Family & Risks

Of the names that appeared in the Forbes 400 Top Wealthiest Americans list in 1982, only 14% were still on the list by 2003. 205 names dropped off because their wealth did not grow fast enough or their wealth eroded because of over-concentration in one asset, over leverage, over-spending, family discord, liability suits and taxes. 141 names dropped off through death and redistribution to family members and foundations.

The issue

  • Preserving wealth is challenging.
  • Families often underestimate, ignore or fail to see the risks that lead to wealth erosion and they fail to actively and effectively mitigate these risks.
  • Most family wealth is eroded due to families focusing too much on short term risk and paying too little attention to the key strategic risks such as planning in the event of sudden death.

The challenges

  • There is no fool proof strategy to preserve the family’s wealth. Avoiding all risk is not possible.
  • The best strategy is to understand the different kinds of risk and manage them.
  • Risk modelling has its limitations: there are fat tails, Black Swan events, and unknown unknowns.

The risks
We have identified 9 material risks to wealth preservation and the continued success of the family:

  • Concentration in one asset, be it a company, an industry, real estate or an art collection: this can be a source of wealth as well as a source of risk.
  • Overspending: in order to sustain their wealth, clients need to be realistic about wealth creation vs. spending.
  • Currency: needs to be managed to ensure a match between the family’s assets and its financial goals.
  • Liquidity: families must ensure that they have sufficient liquidity for unexpected events.
  • Inflation/deflation: getting this call right over the next decade will be critical to creating or destroying wealth.
  • Leverage: can provide an opportunity to enhance returns, but it can also increase risk.
  • Tax: in a world of unsustainable sovereign fiscal deficits, families need to implement effective tax planning on a timely basis, or risk attack from revenue-hungry governments.
  • Structures: families need to ensure that their legal structures are robust to withstand a challenge from a third party.
  • Family succession: failing to plan effectively for the next generation can seriously impair the family’s wealth, as well as destroying the family unit.

How Apollo Partners can help

  • We have developed a structured approach to identifiying family risks and implementing practical solutions to mitigate them.
  • We regularly meet our clients and review and update their risk mitigation strategies and identify any potential new risks.