It is not just in the realms of financial advice that families have started to question the service they're getting. The humble family business advisor is also having to up his/her game.
Ritter Arnold is president of the agricultural arm of his US-based family's business, E Ritter & Co. A member of the fourth generation, he sits on the board of directors, which is made up of both family and external members. "Families are looking to their advisors to keep them out of the ditch right now," he says.
"So many things are happening in an unprecedented fashion. We are hiring subject matter experts to replace family members who have resigned from our board. Other family members look to them with greater confidence. For example, we have a gentleman who has been involved in agriculture at a high level who works for a US company – he brings great experience and exposure. We can look out and see it is hot and dry in Arkansas, and we may assume that it is hot and dry everywhere. He brings an international perspective."
In these testing market conditions, family members who have had limited experience in the business world may find it difficult to make decisions quickly, which can result in decision paralysis. "We are looking for good sound advice." Ritter continues. "And above all we are looking for quick decisions – these turbulent times call for expediency."
Peter Leach, who has 30 years of experience advising family businesses in the UK, Middle East, Europe and Asia, says family tensions will come to the fore in the current economic climate, so family businesses will now look more carefully at advisors who can work as a team. Behind the expensive suits and flashy presentations, advisors will be hired because they are good at implementing the family's wishes.
However, family businesses cannot afford to have an advisor who is just a "yes man". They need someone who is prepared to challenge them. The advisor cannot shy away from telling the truth, especially if their client has contributed to a problem. As a result, the advisor must establish a relationship built on the credibility of good counsel. In this sense the advisor needs to play a role akin to that of a non-executive director.
Dominique Moorkens, CEO of the Beligum-based, third generation family business, the Alcopa Group, agrees with this principle so strongly he has put it down on paper. "The family has drawn up a lettre de mission or mission letter," he explains. "One of the things it states is the need for our advisors to challenge people. Everyone needs this. When the most intelligent guys have no challenge there is no future. The personality of the advisor is very important. He has to do it without fighting, to build a good future strategy."
Nevertheless, Arnold says it would be an unusual advisor who would take on a wholly family-dominated board. "The advisor has to get a feel for what the family truly wants. The family who has been in business a long time may have great emotional attachments to part of the business. Other family members may care only about financial return. The advisor therefore needs to be flexible enough to navigate these issues."
The advisor must therefore have the communication skills to discuss the family's strengths and weaknesses with sensitivity to avoid friction and confrontation. Leach believes the three most important skills for a family business consultant are communication, an ability to build trust and facilitation.
It is vital for Moorkens' family to be able to trust the mettle of their advisor as they are facing testing market conditions in the auto industry. The family's Belgium holding company has branches in several countries and specialises in the distribution of cars and motorised two wheelers.
"Everyone is insecure at the moment," says Moorkens. "But all stakeholders in the family have strong loyalty to our business partners. We have many automobile franchises but the market is dropping by 20%. In these times we must still think long-term even if there are those who are thinking short-term and getting out of the business. We maintain our social assets, our good people in the company. These people feel much more secure in a family firm than one reacting to the stock exchange."
A family is more likely to build trust with their advisor if it can be assured of the advisor's effectiveness. However, it can be difficult to measure effectiveness, especially if expectations have not been laid out at the outset. Arnold says that when it comes to measuring his advisor's effectiveness, results speak for themselves: "By the absence of crisis in our business – our directors have been able to reassure management that we have been on the right path. If everyone has been doing their job the company will be in neutral position, rather than a damaged one. You want a relationship with your advisor that can resolve instability. All of us have been swayed in the past by promises of minimal risk and huge return. We know now that this is unrealistic. We are looking for good sound advice from our advisor, who will steer us down the road and miss the many potholes."
Maintaining trust between families and their advisors can be helped along if these expectations are outlined and the advisor's role and mandate is clearly defined by both parties before any further work is done. This view is backed up by Patricia Milner, a partner from law firm Withers. "It is important that both parties are clearly aware as to where certain responsibilities lie and who is answerable for undertaking and completing each distinct task as well as, sometimes even more importantly, what tasks certain people are not responsible for," she says.
Finally, Arnold says families must remember that establishing trust with a new advisor can take time. "Cast a very wide net. Come up with a large list of potential advisors and do not compromise on what you want to have. It's not a 6-week process, it's a 6-9 month process. Identify, qualify and check professional references. You have to make sure the candidate is a good fit for the family."
