Business man showing paperwork to coworker
07 Dec 2021

How Wealthy Families Cope During a Crisis

This article appeared in the Swiss newspaper Neue Zürcher Zeitung.

It covers the entry into a crisis and which mind-set is important during a turbulent times. In the second part you read more about family governance and getting out of a crisis.

NZZ

Wealthy families usually hold a considerable portion of their assets in non-liquid, hard-to-value investments. This poses great challenges for asset managers to cope in times of crisis.

By Matthias Jenzer, CEO, Quilvest (Switzerland) Ltd.

A crisis has two basic stages – the way in and the way out. In retrospect, mastering these two very different stages determines how well a crisis has been managed. In financial market crisis, this applies to all investors – individuals and families – whether very wealthy or not.

Conceptually, mastering a crisis is straightforward. The past provides many examples. Assets have to be sold-off expensively before the crisis and then bought back cheaply in the middle of the crisis. This sounds conceptually simple, but is very difficult to accomplish in practice. The biggest difficulty is to remain pragmatic, logical and calm at all times – no euphoria, no panic. This basic problem is the same for all investors. We are all human, and all of our water boils at the same temperature.

Big Differences

Nevertheless, there are still major differences for well established families during a time of crisis.

Though all people boil water in the same way, some people also have top-quality fresh vegetables and special spices they can add to their pot of boiling water. When the extra ingredients are added to water in the right proportion, they can lead to quite a delicious broth.

In a similar sense, well established families can survive crisis fairly well in the asset-specific sense, or at least better than most other groups or individuals. That said, we must also recognize that not all wealthy families are alike.

There can be significant differences in the source and quality of a family’s core wealth, which usually consists of one or more industrial or service companies. Even within this group, there are families with well diversified wealth, and those with minimal diversification.

Stark differences can also be observed in how a family is organized and how it networks within and outside the family structure.  Equally important are the advisors who influence the family with their ongoing analysis and advice.

All these factors are critical for determining how well a particular family can manage a crisis.  It is essential for a wealthy family to set up suitable processes and committees to go through good and bad times as calmly, cleverly and effectively as possible. Well-organized families try to involve the next generation early and firmly in the crisis management process. All family members who are ready for serious discussions and willing to be part of the decision-making process should be involved. This encourages a broad diversified set of views which lead to more effective discussions and qualitatively better decisions.

It is essential for a wealthy family to set up suitable processes and committees to go through good and bad times as calmly, cleverly and effectively as possible.

- Matthias Jenzer
Stadelhofen Zürich

Don’t Panic

To define and live a crisis-resistant family governance, the input of an external party is of great importance. The family’s financial advisor plays an important role here. A wealthy family requires the investment advisor to have a strong sense of empathy and negotiating skills in these delicate family matters. If the family functions poorly, it makes bad decisions – especially during crisis.

Wealthy families usually have widely diversified assets because they can afford it. In addition, illiquid and relatively non-transparent investments (private equity, real estate) usually make up a large part of total assets; losses are less dramatic at the beginning of the crisis. This reduces the risk that the family will be fully caught up in the crisis and panic – panic that encourages or even provokes wrong decisions. A wealthy family is aware of this fact. Their asset manager is generally under pressure during the pre-crisis period to help them structure diversified assets with suitable ideas.

The fact that most wealthy families have a lot of experience in managing a family-owned business helps immensely in a crisis. Instead of short-term decisions based on short-term reasons and panic, the focus is on long-term decisions – a very helpful prerequisite for effective crisis management.

“All family members who are ready for serious discussions and willing to be part of the decision-making process should be involved.”

- Matthias Jenzer

Credits: Photo #01 Architect: Santiago Calatrava. Detail of the ceiling of the train station Stadelhofen, Zurich, 1983 – 1990