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Advisors – dealing with the unknown unknowns

By Family Wealth AdvisoryMay, 20244 min read

Former US secretary of defence Donald Rumsfeld famously said “there are unknown unknowns” – the things we don’t know that we don’t know. While at the time, the comment was the subject of some ridicule, the concept was well-established in the military relating to risk and decision making. We can prepare for “known unknowns” – risks we are aware of – but it’s the stuff we don’t know that we don’t know that can really hurt.

We can adapt this concept to advisors, who are subject matter experts within a specific domain. The “known knowns” are a given – that is the core knowledge and experience they hold. They also need to be across the “known unknowns” – the risks associated with their recommendations or decisions but still within their field. And they need to be always learning to minimise the “unknown unknowns” – both expanding their field of knowledge to ensure it remains current, as well as more advanced thinking about risk like systems and scenarios.

That generally works where the boundaries of the expertise are reasonably well-defined: we call a plumber when the pipes are clogged, and a lawyer when we want to contract with another party, or a conveyancing specialist when purchasing a property.

However, when we think about the advice needs of complex wealthy families, this approach is not sufficient.

Look at any ‘menu’ of services offered by a multi-family office or a private bank. The number of boxes on the page can be overwhelming: services like wealth management, tax advice, philanthropy, trustee/custody; administrative services for reporting and lifestyle services. Why so many? Because with increasing number of people and assets in a family group comes increased complexity and interconnections between them.

The UHNW Institute grouped the services into ten domains (see the diagram) in two categories: wealth creation and stewardship, and cultivation of family capital. This model is helpful for both advisors and families to understand what expertise is needed, and how the domains of expertise can interconnect

When serving a family, being an expert in philanthropy strategy, risk management, or asset allocation is not enough. The philanthropy strategy also needs a governance and decision-making piece, may involve leadership, the rising generation, family dynamics and more. Risk management relates to health and wellbeing. Asset allocation may draw on social impact goals.

No single person can be an expert in all these domains. Even bringing together a complete set of experts across the domains in a single firm is challenging (although some firms will try or purport to have this).

What advisors need to do is work on the “unknown unknowns” – to know just enough about the other domains so they can call in other advisors and collaborate with them. The philanthropy strategist ought to know enough about governance and family dynamics to know when those and other such experts are needed.

In collaborations like this, the domain at the centre of the circle – Family Advisory Relationships – comes into play. With multiple experts, one of them (or someone else entirely) needs to take a co-ordinator role to ensure they have agreed ways to work together and keep others informed in the best interests of the family.

In the complex world of family advisory, collaboration and being family-centric are essential to deliver good outcomes.

Conversation Starters:

(for advisors) How much do you know about what you don’t know? In what ways have you collaborated with others when working with a family?

(for families) How many different advisors does your family have? In what ways do they work or not work together?

Further reading:

Inside Merrill’s New Framework for Wealthy Families
What wealth managers can learn from family dynamics
These Factors Are Driving M&A In The Wealth Management Industry
Why you absolutely must meet your wealthy clients’ kids
What difference does it make if your client is a family business or business family?
Five things I’ve learned as a family business advisor
Three Strategies to Keep the Next Generation of Clients
Why Wealth Managers Start With Family-Centered Client Discovery
Best Idea: Nest Trains NexGen Advisors To Replace Retirees
Why Almost Every Family Office Employee Is Getting a Fat Raise in 2023

Here is more reading on Family Wealth Advisory.

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