Ask any husband-and-wife team if they share in the financial decisions of their family business and they’ll probably say yes. But dig a little deeper, and you’ll find that their definition of 'financial decisions' varies greatly.
Men often view financial decisions as those pertaining to long-term planning, sale of business and insurance. Women, on the other hand, consider financial decisions as the management of daily expenses, accounts payable, employee benefits and payroll.
They also tend to differ when it comes to investing: risk tolerance, expected results from investing and financial priorities, which means emotions run high when money is discussed. In turn, these differences have a tendency to flow through to the family business.
As counsellors will attest, money can be a divisive issue in marriage; from the early days, over who is going to do the actual paying of bills, right through to decision making over investing and retirement planning. The pressure can magnify if the couple runs a business together.
Couples should make a point of having a ‘money conversation’ early on, and should explicitly communicate their financial hopes and expectations. In any relationship, making assumptions can lead to misunderstanding. Openly discussing risk tolerance and possible outcomes depending on the scenario will bring a better balance to the business too.
There are four main patterns of most financial decision making, which – for the family business couple especially – are important to recognize:
1. The man decides. Women gravitate towards predictable results, which may mean sacrificing higher rates of return. Men, on the other hand, tend to want to beat the market, despite the increased risk necessary to get heightened results.
When the man makes the decisions, he will often take the riskier decision with the hope of higher outcomes. This can stress the woman but she will not want to argue her position, which is why she will opt out of shared decision making. Female business owners, at the end of their family business career, often discuss how they would not have taken the higher risk investments made by their partner. Looking back, if there is success, it is easier to say the risk worked.
Without the stress of added risk, the company would not have grown and sold for the higher valuation. Women wanting predictable returns in old age can cause stress between the family business couple, but following that lower risk will not get the big deals.
2. The woman decides. Financial decisions made exclusively by women make up a small percentage of couples. In these cases, the woman tends to be the primary bread winner. Interestingly enough, they pick up the men’s risk profile by liking more aggressive investments. They may be unhappy about having to lead the financial planning at the time, but on the plus side, they’re far less worried about running out of money once retired. These women also tend to turn to their financial expert to manage their finances and help make decisions about their investments.
3. Decisions are independent. LGBT couples are more likely than heterosexual couples to separate their financial planning and investment because of that important factor: differing risk tolerance. Despite being the same gender with the similar risk and outcome profiles, they see themselves as independent as compared to family business couples. The trick is to make sure to use a financial expert as a sounding board in order to balance the risk appetite.
4. Decisions are shared. There are advantages having both parties to voice their concerns on a matter, but this might mean the ultimate decision results in a compromise of two conflicting opinions, which may not ultimately be the right one. There’s also the potential for more arguments if both parties need to be involved in every financial decision and do not understand the different risk profiles they each prefer.
Determine which partner is better at making particular types of financial decisions and then step back and get out of the way. This shouldn’t necessarily mean that the breadwinner makes all the decisions, and it doesn’t mean any one spouse makes all the decisions. It means that sometimes it’s better for the man or the woman to make a decision individually, sometimes it’s better for them to make shared decisions, and sometimes it’s better to make separate and independent decisions.
Interesting enough, the way financial decision making is divided in a couple will make a difference in quality of the relationship, particularly in retirement. Women who have not been involved in the decision making are the unhappiest group in retirement years and can become anxious. In stark comparison, if women have been included in joint decision making about investment decisions, they experience the highest levels of happiness.
What’s important for couples, especially those in business together, to understand is that neither men nor women enjoy being the exclusive decision-maker as they must balance their different risk tolerances and financial priorities in an unpredictable market.
It’s never too late to sort out the conflicts between a couple over financial planning, but those running a family business could improve their relationships and performance by understanding, early on in their marriages, the key factors that affect financial decision making.
Jacoline Loewen is the director of business development of UBS Bank (Canada), named Best Private Bank Globally 2014. Ms. Loewen is also the author of Money Magnet: How to Attract Investors to Your Business. You can follow her on Twitter @jacolineloewen.