2024 Week 47

Fortified but Fragile: Balancing Caution and Risk in Generational Wealth

by BlogFamily DynamicsRisk Management

Fortified but Fragile: Balancing Caution and Risk in Generational Wealth

“Shirtsleeves to shirtsleeves in three generations”—this reality challenges many ultra-high-net-worth (UHNW) families, even those who recognise the pattern. While the first generation creates substantial wealth through calculated risks and innovation, subsequent generations often face a unique paradox in wealth preservation.

As family wealth grows, so does the natural inclination to protect it. Yet this heightened focus on preservation can overshadow crucial opportunities for growth and adaptation. The subtle impact of this mindset shift affects not just investment strategies but the entire framework of integrated wealth management across generations.

A family’s enduring prosperity depends on how each generation approaches wealth planning. Finding an equilibrium between preservation and strategic growth creates the foundation for lasting legacies and successful intergenerational transitions.

The Creator's Risk: First Generation's Calculated Gambles

Think back to the wealth creator in your family. What sets them apart? It wasn’t just hard work or intelligence, though these certainly played a role. The distinguishing factor was often their approach to risk.

Wealth creators typically share certain characteristics. They possess a keen ability to spot opportunities where others see only obstacles. They’re willing to step into uncertainty, backed by thorough research and analysis. Most importantly, they understand that significant rewards often require proportional risks.

This calculated risk-taking is the engine of substantial wealth accumulation. It’s not about recklessness or gambling, but rather about making informed decisions in the face of uncertainty. The wealth creator views risk not as something to be avoided at all costs but as a tool to be wielded with skill and precision.

The Guardian's Dilemma: Second Generation's Balancing Act

As wealth passes to the second generation, a shift occurs. You’re no longer building wealth from scratch but inheriting a substantial legacy. This transition often brings a change in mindset—from wealth creation to wealth preservation.

This shift is understandable and, to some extent, necessary. You feel responsible for protecting what your parents or grandparents worked so hard to build. However, this is where the balancing act begins. How do you honour the wealth creator’s legacy while still positioning your family for future opportunities?

The challenge lies in finding the middle ground between prudence and stagnation. On one hand, reckless risk-taking could jeopardise the family’s financial security. On the other hand, a too-cautious approach can diminish family wealth as bolder peers capture emerging opportunities.

You might find yourself walking a tightrope, constantly questioning whether your decisions are too conservative or too risky. This dilemma can be paralysing, leading to a preference for the status quo even when change is necessary for growth.

The Inheritor's Paralysis: Third Generation's Risk Aversion Trap

By the time wealth reaches the third generation, the mindset often shifts even further towards preservation. You might grapple with a deep-seated fear of losing the wealth that has defined your family for two generations.

This fear can profoundly impact your decision-making. You might prioritise ‘safe’ investments that barely keep pace with inflation. Business opportunities that the wealth creator would have pounced on might seem too risky to you. The focus becomes maintaining what you have rather than growing it.

Here’s the thing: protecting existing wealth shouldn’t mean missing tomorrow’s opportunities. Markets evolve, industries transform, and families who focus solely on preservation risk watch their legacy diminish. Strategic growth remains essential to securing multi-generational prosperity.

Consider the cautionary tale of Nokia. Once the world’s leading mobile phone manufacturer, Nokia’s downfall serves as a stark reminder of the risks of complacency. In the early 2000s, Nokia held a dominant position in the mobile phone market. However, as smartphones emerged, Nokia was slow to adapt, clinging to its existing successful models rather than fully embracing the smartphone revolution—a potentially risky move away from the status quo. This risk aversion and failure to innovate ultimately led Nokia to lose its market leadership to more dynamic competitors like Apple and Samsung.

This risk aversion can lead to a relative decline in wealth. While your portfolio may not be shrinking in absolute terms, it may be losing ground compared to more dynamic wealth management strategies. Over time, this can result in the very outcome you’re trying to avoid—the erosion of your family’s financial legacy.

Breaking the Cycle: Cultivating Intergenerational Risk Intelligence

The key to breaking this cycle lies in cultivating what we might call ‘intergenerational risk intelligence’—a balanced approach to risk that draws on the strengths of each generation’s perspective.

