“What is a filing cabinet asset?” most clients ask with a perplexed smile. After twenty years of working with families in business, we have learned that they accumulate “things” that are filed away in those filing cabinets and—in many cases—these things are now worth a lot of money. Whether it is land, income-generating property (a mobile home park, apartment complex, office building, storage warehouse, or the like) a membership interest in a private company, private loans, a piece of artwork, a table (a funny story for another day), or the family farm, families in business often use their free cash flow to acquire other assets. In some cases, their “things” are now worth more than their business. And this is where it gets complex. Accumulating things is different from inheriting things. Think of it like this: Accumulating things is like building a library by purchasing one book at a time, while inheriting things is like someone giving you a library of books at once and expecting you to know something about every book. So how efficiently and effectively can you report on all the assets your family in business owns? Whether you are a family in transition, developing or educating your board, or simply tracking and reporting on the family’s assets we recommend a four-step process: Collect, Organize, Present and Advise.
Collect
As a family in business with assets (in the filing cabinet), you are in one of three categories: 1) the patriarch and/or matriarch is still alive and in control with their team, 2) your family is transitioning to either a family member(s) or a leadership team, either with or without a board, or 3) your family is several generations into this and now you are just tracking the performance of the family’s assets. In any one of these stages, collecting information—whether through a corporate librarian, a family CFO, or just a curious family member—by asking “how much?” (cost basis), “why this asset?”, timing of purchase (and/or sale), and “for what reasons?” is the starting point. Whether you are opening the proverbial filing cabinet, downloading bank (and securities) statements from a financial institution’s website, scouring tax returns, or talking to old business partners, the collection process is the key to building the foundation for a meaningful reporting matrix that tracks the family’s assets and their performance. Not to mention this information can be helpful in creating both a family history timeline as well as understanding the behavioral dynamics of decision making in a family.
Organize
Remember when I mentioned building a library? Think of organizing the data as building the card catalog. Organizing the data starts with cataloging the assets and ends with tracking each asset so that meaningful performance reports are available for decision making. Your family may have already collected the information on their public and private assets or rely on the information provided by advisors and consultants; so the struggle is not so much collecting the data as it is organizing it. Depending on your portfolio size (especially of private assets), a family may face dozens, if not hundreds, of reports from partnerships, asset management companies, and financial advisors, and are faced with evaluating the information and making decisions. Private assets (e.g. commercial real estate holdings, private equity interests, private loans, etc.) are the most difficult assets to organize due to their very nature and illiquidity. So, whether you are using Excel spreadsheets, subscribing to the latest and greatest software package, or building your own proprietary system, decide what your mechanism is for organizing the family’s assets so your family will benefit from meaningful reports that will be presented.
Present
So you’ve collected and organized the data. Now what? It’s time to tell the story—or present it. The presentation of data from so many different sources is, in my opinion, the biggest challenge facing both advisors and families. How do you organize information from so many different sources, across so many different types of asset classes, for so many different types of viewers (family members), with so important decisions can be made? Our answer is grounded in three simple points. Make the presentation relevant, decision focused, and aesthetically pleasing.
- Relevant: The information tells a story with facts that impact the beneficiary. While the financial advisors, asset managers, and tax counsel digest the details, the board/family members do well when the reports tell a story about the bottom line.
- Decision-Focused: The reports present questions that the family needs to answer. Decisions are usually focused on cash that is needed or cash that can be distributed and the risk being taken.
- Aesthetically Pleasing: The presentation is easy on the eyes and invites the beneficiary into a conversation.
It is a growing trend for families to take an active role in the management of their assets, informally or formally through their family office. This is being made possible by families having access to information about their assets and technology, allowing for meaningful reporting that was once too cumbersome and difficult to put together and present to the common family member.
Advise
Most families in businesses are inundated with advisory services from firms offering expertise in the family’s assets. Whether it is your family business interest, public market assets (securities), commercial real estate, or private equity/debt, there is no shortage of excellent asset management advisors in the marketplace. But picking advisors comes with its own challenges, which is why we recommend your family taking ownership of the assets the family owns. With the proper infrastructure, you are in a better position to evaluate your assets and select those advisors who will have the greatest impact on the performance of your current assets and the ones you will own in the future.
Families are stronger together and one of the pillars keeping a family together is the long-term financial benefits generated by the assets that may be locked away in the filing cabinets. So where did the reference to “filing cabinets” come from, you ask? When I was twenty-two years old, my grandfather took me back to the office he and my grandmother shared in their small “millionaire next door” home and pulled out Farmers’ and Merchant Bank stock certificates (which by that time was Nation’s Bank) for me to coordinate dividing between the grandchildren. I enjoyed watching him flip through crusty old 3-ring binders and faded manilla folders, telling me stories of all the different interests he had accumulated in so many different things over his (now 100+ year) life, all stored away in those filing cabinets. As years passed and I have advised more families, I realize most have had similar experiences. I remember walking away from my grandfather’s house that day, a young Financial Advisor at Merrill Lynch, thinking, “Man I love those stories—but who in the h&^* manages the land, buildings, and stocks in those filing cabinets?” I am still wondering about that to this day.
J. Kevin Heaton is the Founder and President of i3, LLC. Started in 2007, i3 is a family advisory practice providing family governance, global family asset reporting, and private asset management services to high net worth families and families with high profile lifestyles.