Exclusive: Donald Trump on advisors
Donald Trump is one of the most recognisable and successful figures in modern business culture. He is chairman and CEO of his family business, The Trump Organisation, and founder of Trump Entertainment. He has entrusted the future growth of the Trump brand to his three children, Donald Jr, Ivanka and Eric, who between them lead development and acquisitions for the New-York based business.
In an exclusive interview with Campden FB, Trump admits the question of how family business advisors win back trust is not easily solved. "I'd say they need to do it very carefully," says Trump, whose broad portfolio of interests covers property, hotels, golf courses and many media and entertainment ventures.
"Fortunately for me and the Trump Organisation, we don't rely on advisors to a large extent. I will listen, but ultimately the decision is ours. I've never been one to completely trust an individual or entity and that's a wise way to go about things, particularly when one runs a large organisation." Trusting your own judgment is the hallmark of many great businessmen and particularly helpful when, as today, tough decisions need to be made. However, trust is not the only problem currently facing business families and their advisors.
Since the onset of the financial crisis, expectations have shifted too. The crisis can exacerbate family tensions and advisors are often relied upon to act as impartial intermediates during particularly stressful periods. They may also be expected to help bring stability to a business, be flexible enough to adapt to the fast changing markets, facilitate communication within the family, minimise investment risk and provide many other services to the family.
The difficulty lies in knowing what can and should reasonably be expected from advisors. "In tbe current climate, family businesses should expect caution from their advisors but they still need to be prepared for opportunism," says Trump. "When the climate turns, predictability is no longer so predictable. Being circumspect is important in every situation."
None more so, it seems, than when you need to measure an advisor's effectiveness, which is particularly challenging in the current climate. However, Trump divulges he has a simple test he always adheres to. "How often are they right? That's the number one prerequisite of effectiveness," he concludes.
Families must reassess approach to financial advisors
The financial crisis and related fraud scandals over the past 12 months have caused the "bridge of trust" between many families and their financial advisors to be damaged. The banking collapse, the subprime mortgage crisis, the $65 billion Madoff fraud and turbulence in the stock markets have meant many families have lost significant wealth.
Prior to the crisis, families may have chosen independent advisors, believing them to offer an alternative perspective to mainstream firms. However, confidence in the ability of some advisors to provide adequate due diligence and risk management capabilities has been seriously undermined.
The extent to which that trust has been damaged is confirmed by data from the Capgemini/Merrill Lynch World Wealth Report 2009, which indicates that high net worth clients will use 8% fewer independent advisors in 2009 than in 2008.
However, Steve McCarthy, who runs family investment office KC Capital and has considerable Wall Street experience on both the sell side and buy side, says that for all the failures of the advisors, families themselves need to reassess how they approach the relationship. "Trusted advisors fail because they lack a clear understanding of the client's objectives and goals both on the sell side and buy side," says McCarthy. "Too often there is no well defined hierarchy of responsibility, sometimes the family doesn't articulate this well enough and you have turf battles. The family needs to show clarity on this."
McCarthy believes families need to clarify their advisors' role and give them a timetable for success, such as a 12-18 month period. Following the financial crisis, where complicated products like CDOs were sold to private investors who did not understand them, McCarthy says there is now a far greater role for true candour and fiduciary responsibility in the investor/advisor relationship.
"There is a lot of sell side frustration as they are only given one-off assignments," he explains. "On the buy side there is often a lack of preparation or focus from the family, just ideas from a cocktail party. They have expectations about returns – a friend got a higher return, why didn't we? Too often there is just overkill of comparison shopping. Both the advisor and family need to be candid and open about process, expectations and business relationship."
Both sides have been guilty of "chasing the hot dime" and neither know the product or the process, according to McCarthy who believes too much product has been sold rather than relationships being developed. There needs to be authentic discussion about reasonable expectations and families should ask themselves some key questions:
• What am I trying to accomplish with my wealth?
• Does the advisor know what the family expectations are?
• What does the advisor expect from the family?
• How can conflicts of interest be avoided?
• How are payments arranged?
• What are the parameters?
• What is the level/frequency of reporting?
"These are the questions families need to be asking," says McCarthy.