Start by reconnecting with the wealth creator’s mindset. This doesn’t mean taking on the same level of risk, but rather understanding and applying the principles that led to success. Study the decisions that built your family’s wealth. What calculated risks paid off? What was the reasoning behind them?

Next, work on balancing preservation with necessary risk-taking for growth. This might involve diversifying your portfolio to include a mix of stable investments and carefully chosen higher-risk, higher-reward opportunities. Remember, the goal is not to eliminate risk but to manage it intelligently.

Perhaps most importantly, focus on educating and empowering future generations. Teach them to be stewards of wealth, not just guardians. This involves financial literacy and cultivating an entrepreneurial mindset and the ability to analyse and take calculated risks.

Consider setting aside a portion of family wealth as a ‘risk capital’ fund, where younger family members can propose and manage investments or new business ventures. This provides a controlled environment for learning about risk and reward, ensuring the family’s risk intelligence evolves with each generation.

Legacy wealth requires a thoughtful balance of preservation and strategic growth. Your family’s prosperity was built through calculated action and clear vision. Cultivating this same mindset across generations while adapting to new opportunities strengthens your family’s capacity for enduring success.

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As you take steps to ensure your family’s wealth remains preserved, protected, and flexible, connect with Beacon Family Office for a conversation about where to start.

Picture of ABOUT THE AUTHOR

ABOUT THE AUTHOR

As the Senior Wealth Advisor at Beacon Family Office at Assante, Cory Gagnon has supported successful family enterprises to preserve, protect and transition their wealth since 2011.

Cory’s personal objective as a Wealth Advisor is simple. He is committed to supporting families to take control of the areas of their lives that truly matter to them. This commitment revolves around using specific tools and strategies that enable families to take action with confidence which will support them through life’s critical transitions.

Picture of ABOUT THE AUTHOR

ABOUT THE AUTHOR

As the Senior Wealth Advisor at Beacon Family Office at Assante, Cory Gagnon has supported successful family enterprises to preserve, protect and transition their wealth since 2011.

Cory’s personal objective as a Wealth Advisor is simple. He is committed to supporting families to take control of the areas of their lives that truly matter to them. This commitment revolves around using specific tools and strategies that enable families to take action with confidence which will support them through life’s critical transitions.

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Why Have a Contingency Plan for Your Business?

Business Sale Preparation: Contingency Planning Essentials

by BlogBusinessRisk ManagementTransition Planning
Why Have a Contingency Plan for Your Business?

Business Sale Preparation: Contingency Planning Essentials

Selling a business is a significant milestone for any business owner, regardless of their reason for selling. While the prospect of a successful sale is exciting, it’s essential to recognize and prepare for the potential challenges that may emerge during the process. From valuation disputes and due diligence issues to market fluctuations and regulatory changes, obstacles can complicate or derail the transaction, putting your hard-earned assets at risk. To safeguard your business and ensure a smoother transition, it is crucial to develop contingency plans and take proactive steps to mitigate potential risks. 

Of note, there are strategies you can employ to identify potential hurdles, develop effective contingency plans, and protect your business throughout the selling journey.

Identifying Potential Obstacles and Risks

Before initiating the sale, take time to assess the likelihood of common challenges that may arise. Valuation disputes are a frequent occurrence, particularly when there is a gap between your perceived value of the business and the buyer’s assessment. Due diligence issues, such as discrepancies in financial records or legal complications, can also derail the transaction. To account for these types of challenges, work with experienced advisors to identify and mitigate these risks early on. While your sale may be unique to you and your business, their experience provides insights that will help you avoid these common challenges.

External factors, such as market fluctuations and regulatory changes, can also impact the sale. For example, a downturn in the economy or a shift in consumer preferences may affect the demand for your business or the valuation multiples in your industry. Similarly, changes in tax laws or industry regulations can create additional hurdles or alter the attractiveness of your business to potential buyers. There are strategies and practices that an experienced advisor can provide to help you navigate these “out of your control” types of challenges.

