At the Family Office Metrics (FOM) Op Tech convention last September, Paul McKibbin, a principal of FOM, presented some excellent tools that his firm uses to evaluate the success of business strategies, operations, technology integration, and other quantifiable elements of family office type services routinely provided by advisors to very high-net-worth clients.
However, when I spoke with McKibbin afterwards, it became apparent that while estate planning for very high-net-worth clients has had a dramatic impact on family offices and the advisors who serve them, there are no known metrics to evaluate their success or failure.
There is a way of establishing such metrics, but it requires an understanding the strengths and weaknesses of estate planning, as well as a familiarity with scenario planning.
Traditional, forecast-based estate planning is based on a linear projection of the immediate past to forecast the most probable results in the future. It assumes the most probable future, based on the extrapolation of quantifiable data, as well as a sophisticated way of handling short-term and tactical issues. Projecting beyond the immediate, tactical future quickly becomes futile because of the inherent uncertainties of the risks that exist (such as taxes, recession, death and disaster). Such linear forecasts are excellent at highlighting the most likely foreseeable risks. But they often "blind" clients and advisors to the less likely, but still possible, risks and opportunities that will occur in such a complex situation. This willing blindness has been explored at some length in terms of business management by Nassim Nicholas Taleb in his book "The Black Swan."
But to evaluate the success of an estate plan in the long run requires going through a "dry run" using a different technique — scenario planning. Scenario-based planning is not linear planning. Rather, you are looking for what is the most probable future. It is a medium-term (10-year) and long-term (50+ year) forecasting tool to reduce uncertainties to a manageable level while not concealing the risks.
It is a popular form of strategic planning that explores possible futures for a family or business, based on a combination of known factors and potential trends. It is frequently used with other tools in the formation of planning strategy.
It works by sketching out a small number of stories about how the future may unfold, which gives you a clearer picture of the decisions you must make today to prepare for these eventualities. It opens up divergent thinking and reduces complexity while avoiding oversimplification. It also provides the format of a common language and view to help bridge the communications gap between one generation and the next.
Scenario planning does not replace forecast-based estate planning or visions of the owner of a family business, art collection or real estate. Rather, it is used when forecasting and vision are unable to handle the level of complex uncertainty that is usually associated with a disruptive event that will require an integration of the future planning into day-to-day events.
I use a framework for thinking about the future that is based on the "observe-orient-act" principal. It can be viewed in terms Tracking, Analysis, Imaging, Deciding, Acting, or TAIDA. Following is a brief description of each element.
Tracking: Don't get blinded by the light. Our instinct is to look where the light is shining rather than observe all that is really happening. The result is that we lose track of risks, so a deliberate effort needs to be made to track as widely as possible all elements of news and thought, not just tax-related matters.
Analysis: Determine what is really happening. This is taking the data from tracking and trying to determine what the future consequences will be from the actions of the present, as well as a deeper digging into the creative and intuitive models and visions by repeatedly asking questions such as the following: What is happening and what seems to be happening; What are the necessary conditions for this to be reality; How tenable is this model; What are the points of strength and weakness?
Imaging: Bring dreams to life. Be more intuitive, to create not only an intellectual understanding but also an emotional meaning to the future. This uses intuition, will, and a relationship with the future as part of the imaging process. The key to success may be action, but the key to successful action is the imaging of that success when the action is taken.
Deciding: Be able to select and reject. Decisions are made in that moment between vision and action, between the concrete that can be tested and quantified, and the intangible which can only be envisioned. This is mostly taken by the client, and shows the difference between an entrepreneur (who can blend both the concrete and the desires), the dreamer (who has desires, but no ability to make them concrete) and the manager (who can create the concrete actions, but does not have the ability to create the desire).
Acting: Know the importance of presence and learning. Learning, the art of integrating new information into old knowledge, requires a clear purpose to be more than just academic. Signals from both the outside world and the inside world of the family and the organization need to be considered in learning, but doing and acting control the learning process. The most efficient families and organizations are those that learn to foresee and act, and are, consequently, one step ahead, rather than react and expend energy on emergency situations. The key to this is to keep actions focused on a vision, so-called "centered actions."
For the advisor to very high-net-worth clients, scenario planning is not a commonly used tool for several reasons. First, there is uncertainty of conclusions as no one can say definitely "this is the future." Second, it is complex, non-linear and counter-intuitive to the simpler, linear, and more intuitive style of the traditional specialized estate planners. Third, since the goals have both qualitative and quantitative elements, the answers are "soft" and subjective. The results are not as easily measured by the linear "hard" results desired in the traditional quantitatively-based analytical culture. And finally, it is always customized for each client, so it tends to be both expensive and time consuming.
For the advisor looking for a way to evaluating whether a client's planning can handle not only the probable (the linear forecast extrapolated from existing trends), but also the possible significant outlier events (such as death, disability and economic crashes) scenario planning is the only way to test the system against any sort of useful metrics.
Doing so is not simple and requires a very non-linear view of the way the future can be predicted. But it builds a much more robust plan and operation and can better handle risks and take advantage of opportunities, than traditional planning can by itself.
Matthew F. Erskine is principal of The Erskine Co.
in Worcester, Mass., offering expertise in the management
of unique family assets. He can be reached at www.erskineco.com.