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John W. Sleeting

Managing Partner – Family Office Services

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Director – Institutional Advisory Services

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Jeffrey P. DeHaan, CFP®

Managing Partner – Private Wealth Management

Family Office — Social Capital

John Sleeting December 01, 2019

As outlined in our 2017 ‘Intro to Family Offices’, we highlighted the intentionality of structure which families bring to develop their Capital. In particular we shared that a family’s wealth, and thereby risk management, should be viewed across a wide array of Capital considerations and approached with respective thoughtfulness:

  • Human Capital; the role each individual plays in the family and the respective development of their unique talents,
  • Intellectual Capital; what each person knows and how they contribute to the decision making process within the family,
  • Social Capital; what the family views as their role in society, what lasting difference (legacy) they will make and which organizations they will engage and support for the betterment of society,
  • Financial Capital; the legal property ownership of the family … financial assets, business interests, real estate holdings, farmland, intellectual property, mineral rights, etc.

We know the Family Office, whether it be a Single Family Office (SFO), or services provided through a Multi-Family Office (MFO) / Registered Investment Advisor (RIA), provides a legal and tax framework; however, it does not define fulfillment mechanisms, tools, processes or disciplines which can only be adopted by family leadership.

We previously outlined considerations for a Family Business Board and specifically noted that, “…one must consider the Philanthropic / Social Capital aspirations as a business unto itself and have a separate board of governance with its own charter. The charter for such philanthropic objectives contributes significantly toward the families’ Social Capital vision and is independent of the legal/tax/financial tools (e.g. Private Foundations, Donor Advised Funds, or Charitable Trusts).”

We’re often asked ‘where to start with family governance?’, and our reply is typically to begin with Social Capital. Anyone can write a check to charity, but building a legacy is a comprehensive endeavor which integrates the various forms of Capital. We admit, it may sound counter-intuitive to initiate family office governance through charitable giving, but upon reflection it becomes a very logical starting point.

Susan V. Bosak, Legacy Project, says “Legacy is fundamental to what it is to be human. Research shows that without a sense of working to create a legacy, adults lose meaning in their life. Exploring the idea of legacy offers a glimpse not only into human relationships and building strong communities, but also the human spirit. The idea of legacy may remind us of death, but it’s not about death. Being reminded of death is actually a good thing, because death informs life. It gives you a perspective on what’s important.”

One’s lasting difference is not limited to the tax status of a legal entity (for profit / not-for-profit), but encapsulates the totality of one’s existence. Therefore, in pursuit of a grander legacy vision, we encourage beginning with Social Capital questions as a clarifying first step; including consideration of:

  • Why give? Giving is a very personal decision with motivations running as deep and unique as the giver … so one must ask, why give? What are my motivations? What is your families’ aspirational role in society?
  • Where to give? Do you know how the finances are being managed and by whom—are they good stewards of what you’ve entrusted to them? Is the organization a strategic fit toward achieving your life story?
  • Does the recipient organization reflect shared personal/family values?
  • Are you spread too thin? ‘Good giving’ is a challenge and being focused is important. Linking one’s time and involvement to the cause, before deploying financial resources, may be advised.
  • How do you monitor the organization to assess if they have drifted in their mission?

(Side note, I recommend the book Mission Drift by Peter Greer & Chris Horst on this subject.)

  • How is the next generation engaged and what role are they playing (Human & Intellectual Capital)?

The last question is the cornerstone of why we believe starting with Social Capital is a great learning ground for the development of family governance.

To give something of value and not receive anything in return is a selfless act. If subsequent generations (adult children / grand-children) are engaged in the giving discernment process, they are forced to reconcile their personal beliefs and families’ values in the context of society. This leads to understanding of the uniqueness of the each individual and brings clarity of joint purpose within the family.

At this point we’re asked which tool is better, a Charitable Trust, Private Foundation, Donor Advised Fund, or otherwise. Again, we encourage not focusing on the mechanism at the start, but on the process and governance structure from which the operating dynamics will emerge and guide the appropriate tool application. In other words, don’t let the legal / tax tail wag the strategy dog.

The strategy is to bring families closer together, transmit family values through the next generation and teach valuable skills. In the book Managing Foundations and Charitable Trusts, Silk & Lintott dedicate an entire chapter to these tenants of giving and next generation engagement. A few skills they highlight being developed in the next generation:

  • Foundation Board Meeting: preparedness, accountability, formality in structure and decision making,
  • Strategic Alignment: assessing a recipient organization’s strategy, ability to execute the mission, sustainability, and alignment to family values,
  • Financial Matters: strategic gifts into the foundation (or DAF, Trust, etc), timeliness of grants out to end recipients, investment management, budgeting, tax reporting & compliance,
  • Communication: in person and in writing, among family members and with potential grant recipients.

Grant making to charitable recipients is simply a form of outsourcing. The family is deciding to outsource work best accomplished by the organization of choice to make a greater impact than the family could do on their own. The efficient allocation of financial capital toward non-profit institutions is no less meaningful than the work of the family business itself. Therefore, it is imperative that the family take a disciplined approach in allocating Social Capital and developing a legacy through the next generation.

John W. Sleeting

Partner

P.S. During December I, along with several of our Clearwater Capital team, will be performing due diligence in New York City with investment management firms BlackRock & WisdomTree. These visits will be instrumental in the refinement of our 2019 Outlook and underlying strategies.

John Sleeting

disclosure

THIS COMMENTARY HAS BEEN PREPARED BY CLEARWATER CAPITAL PARTNERS. THE OPINIONS VOICED IN THIS MATERIAL ARE FOR GENERAL INFORMATION ONLY AND ARE NOT INTENDED TO PROVIDE OR BE CONSTRUED AS PROVIDING LEGAL, ACCOUNTING, OR SPECIFIC INVESTMENT ADVICE OR RECOMMENDATIONS FOR ANY INDIVIDUAL. ALL ECONOMIC DATA IS DERIVED FROM PUBLIC SOURCES BELIEVED TO BE RELIABLE. TO DETERMINE WHICH INVESTMENTS MAY BE APPROPRIATE FOR YOU, PLEASE CONSULT WITH US PRIOR TO INVESTING. INVESTING INVOLVES RISK WHICH MAY INCLUDE LOSS OF PRINCIPAL.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities, insurance products, or to adopt any investment strategy. The opinions expressed are as of the date of writing and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by Clearwater Capital Partners to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. Index performance is shown for illustrative purposes only. You cannot invest directly in an index. S&P 500 is a registered trademark of Standard & Poor’s Financial Services, a division of S&P Global (“S&P”)  DOW JONES, DJ, DJIA and DOW JONES INDUSTRIAL AVERAGE are registered trademarks of Dow Jones Trademark Holdings (“Dow Jones”). The two main risks related to fixed-income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments.

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