Finally, prepare yourself and your business for the possibility of a prolonged selling period or a lack of suitable buyers. Rarely does selling a business happen overnight. It often takes several months, if not years, depending on various factors such as the size and complexity of the business, the state of the market, and the availability of qualified buyers. You may also have to work on the business to increase its actual value for it to be more attractive to the buyer market, which takes time. Having a realistic timeline and setting aside sufficient resources to support the business during this period can help you maintain stability and avoid making hasty decisions under pressure.

Developing Contingency Plans for Various Scenarios

To mitigate the risks associated with selling your business, develop contingency plans for various scenarios. A financial contingency plan should be put in place to ensure your business’s stability during the transition. This may involve setting aside financial reserves, securing additional financing, or implementing cost-cutting measures to maintain profitability. It is also important for you to have a clear understanding of your working capital requirements and to ensure that you have sufficient liquidity to meet your obligations throughout the selling period.

A leadership contingency plan is another critical component of your overall strategy. Unexpected departures or changes in key management positions can create instability and uncertainty, which can negatively impact the sale. By establishing clear lines of communication, you can help ensure a smooth transition and maintain the confidence of potential buyers.

An operational contingency plan helps to maintain business continuity and performance during the selling journey. This may involve identifying key processes and systems that need to be maintained or improved, establishing backup plans for critical functions, and ensuring that your employees are well-informed and supported throughout the transition. Through a commitment to operational excellence, you can demonstrate the value and stability of your business to potential buyers and minimize potential risks to your customers and stakeholders. This all builds trust in the business itself – which adds value to the sale.

Protecting Your Business

Along with the development of contingency plans, there are several steps you can take to protect your business during the sale. Implementing security protocols to protect sensitive data and intellectual property is among the most crucial. This may involve establishing strict confidentiality agreements with potential buyers, limiting access to sensitive data, and implementing robust cybersecurity measures to prevent data breaches or unauthorized access.

Maintaining strong relationships with your key customers, suppliers, and partners is also essential during the selling journey. By communicating openly and transparently about the potential sale, addressing any concerns or questions, and reinforcing your commitment to ongoing partnerships, you can help maintain trust and stability. Here’s where a relationship contingency plan helps to ensure continuity of service and support, even in the event of a change in ownership.

Finally, by continuing to invest in innovation, growth, and employee development, you can help maintain – or even increase – the value and attractiveness of your business to potential buyers. Demonstrating your commitment to ongoing improvement, identifying new market opportunities, and nurturing a talented and engaged workforce can help differentiate your business and attract high-quality buyers who share your vision for the future.

Listen to our Legacy Builders Podcast

If you're considering selling your business or are in the midst of a sale, expert guidance is crucial to navigate the complexities and safeguard your hard-earned assets. Connect with Beacon Family Office today for a confidential consultation, and let our experienced team of trusted partners help explore your contingency strategies, protect your business, and ensure a smooth transition.

2023 Week 47

Generational Transitions: Balancing Control and Stability

by BlogLife ChangesRetirementRisk Management

Generational Transitions: Balancing Control and Stability

The generational transition within a family enterprise is a pivotal moment in the family legacy. It’s this moment that will influence the trajectory of family wealth management, the future of the business, and the dynamics of family relationships. The retirement of the outgoing generation marks a fundamental shift in leadership, decision-making, and the values driving the family business. This shift is not just about the transfer of authority; it’s a complex process that impacts the entire ecosystem of the enterprise. Its significance extends beyond the business, deeply intertwining with personal and familial aspects.

Retirement, especially in the context of a family enterprise, holds unique weight. It’s a transformative moment where responsibility and legacy are passed on to the next generation. The significance of maintaining stability during this transition phase cannot be overstated. It’s not merely about financial stability but also about preserving the values, vision, and principles that have steered the family enterprise thus far.

Knowing this is a time for potential instability, how can you prepare to ensure there is balance, control, and minimal risk during this transition? What follows are the first steps to ensuring a successful generational transition.

Enterprise Stability During Generation Transition

Maintaining the stability of a family enterprise during generational transitions is a crucial factor that directly influences the continuity and growth of the business. The seamless passage of leadership and responsibilities from one generation to the next is pivotal in ensuring a stable operational framework. A well-orchestrated transition allows for the preservation of the enterprise’s core values, mission, and business plans. It enables a smooth continuation of operations without significant disruptions, fostering confidence among stakeholders, clients, and employees. This takes intentional planning, often years prior to the outgoing generation’s decision to retire.

