might not need in their lifetime. So again, they want to start thinking about actually having that wealth succeed down the generations.

Wealthy families often have complex financial affairs, with assets situated in a number of jurisdictions within various structures. And it’s so important, therefore, that the key family members, patriarch and matriarch, mum and dad, ensure that they have the correct rules in place to allow for an efficient transfer of their estate to their chosen beneficiaries; passing on their wealth in the way they want. And, as you know, not having a will, or having wills which are not appropriate to their current circumstances, can lead to significant problems in how their assets are distributed upon death.

It’s a regular occurrence when we meet new families that, actually, they either have no wills in place, or they don’t have the appropriate wills. They might have one will, which they think covers their entire worldwide estate, but actually, in fact, it only would cover the assets in that particular jurisdiction. And, most wealthy families have assets outside of one particular jurisdiction. They might have assets in the UK, in Dubai, Jersey, Switzerland, and in other locations. And it’s key that they have the right rules in place to cover those assets in the event of death.

Toby Johncox

Exactly. Just having that one will registered in London, although it might describe all your assets globally, it’s not enforceable in all the various jurisdictions.

Jordan Williams

And on the point about succession planning and decision making and protecting the estate, again, similar to wills, where families haven’t taken the time or haven’t even thought about ensuring they’re in place. And, let’s be honest, these aren’t the sexiest of subjects for people to talk about. People seem to want to have discussions about investing their wealth and buying, whether it’s real estate or buying into specific financial investments, but not sitting down and talking about a will. And as we’ll come on to shortly, talking about life insurance. It’s one of those things that they know they have to do, but they’ll find any excuse not to actually do it at that particular time.

But what we have certainly noticed is that since the COVID pandemic, people are now starting to think about whether they have the right protections in place, and along with the wills we would argue it’s absolutely imperative that any wealthy family and indeed anyone should have the right lasting powers of attorney in place. And I’m surprised by the number of families who don’t have these documents in place yet they’re vital for key family members. In the event of mental and or physical incapacity, without these documents, who is going to make the decisions on their behalf with respect to their property and financial affairs, and their health and welfare? If they themselves can’t do that.

Toby Johncox

You’re right. We’re talking today about five core things that people should be doing now in the market in order to plan their wealth. We’re not talking about going out and buying a really exciting Ferrari or a yacht or a helicopter. We’re saying that your car or helicopter won’t protect you against the inevitable parts of life. So, once you’ve handed all your assets down through the generations, then there’s the life insurance. And why would you take out life insurance? Why is it important to look at your life insurance?

Jordan Williams

Again, it’s not the most exciting of topics, and certainly not the most positive thing to be thinking about. But, there’s an increase in conversations we’re having with families about making sure they’ve got adequate life insurance in place to provide for their loved ones in the event of death. Having the right life cover provides the family with that comfort that there are sufficient funds available to meet future liabilities and commitments. If there wasn’t that cover in place how does the surviving spouse, or even the children, ensure that they can maintain their standard of living. That they don’t need to dispose of any assets, that they can actually fund their commitments and liabilities, and lifestyle, going forward? So that’s why that’s so important.

And the other reason for ensuring that one has appropriate life insurance in place is to provide liquidity in the event there is a significant inheritance tax liability to pay. And that’s, obviously, one of the main reasons families will want to take out life insurance to make sure that actually there is that liquidity in place, immediately, or at least very quickly, to settle any liability that may arise as a result of death.

So, they’re the two main reasons that we are helping our clients to really think about whether they have the right life insurance in place. Is it structured correctly, again, making sure that any traditional life insurance policy, where appropriate, is written into trust, ensuring that beneficiaries can actually receive the full benefits of that. And it’s also a good time to actually assess whether that’s the most appropriate sort of policy, whether there are better policies out there for more affordable premiums.

Toby Johncox

That’s exactly it, because people collect these things over years and years, whether it’s through payments, or through a mortgage they’ve taken and just signed a piece of paper. And they may already have life insurance, but when you have a conversation with them about what their life insurance is, very few people actually know the core benefits of what they’ve got in a policy.

Jordan Williams

And many people who have inherited, or at least have benefited from life insurance policies from their employers, so death in service, that sort of benefit, but they may no longer be with their employer anymore, but have not realised that actually, that level of cover that they once had is no longer available to them, and they haven’t replaced it. And, obviously, people’s circumstances change all the time. So it is absolutely essential to review the measures and the cover that you’ve got in place now, to make sure it’s fit for purpose today.

Toby Johncox

So we’ve discussed understanding your investment portfolio, we’ve gotten a key on when you understand that maybe what you need to do to make sure it’s best utilised, and making sure that wealth is passed on through generations. And obviously, that’s protected when it is passed on. But how does someone keep track of all of this?

Jordan Williams

It’s not easy. Everyone leads incredibly busy lives. People have their jobs, they’ve got their families to look after, and other concerns. But one thing is actually to understand the importance of ensuring that one’s affairs are in order and appropriate to their circumstances. And by doing that ensuring that there’s regular oversight of your wealth, which can undoubtedly lead to better preparedness, better decision making, and, of course, better governance of the family estate.

There are numerous examples where wealthy families, their estate is so large, they don’t know what their wealth balance sheet looks. They won’t know about their asset allocation, they won’t know about the currency allocation, which might mean, they’re not aware of the risks that they have within their estate. They don’t know how their investment managers are performing. And so how on earth can they hold them to account to ensure that they’re on track to meeting their strategy and their objectives. And they’re often not aware of their liquidity position as well, or have accurate details of their capital commitments and liabilities over the next 12 to 18 months. So having that sort of oversight is absolutely key. Again, it’s not easy to do that – it does take time.

And it does take the mindset to really grapple and actually bring everything together, and have open and honest conversations with other key family members. And that’s a really important point. We are encouraging families to engage with other family members, maybe their children who are of an age now where they can actually understand and actually can appreciate the family dynamic in terms of wealth that they have. Because quite often key family members aren’t fully aware of the family’s overall wealth position if the knowledge and information is kept by the patriarch and matriarch of the family. And it highlights the importance of having an up to date, centralised and accurate filing system, which can ideally be accessed anywhere in the world. If something were to happen to Mum or Dad, how would other family members know how to access that family wealth? Where would they look? Who would they contact?

Going back to the question about how do people keep track? How do they oversee their wealth? And why is that important? That’s exactly the reason.

Toby Johncox

People sometimes don’t realise they have assets all over the world. And often things get lost, if they’re not documented correctly, which is, obviously the responsibility of professional advisors. So building a team around you to manage your wealth. On the real estate side of things from a legal, tax, mortgage advisor, real estate professional perspective, real estate is a very tangible investment. But investment advisors and wealth managers are managing intangible assets globally, and it’s critical to make sure that’s reported back to you and your family.