Philip Richter is the president and a partner at Hollow Brook Wealth Management in Katonah, New York, where he oversees client relations, marketing and business development and sits on the investment committee. Here he discusses why it’s important for financial advisers to integrate emotional intelligence into strategic planning for family office clients.
How do you create a client experience that balances emotional needs with strategic investment goals?
The most important thing a financial adviser can do for their client is listen. Gathering detailed facts and presenting comprehensive data in a methodical way is critical to reaching the right personal and financial outcome. We endeavor to provide our clients with thoughtful analysis and useful data needed for them to weigh and consider their options in a holistic way. The discussion process facilitates alignment between a financial adviser and client, which is crucial to success. It is the rare financial adviser who does meticulous homework on the client’s situation and takes the time to truly understand their needs and personal goals, including interpreting — and sometimes mediating — difficult conflicts.
Can you share how “emotional investing” impacts your approach to helping clients with legacy assets?
Legacy assets can include anything from low-cost-basis stock that share ties to a grandparent, to a generational family home, to a collector vehicle that belonged to the family. Emotional attachment to these types of assets can be positive or negative depending on the context. Preserving legacy is often important to families, but it usually comes at a cost. There are many other considerations that have nothing to do with money. Legacy properties can require attention, time and work.
Sometimes it is better to avoid the tax gain and simply keep low-cost stock and allow it to continue compounding through appreciation and dividends. What if the company is not what it was when grandpa was CEO? What if the market has changed? It is the responsibility of the professional financial adviser to help the client understand the business dynamics today. Maybe the stock is trading at a very high multiple, or perhaps research indicates the company has been losing market share for years. A wide variety of facts must be researched, shared and discussed with the client.
In the case of a legacy family vacation home, there are many “soft” issues to consider along with financial ones. Is a family keeping a property for nostalgia when in fact it will get little use? Is the property consistent with the current lifestyle of the family? Options might include making the property a rental or sharing dates and expenses with other family members.
When clients face difficult choices, such as selling a family business or inherited property, what steps do you take to guide them through these decisions?
Determining what to do with legacy family assets is a tough business, and the considerations are complex and multifaceted. The proper approach requires doing the rigorous professional work and meticulously documenting disparate considerations, such as the tax impact of selling a family business or the lifestyle downside of selling a family farm.
There are two primary considerations when contemplating the future legacy assets in a portfolio — financial and emotional. The valuable financial adviser is the one who can carefully and skillfully contemplate both while gently guiding the client to a sensible decision. Some methods we have found effective include mapping out a decision tree and outlining the implications of a sell or hold position. These are not groundbreaking by themselves, but the ability to visually convey these concepts backed by additional research is often the best way to weigh the myriad of complex options. The most helpful financial adviser is the one who thoroughly understands their clients’ financial and emotional needs, which requires exceptional listening skills.
How does empathy play a role in your philosophy, especially during life-changing decisions?
In my experience, empathy is one of the most important skills that a professional financial adviser can possess. When making major financial decisions that may impact income, taxes or even the identity of the family, it is crucial to appraise all the facts and on balance consider the holistic framework. It is not enough to build a financial model and demonstrate to your client how selling the family farm will generate plenty of income during your lifetime. Income is only one small component of life. Selling the family farm could have very negative consequences, the foremost of which is regret. This is why we stress that all options need to be identified and addressed. For example, a creative and thoughtful financial adviser might consider additional ways for the family farm to generate income to better cover its carrying costs and offset taxes — ideas like boarding horses, hosting weddings or renting houses on the property.
Before recommending the sale of a legacy asset, an adviser should consider the long-term appreciation potential of the asset. For example, real estate can serve as a valid inflation hedge for a broader portfolio. Sometimes things that are nuanced and not obvious can have an enormous impact on asset protection or long-term value creation.
What makes the integration of emotional intelligence with strategic planning such a powerful asset?
It is rare for any individual to possess multiple diverse skill sets. A computer scientist might struggle to make conversation at a political fundraiser. Likewise, an accountant might feel like a fish out of water at a biotechnology conference. The ultimate financial adviser is one who can listen, communicate effectively, empathize with others and manage relationships. Even better is the financial adviser who has mastery of these soft skills but also possesses the hard skills of critical thinking, risk analysis, investment experience and business acumen.
The thermodynamics of family capital
By DAVID WERDIGER
“Energy can neither be created nor destroyed; rather, it can only be transformed or transferred from one form to another,” states the first law of thermodynamics. You may wonder what this has to do with family capital. After all, family capital is something that is regularly created and destroyed.
What they do have in common is the idea of transforming — changing family capital from one form to another.
Jay Hughes popularized the concept of five forms of family capital:
- Human capital: The physical and emotional well-being of family members.
- Intellectual capital: The knowledge held by the family system, individually and collectively.
- Social capital: The relationships within the family and with their communities and the ability of family members to work together toward shared goals.
- Spiritual capital: The shared purpose or vision of the family — its “North Star.”
- Financial capital: The financial assets of the family
This broader understanding of family capital can help families of significant wealth (a) recognize that it’s not all about the money and (b) develop a plan for the family to thrive by placing suitable focus on the nonfinancial capital.
The relationship between the quantitative and qualitative forms of family capital is important. This is where the idea of transformation of family capital — inspired by thermodynamics — can be useful.
Here are a few basic examples:
- Instead of thinking about spending money on the health of family members, what we are actually doing is transforming financial capital into human capital.
- If the family pays for someone’s university degree, financial capital is being transformed into intellectual capital.
- Family philanthropy transforms financial capital into social capital.
- Money spent toward implementing the family’s shared goals is a transformation of financial capital into spiritual capital.
Unlike energy, which is neither created nor destroyed, family capital — both quantitative and qualitative — can grow. While investment activity is the primary focus of many family offices, it’s important to put it in context. Growing the family’s financial capital should not be viewed as a goal in and of itself but, rather, a way to provide fuel for current and future generations and thus perpetuate the cycle of transformation into qualitative forms of family capital.
While traditionally, the term “investing” is applied to financial capital, with the broader view of multiple forms of family capital, we can apply the term both within each form of capital and between them. Educating family members doesn’t just increase intellectual capital, but that additional knowledge within the family system can be used to generate new ideas for growing further and for growing other forms of family capital. Instead of thinking about education as “spending” or “depleting” financial capital, it is actually a form of “investing.”
Family vacations — often a big-ticket item — are one of the best ways to grow social capital: to build strong bonds between family members through positive shared experiences, and for the family to work together planning the vacation and activities. That ability to work together on a shared goal readily translates to other contexts: sitting together on committees or boards that may have an operating business or philanthropy focus.
While financial capital is quantitative and the other forms of capital are qualitative, families can develop and use a “family balance sheet” that measures all of them as a broad-based “health check” of the family, like the concept of a balanced scorecard.
What’s the point of financial capital being massively in surplus when family members are not living their best lives (a human capital deficit) or when family members are in conflict (a social capital deficit)? Is there any amount of money that can balance out poor health? A bitter family dispute? After all, what’s the money for?
By taking a holistic view of family capital and reframing spending as transforming financial capital into forms of nonfinancial capital, the family can invest to make itself thrive.