Family wealth management, in conjunction with the family office, assumes a multifaceted role, especially in terms of establishing financial plans and upholding the long-term interests of the family and the enterprise side-by-side. Effective strategies address the complexities of transitioning ownership while integrating the financial and legal dimensions of the process. As the central platform for these endeavours, the family office ensures a coherent framework for the management of the family’s assets, investment portfolios, and governance structures. It acts as a strategic partner in preserving and nurturing the family’s wealth, imparting a sense of stability crucial for successful generational transitions and business continuity.

Having robust financial plans built into the family office is important for keeping the business stable during these times of transition. By strategically navigating these transitions, the family enterprise can remain stable while laying a strong foundation for sustained growth and success across generations.

The Perils of Overcontrol: Frustration and Turmoil

Excessive control, particularly from the outgoing generation in family enterprises, can create a myriad of challenges, leading to frustration, conflicts, and potential turmoil within the business and family relationships. While the outgoing generation may have a deep-rooted connection to the business they’ve nurtured, exerting excessive control without allowing the newer generation space to express themselves can hinder further growth. It often breeds a sense of aggravation and stifles the creativity and fresh perspectives the new generation can bring. This control dynamic, if unaddressed, can cause rifts within the family, impacting the smooth operation of the business. In extreme cases, this can see the family enterprise diminish, either in reputation, service, or value. 

Balancing autonomy and guidance emerges as a critical factor in mitigating the perils of overcontrol. Giving the younger generation the opportunity to take charge and contribute their ideas develops a sense of ownership and accountability. Finding this equilibrium is not an easy task; it requires a willingness to embrace change and adapt to a new way of managing the enterprise. The new generation can bring innovations to propel the business forward, while the guidance of the outgoing generation, when balanced appropriately, ensures the preservation of the enterprise’s core values and legacy.

To mitigate the potential risks of overcontrol, strategies emphasizing trust-building and the creation of a collaborative environment are paramount. Encouraging open dialogue and mutual respect between the outgoing and incoming generations is imperative. Implementing mentorship programs, establishing shared decision-making processes, and creating platforms for constructive discussions can help bridge the gap between the two generations. Building trust and mutual understanding lays the foundation for a more harmonious transition, cultivating an environment where both generations can contribute their strengths and ideas without feeling restricted or disregarded.

Gaining Understanding and Support from Stakeholders

The success of generational transitions within family enterprises relies on the active engagement and support of all parties involved, including those not part of the “family” in the family business (e.g., stakeholders). This inclusive approach involves not only the outgoing and incoming generations but also extends to family members, key employees, and external advisors. Each stakeholder plays a pivotal role in ensuring a smooth and successful transition. The outgoing generation’s willingness to pass the baton and support the newer generation in assuming responsibilities is as crucial as the incoming generation’s willingness to learn and lead. Additionally, involving family members and key employees in the process fosters a sense of belonging and commitment, aligning everyone towards a common goal. External advisors, with their expertise and impartial perspectives, can offer invaluable guidance, especially in addressing complex financial and legal aspects, contributing to a more comprehensive transition process.

Transparent communication and education are essential components that underscore the success of these transitions. This involves open and honest discussions about the logistical aspects and the personal elements that accompany such a significant transition. Ensuring that everyone, from the outgoing generation to external advisors, is on the same page. Likewise, the ability to adapt to new methodologies, new leadership, and evolving business dynamics is important. Stakeholders must recognize the inevitability of change and handle it with an open and flexible mindset. These foster a collective understanding and commitment toward the shared objective and pave the way for a successful transition and a sustainable future for the family business.

Listen to our Legacy Builders Podcast

Wherever you are on the generational transition path, take charge of your family's financial legacy and navigate this transition with confidence. Connect with the Beacon Family Office to begin building the strategy to implement robust financial plans, balance control and stability, and overcome potential challenges with ease. Book an initial conversation today.

