‘I am perhaps the only person in my family who keeps track of all family stakes’, half-jokingly said Réka Világi at a recent conference on family businesses organised by the TREND Weekly.
This was in response to the topic of distributing wealth to descendants. In this context, the head of the family should know what exactly is there to be distributed. Réka Világi, a daughter of businessman Ozskár Világi and the manager of his food companies, has spent many years on her own initiative summarising all business activities of her family. ‘We didn’t talk business at home.’
Statistically, similar enthusiasm for the development of family wealth is rather rare among descendants, also because most families do not discuss money aloud. Experts say that doing a review of the family’s position with teenage kids at least once in a while increases the chance that the wealth will not be dissipated.
How not to fall out with the family
‘Religion, personal life and money are something that is difficult to share in the family. My experience shows that wealth is managed well, keeps growing and is easily transferred from one generation to another if the head of the family has an open and close relationship with other family members’, says Jean-François Cats, a member of the advisory team at RSM Tacoma Family Office.
The relationship is also created if the family main decision-maker shares financial information with his descendants. This also is an essential part of raising children. And irrespective of the type of family business and assets and whether or not it is required by the family’s internal rules, the key is to outline the financial position at least once a year. This should be prepared responsibly and presented in an adequate form by the head of the family.
‘If you don’t do it, you must be ready for a risk that your children will behave in a way you do not like. Sometimes brothers and sisters have such terrible rows that the family members are no longer on speaking terms with one another or they never even meet again’, Mr Cats names a few extreme examples. Sometimes they even take it to court. And this is partly the fault of the parents.
He also remembers the words one of his bosses emphasised to him when he was young: ‘In all cases, it is important to work out the sum of all credit and debit entries. What he meant is that people are generally reluctant to remember that they have credits, so they think they are richer than they actually are.’
Business discussed, property not
The need to share information about property with family members is becoming an increasingly topical issue in Slovakia, according to Peter Dudák, Premium Client Manager at VÚB. ‘Transgenerational transfers in family businesses have been widely discussed. However, there is not much debate about the distribution of the family’s assets as such.’
As for family gatherings held at least once a year to discuss financial matters, Mr Dudák claims that this is far from common in Slovakia, while it is a standard in more well-off families in the West. The turn of the year is a perfect time for that. Businesses close their books, people naturally take a look back at their highs and lows, and there is more time for family meetings.
There are many examples of situations where the distribution issues are not addressed during the lifetime of the head of the family and then the family faces financial difficulties. For instance, after the sudden death of the founder, the family struggles to pay mandatory monthly instalments. Accounts and assets are frozen, often for months, until probate is granted. And when the heirs are unable to agree, the period during which the money is not available to the heirs is extended. In addition, if the family has no clear idea of what accounts and investments they have, it may cost them dearly.
‘For instance, our premium-client services are offered including a ‘family’ principle. Spouses and children may gain access to a part of the family’s assets. This is to cover situations when something happens to the founder’, Peter Dudák explains the alternative solution.
‘We can see that the activity in family finance has been increasing’, says, more optimistically, Marek Neckár, Private Banking Manager at Tatra banka, the market leader in private banking. Marek Neckár supports his statement with a growing number of cases where private bankers are contacted by clients accompanied by their teenage children. They not only want to open a current account for them but sometimes also transfer some money for them to invest, to try what financial products and asset management are actually about. In that case, there is more chance that if a young heir suddenly gets his hands on a large amount of money, he will know how to take reasonable care of it and will not squander it in a few years. Tatra banka also adopts a family approach. Private banking services can be used by other members of the family even if they do not have the minimum entry amount in their own accounts. The family is perceived as a whole.
‘Preparing children for taking over the family business as well as the family wealth should be a long-term process’, said Marek Neckár. However, he adds that parents are often busy managing their firms and try to put their children in the picture at least through good education to prepare them for the future in business.
Spouses and partners
As for life partners, it is a standard feature of private banking services in Slovakia that partners know at least the private banker administering their family’s portfolios. They can contact the banker in emergency situations but they need not to care much about financial products and services. It is also common that spouses or partners have the right of disposal of at least some accounts. This is only due to the family approach. As a result, they can avoid the critical situation when the account holder is temporarily or permanently unable to dispose of his funds.
If the distribution of family property is not addressed in advance and calmly, financial losses are not the only risk the family can face.
Family property often becomes fragmented and loses its value and importance. This happens for objective reasons – to pay relevant taxes and charges. ‘Statistically, in average, each next generation loses one third of the previous property’, warns Peter Dudák.
Besides objective reasons, family property often diminishes for subjective reasons. Heirs are simply unable to ‘manage’ and develop the business, money or real estate. This is why providing long-term education to family members focusing on what running a family business as well as administering family assets means.
In terms of law, reaching the age of majority is considered the turning point. Once they reach 18 years of age, descendants alone are responsible for assets in their accounts and products and the parents lose control of such assets.
Who and when
Finding the right time when parents should start financially educate their children is very individual. Some do it once the kid brings home a girlfriend or a boyfriend. ‘I think that the right moment is when children become interested in finance themselves. When the first question comes, it should be answered, not avoided. Later, one or two meetings a year should be organised to discuss the development of your business. I personally think that children at the age of 16 or 17 can get introduced to the issues as they already are quite knowledgeable on the subject and ask questions’, says Jean-François Cats.
And who should be involved in the introduction to family property? In an ideal world, there should be mutual trust between the spouses or partners. But life is not always ideal. For instance, in Belgium, there are several types of prenuptial agreements. Today, at a time when partners can be from very diverse social or cultural backgrounds, Jean-François Cats strongly recommends entering into an arrangement defining a financial ‘clear break’ between assets brought into the marriage by the couple and assets acquired together. Transparent relationships between the partners should ideally be preserved even if they cannot agree on their joint future but have children together.
When children ask what 2018 will be like
The turn of the year is a time for reviewing and taking stock of the past as well as for planning. Expectations for the coming year look very optimistic, at least from the perspective of financial figures. According to VÚB’s analysts, Slovakia is going to witness another year of a decent economic growth over 3 per cent. Slovakia’s GDP will most likely increase by 3.4 per cent and is expected to rise even more next year. Records may be broken in wages and employment. For the first time, the average wage is expected to exceed €1,000 and the unemployment rate is expected to reach a new historic minimum. All of this will play into the hands of family businesses, both large and small-sized ones.
As for the administration of family property as such, relatively major changes will be brought by MIFID II, the EU Markets in Financial Instruments Directive II. Private bankers, investment managers and other entities will be required to disclose to their clients of all fees and charges charged in the relevant period at least once a year and mandatorily at the year-end. In addition, they must also disclose for what services the charges were charged.
Investments will also undergo some changes. ‘Until now, investments have been made mostly under brokerage agreements, under which bankers merely executed the client’s instructions. Under the new rules, investments will be made mainly by means of advice, while the bankers must record in a meeting with the client the reason for advising the client on the particular transaction’, explains Marek Neckár of Tatra banka. The National Bank of Slovakia will be authorised to review the records and the banker’s conclusions.