Sustaining Family Wealth Across Generations
14th September 2015 David Harland, Managing Director, FINH
A snapshot of the challenges with wealth management across the generations.
The percentage of families that fail to pass on wealth successfully to their heirs is according to forbes.com, around 70%. Ensuring this rate improves throughout the generations is one my key roles as a family business advisor.
Below is a snapshot on recent surveys and commentary on wealth management across the generations and some suggestions on how it might be improved.
We’ve all heard the saying “shirtsleeves to shirtsleeves in three generations,” an American translation of an old Lancashire proverb. The old adage is not unique to any country or culture; in Italian, it translates as “from stalls to stars to stalls,” and the Chinese say “wealth never survives three generations.” Regardless of the language, the sentiment is the same: it is difficult for families to sustain wealth across multiple generations. The simplistic explanation behind the proverbs is that the first generation builds the wealth, the second enjoys it, and the third squanders it.
Many self-made families worry about the impact wealth and growing up wealthy will have on their children. Some worry their children will lose touch with reality or fail to develop motivation in life, content to skate by on the family fortune. Others fear squabbles over an inheritance or control of the family business will tarnish sibling relationships once the parents are gone.
Two recent surveys lay out these concerns starkly. A Morgan Stanley study on “Next Generation Wealth” interviewed ultra-wealthy families and found that fears about the impact of wealth on their children’s lives and relationships topped the list, which focused on generational wealth issues. A poll of wealthy Americans by private banking giant U.S. Trust showed that only one-third strongly believed that their children would be able to effectively handle their inheritance.
In my work as a family business advisor, I frequently see families tackle the issue of financial education and preparing their heirs to manage the family legacy. At the same time, they grapple with giving up control over the wealth and knowing what to divulge when. In response to these concerns, many parents do not fully disclose their wealth to their children or choose to limit their exposure to money. This reticence has real consequences when heirs are not taught how to manage money responsibly. Many parents worry as the moment of wealth transfer approaches that their heirs are unprepared to manage significant assets and wish that they had provided the financial education needed. In my opinion, one of the major reasons that family wealth may not survive multiple generations is that heirs are not prepared to receive their financial inheritance and may lack the emotional and practical skills to manage it well.
The good news is that there are strategies families can employ to discuss wealth with their children and help them develop the knowledge and experience they need to manage an inheritance.
One of the most powerful tools in the family toolbox is a family council, which can serve as a safe space to discuss money, expectations, and other family business concerns. Research has shown that successful multi-generational families give younger members permission to assert themselves in difficult conversations and give them the safety of knowing that disagreement does not carry family penalties.
Parents who worry that their children may be having a slow start can help their children and heirs develop a sense of purpose for themselves. Living up to family expectations can create problems for children trying to carve out their own path in life. Heirs who feel that they have to follow in the footsteps of a patriarch or matriarch may be disinclined to develop a proper work ethic. Instead, parents should focus on helping children develop a strong sense of purpose in their lives, in which money is a tool for enhancement, not an excuse for inactivity.
To foil the “shirtsleeves to shirtsleeves” proverb, an increasing number of wealth managers for high-net-worth families advocate the creation of a 100-plus year strategies to shepherd family wealth through the generations. Getting younger members of the family involved in the planning process can be an excellent way to build their financial savvy and engender a sense of stewardship (rather than ownership).
To give their children appreciation for wealth and a sense of perspective, some families have turned to volunteering with their children. A family vacation spent building a house for the needy or teaching English in an underprivileged school can open up many avenues for discussing wealth.