5 Ways to be Sure You are Making the Right Investment Choice

5 Ways to be Sure You are Making the Right Investment Choice

by FinancialFinancial PlanningInvestment PlanningRisk Management

When you want to make your money grow you first need to learn how to invest properly. The fact is that thousands of Canadians lose money on investments each year by not taking the time to understand their investment strategy. Having a solid investment plan in play, you need to take the right steps and inquire with the right people who can advise you. To get on the right track with your investments, check out these 5 ways to be sure you are making the right investment choice right from the get-go.

Know Your Goal

You will never be able to know if you’re on the right track of making the best investment choice if you don’t know what your goals are. For instance, are you investing for extra retirement security, income, or growth? Do you want to invest for the short-term, mid-term, or long-term? Your answers to these questions can help form your financial plan and strategy that will be in sync with your goals. Thus, any decisions you make should be in sync with your strategy in order to keep you on the right path.

Be Realistic

Being realistic about how much money you have to invest will help you make better investment choices. For instance, if you have a hefty sum of money to invest you will naturally have more investment options available to you, and can easily diversify. If you only have a small amount of money, you should start slow and begin transferring monthly amounts to your investments that you can actually afford. If you’re not realistic you can get yourself into money issues quickly, so talk to an advisor on how to build your portfolio with what you can afford.

Do the Research

Hearing from a friend about a “good stock to buy” often leads to costly regrets. Before you invest, learn as much as you can about stocks, bonds, mutual funds, and all the investment instruments out there. Take the time to understand the jargon and terms, the types of investments available to you, what investments are better for short and long-term, and educate yourself about the financial markets. The more you know, the better prepared you are, and the more likely you will make the right investment choice to see your money grow.

Know the Risks Involved

It’s no surprise that all investments come with some degree of risk. But some investments are much riskier than others. You are more likely to make a sound investment decision if you are aware of the risks that a particular investment can entail, and have the capacity to absorb any potential risk you may experience.

Get Advice from a Professional

Investments are complex to understand and trade. If you don’t know what you’re doing, you could lose money. Talking to a professional for advice on what investment tools are best for your financial condition, is the best way to ensure you’re making the right investment choices for you. Even the savviest traders have financial mentors and work with other professionals to help them get the most out of their investments.

When you need some expert advice, talk to us at The Beacon Group of Assante Financial Management Ltd. Our team of business professionals can guide you in your investment decision and help you understand what financial strategies are best suited to you.

Life Insurance & Business Succession

Life Insurance & Business Succession

by BusinessFinancialFinancial PlanningRisk ManagementUncategorised

Having a life insurance policy in place is one of the best ways to ensure your family’s financial well-being after you pass. However, it may not be only family members that require financial support in your absence. If you are a small business owner, you should strongly consider taking a policy out on yourself that will act as part of your succession plan. Below are two examples of how having a life insurance policy specifically designated to the succession of your business can be used to benefit those you leave behind.

Estate Taxes

Much thought is put into estate planning on a personal level, but if you are a small business owner, it’s important to predict the business estate taxes to be paid upon your death. Discussions with a financial advisor will help you through this process as there are many factors involved in determining how much of the business will be taxable when the business owner dies. If the business was financially successful, there could be a large tax bill requiring payment as part of the estate settlement. This is when a specifically designated life insurance policy can really save your successor. Designate in your Will what each insurance policy you hold is to be applied against to ensure no confusion if you happen to meet an untimely death.

Replacement of Talent

In a small business situation, the business owner often plays a vital role in the day-to-day operations of the company. If the owner was there at the inception of the business and has spent years mastering the business, it will not be an easy feat to replace that person if they should die unexpectedly. People can pass away without notice, and if the survival of their company depends on their specific job being done, then existing staff may need to seek outside help. Having a life insurance policy on the business owner who carries the business is a useful tool for hiring a replacement. Likely someone with the expertise to successfully run a company will come at a higher salary, and having the financial means accessible to fund that salary could mean the difference between the company sinking or the company continuing to thrive.

Life insurance policies are important to have to ensure your family is cared for after your death. However it’s imperative that you also remember to protect your company against financial ruin after your death. Be certain to have enough life insurance in place to cover any expenses associated with your passing. We would be happy to provide you with further information about securing your legacy.

