2018 April

David Smorgon’s guide to managing the family’s wealth

17.04.2018 | The Australian, Will Hamilton – Edited Excerpt

For the past five years, I have hosted an annual dinner with David Smorgon OAM. David is an expert on issues relating to the link between family, communication and wealth. He highlights a common denominator in family disputes about money is a lack of effective communication.

As a prominent member of one of Australia’s wealthiest families, David is passionate about talking to and helping Australian families navigate the complexity and divisiveness that arises over money. He is saddened by the number of these conflicts and is still surprised by the level of disagreement that can exist in families. David’s central message is a very important one for all of us: positive and open communication is needed.

As a financial adviser I always try to get new clients to attend this function in order to hear David’s strong, passionate and well-considered message. A vital aspect of our own work in planning successful investment outcomes for our clients is to encourage them to ­establish and maintain regular and effective communication within their families.

When we have a breakdown in communication, it can result in a breakdown of trust, with more often than not, the patriarch or matriarch of the family. While a patriarch or matriarch may have what they consider to be the best interests of their family in mind, they cannot rule from the grave. If they do not communicate clearly with the whole family, the worst-case scenario is arrived at great cost both financially and emotionally. It’s a salient fact that families can find themselves in court. To prevent the above and to ensure what David refers to as the “health of the family”, he encourages all families to have open, honest and transparent conversations.

Family wealth is one factor. But in many cases there is the added complexity of a family business. A family business involving some or all family members can further complicate the combination of family, wealth and communication. While many families are successful at running their business and making effective decisions, they may not recognise the succession or disposal of the business is just as important. We often note that while many families professionalise the running of their business they fail to professionalise the need to approach wealth transfer the same way.

Conflict can be draining and expensive. Here’s how to avoid it:

  • Understand the importance of tackling difficult issues, such as succession and wealth transfer. This is a process, but many often see it as an event. Without communication the event occurs without prior knowledge of all parties and in some cases family issues are a result of the event;
  • Know that it’s a fact that two out of three wealth transfers fail and therefore don’t meet the expectations originally set. Families can tend to avoid issues, deferring and deflecting them. All issues need to be identified at the earliest possible opportunity and brought to the table, with the safety that family “baggage” can be discussed openly and hopefully resolved;
  • To establish this communication, ensure there is an understanding of good governance (independence) in relation to the future ownership of the family’s wealth;
  • A sensible starting point is to have a family charter, agreeing to a set of values. This should be in writing, and, as David says, the “palest ink is better than a distant memory”; and
  • Recognise that money or wealth is a sensitive issue in the Australian cultural perspective; something many don’t want to talk about. We do not spend enough time with children discussing money and business. It is so important to engage children in conversations about difficult and sensitive issues, both in relation to wealth and money, as well as society and life generally.

David brings his expertise to the table and knows what works. He believes families need to consider the following vital points:

  • Put family on the agenda — thoughts and feelings need to be discussed;
  • Make time. With the demands of many corporate jobs and family dynamics, it is common that absentee parents lose the opportunity to connect with their family. It’s important to foster a strong environment for the proper nurturing of your children and maintain a healthy relationship with your family. Communication is key;
  • Connect with the family emotionally. Consider how much time you spend with your children, and how often you hug or play with your children;
  • Create a trusting environment. There must be open communication, where children can ask you anything, and you in turn, can ask your children anything;
  • Get people involved. Encourage spouses and partners to be involved in your business, as well as home finances;
  • Be compassionate. Learn to “have a warm heart and to give with a warm hand”;
  • Be strong. Learn to say no — many children today have a sense of entitlement;
  • Be flexible. Be prepared to give and take; and
  • Show genuine concern. Be interested and care; and show love, guidance, support.

As David says, “every family has a story, few have a legacy”.

The reason we put so much emphasis on our clients sitting down and hearing David Smorgon’s advice is this: it does not matter how large or small inheritances can be, for the health of all families and the success of future wealth transfer, we need to ensure that fair, regular communication exists.