It is entirely unsurprising that the 2023 Four Pillars of Capital survey finds our respondents focused on immediate, tangible threats to financial capital in particular. Financial markets have recently delivered volatility at best and disappointment at worst, and the factors which caused such profound economic and financial uncertainty are still very much with us.
And with government finances everywhere under pressure there is little evidence of fiscal sympathy for wealth creators. It therefore makes perfect sense for families to be attending more to financial and political risks. We sometimes compare the four pillars of capital to four children. When one of them is having a difficult time, it is quite right for the family to devote extra care and attention to that child. Yet none of the children should ever be neglected, even as the focus of attention may shift.
Whilst we were reassured that failure to prepare the Next Generation is still high on the risk register, we will certainly be counselling families to recognise and nurture those factors which bind them, including purpose, shared values and communication. In the main, tangible financial risks are easier to pinpoint and also lend themselves to the involvement of advisers. But family disputes, however manifested, will cause value destruction of a quantum which far exceeds a year’s subpar investment returns; damage to the family brand can be irreparable.
A concept we have found useful, developed by a recent Bocconi University study of ten European families who have successfully sustained their wealth over a century or more, is ‘nurturing the tree’. It is essential to maintain the fundamental financial health of the family, both through careful attention to its core business and investments and through ensuring that its governance, leadership and succession arrangements are agreed and operate smoothly.
Managing risk may not be a topic that generates excitement, but it is vital to intergenerational success. We are encouraged that the percentage of respondents appearing to pay little formal attention to risk has fallen significantly since 2018, but equally we are concerned that the needle has not moved much in terms of formal, regular risk appraisal. With a more complex landscape of threats to the preservation of long-term prosperity ahead, families and wealth creators need more than ever to employ their intellectual capital to help identify and mitigate risk; there are simply too many to process informally. The benefits of the process will outweigh the time spent.