Understanding the Advantages of Disability Insurance

Understanding the Advantages of Disability Insurance

by Risk Management

Insurance has always been one of those bills that we pay but disregard – until something happens. Not everyone requires a pay out from their insurance companies in their lifetime, if they’re lucky. Accidents and unsuspected medical emergencies are never planned and are always difficult to deal with. Not having disability insurance in place can prove to be a detrimental misstep should something happen to any income earner in your household.

Why is disability insurance important?

Disability insurance is your coverage for when you are disabled and unable to work.  Accidents happen when and where you would least expect it, and oftentimes they are unavoidable. If in the blink of an eye your lost the ability to earn an income as a result of an accident, would you be able to afford your mortgage and car payments? Disability insurance is there to help when you are unable to earn.

What are the types of disability insurance?

Disability insurance can be offered through your mandatory work deductions, or it can be purchased through a private insurance company. The general types of disability insurance remain the same; Short-Term Disability, typically lasting 120 days, and Long-Term Disability. Each insurance provider will have their own policies as to timing of each designation. Speak with your financial advisor for specifics relevant to your unique situation.

Is it worth gambling with your financial livelihood?

Unfortunately disability insurance is not something you can easily purchase after a life- and work-altering event has already occurred. Having disability insurance in place ensures your family and household can still survive financially in the event of a disastrous unforeseen accident.

Who needs disability insurance?

Everyone with income-earning potential, especially those with dependents and regular household bills, should invest in disability insurance. This is why you often see it as an automatic built-in deduction on your pay stub as provided by group health benefits. But what about the self-employed? You should take all necessary steps to protect your greatest asset, which is yourself, against financial ruin should you ever be in an accident.

Compare it to car insurance

You wouldn’t drive your expensive new car, or any car in fact, without having car insurance in place, so why would you live your life without having disability insurance? Your life is much more valuable than any car, and so is your earning potential.

Don’t leave yourself uninsured and vulnerable to financial distress. There is little to nothing that can be done to prevent accidents, so the best thing to do is be fully prepared by having disability insurance in place. Book a consultation with your financial advisor to learn more.

Areal view of two people snorkeling in a tropical location

8 Tips for Arranging Travel Insurance

by Risk ManagementTravel & Leisure

Purchasing travel insurance is a great idea because it reduces the financial risks of traveling. Potential issues like accidents, missed flights, lost baggage, illness, and theft can be mitigated with the right insurance plan. We have provided eight tips to help you choose the right travel insurance for you and your family:

Activity Exclusions

Make sure you read the fine print of your policy to make sure any amateur athletic activities you plan on participating in are covered. For example, some policies may exclude coverage for scuba diving or kayaking. These are the times where you are at the most risk, so make sure you are covered.

Disclose Medical Conditions

You need to be honest when disclosing all pre-existing conditions you have that require coverage. Insurers will look at your medical stability when determining risk. Stability refers to the amount of time you go without needing treatment, medication or hospitalization.

Don’t Rely On Credit Card Coverage

Credit card companies offer a much different product than a travel insurance policy. The “travel insurance” included with some cards have a lot of limitations that are unclear until you need to make use of the insurance.

Annual Plans

If you are a frequent traveler, it could make sense to purchase an annual travel insurance plan. By paying an annual premium, you are covered for all the trips you take during the year.

Avoid Up-Front Payments

If at all possible, it’s best to avoid relying on a plan that requires you to pay up-front before receiving compensation. You don’t want to be stuck paying out of pocket at a foreign hospital.

Worldwide Coverage Restrictions

Some plans don’t cover visits to certain areas of the world. Make sure you a certain you will be covered at your travel destination before purchasing a policy.

Use the Emergency Line

Insurers insist that you phone their 24-hour emergency line if you ever need medical care. The medical professional answering the phone will work with the attending physicians to determine the best course of action while mitigating instances of misuse of medical services. Some insurers may leave you liable for some of the medical bill if you do not call the hotline.

Trust Your Advisor

You should purchase a travel insurance policy that has been recommended to you by your financial planning advisor. The advisors at The Beacon Group of Assante Financial Management Ltd. are trained to ask all the important questions and find you a policy that will leave you fully covered and your finances intact.