During the next 10 years the world’s wealthiest families will collectively transfer more than US$15 trillion to the next generation. This huge transfer of wealth will be subject to complex transactions and negotiations and if not properly managed, financial decisions may be taken which imperil the wealth for future generations.
Intergenerational wealth transfer is complex because it brings together money, power and love. Within many families there are hidden pressure points and deep-rooted behaviours at play that often cause conflict, hindering effective communication about succession planning. IN short, the process needs to be handled carefully.
Here, Paul Barrett outlines common obstacles to the successful transfer of wealth and steps to help you avoid conflict and the erosion of family capital.
TRUST
Trust is fundamental to successful wealth transfer; however, wealth creators often doubt the next generation’s ability to manage the money or the family businesses that they want to pass down.
Sometimes it is a lack of interest or financial ability on the part of the younger generation that can trouble the founders. In other cases, there is a lack of opportunity afforded to the next generation to demonstrate their potential. It’s important that they are given the opportunity to prove their abilities but also be given the right tools and support. That way, they’ll not only gain the trust of the older generation, but also gain confidence in their own abilities.
In the case of family businesses, allowing a successor to cut their teeth on smaller projects where they can demonstrate their ability to work professionally and show their commitment to succeed, can allow responsibility to be handed over in a controlled way.
CONTROL
Closely linked with trust issues is a desire to retain control. Company founders and wealth creators are often extremely cautious about handing over their business and their wealth. There may be a strong desire to avoid losing their accumulated assets. Loss of control can be very difficult for them. It creates a sense of uncertainty and people tend to favour the known over the unknown.
One thing that can help wealth creators to retain a sense of psychological ownership of the money even after it has been passed on is to have a Wealth Advisory Board in place. This provides a structured forum to deal with and communicate around family wealth issues. Key family members can define objectives and make investments under an agreed set of guidelines and with ongoing professional advice. This can serve to give the older generation a means of involvement and reassurance around the decisions being made.
RISK
Differing attitudes to risk between family members can be another cause of underlying tension. The older generation is likely to be thinking about wealth preservation, whereas, a 20 something has a much different time horizon and is more likely to be thinking about wealth accumulation. That may motivate them to want to take greater risks with family capital. It is important that each generation understands the motivations of the other.
OUTLOOK
It's common for older and younger generations to bring different outlooks and experiences to the table. The younger generation tends to have a more global outlook, partly due to the internet and social media, but also as a result of spending more time overseas, either studying, living or travelling.
The older generation will sometimes avoid change and often prefers to stick with things and ideas with which they are familiar. It is helpful for younger generations to learn to communicate the potential positive impact of new business and wealth perspectives that can come from travelling abroad and studying new ideas.
CONFIDENCE
Carrying the weight of a family legacy can be a lot for the next generation to shoulder. Nervous inheritors can be helped by establishing more dialogue across the generations, with the added support of experienced and impartial financial advisers. Implementing a clear governance structure, with trustees whose capabilities span a breadth of diverse skill sets, will provide much needed expertise.
It is the job of an Advisory Board to get everybody around the table and become impartial referees of sorts. Each member of the family will come along with different objectives and agendas – an Advisory Board will help the family to evaluate options and agree a way forward. Aligning on values is often key to finding resolution.
INCLUSIVENESS
An inclusive approach to succession planning can bring multiple benefits. Diversity of thought is good for decision-making. The younger generation can bring important new ideas about how to grow wealth. These digital natives often see different opportunities in the world and want to launch businesses in industries that didn’t even exist 30 years ago. For the family to retain its wealth and to prosper continuously it has to be able to reinvent itself and keep up with ever changing technologies.
Gender diversity helps too. Men and woman tend to have different approaches to investing and different tolerances for risk. The balance can be beneficial when managing family wealth.
A COMMON PURPOSE
Wealth creators tend to feel a strong responsibility to preserve the wealth they have created or are passing along. Future inheritors, on the other hand, are increasingly looking to use their wealth as a force for good from the outset. This is typically driven by the younger generation’s strong and vocal interest in social and ecological issues.
Sustainable investing is increasingly becoming a means to marry a family’s need for both successful investment returns and meaningful investment outcomes. There are opportunities to make money by investing in solutions to our biggest social and environmental challenges.
Some families start with giving as a way to connect around values and building a sense of responsibility. Philanthropic endeavours can be used as a great way to provide early money management skills. The next generation can build practical skills in terms of running an organisation, adhering to a governance structure in place and achieving financial goals.
PLANNING
It is extremely beneficial for a family to create a clear plan for their family business and their family wealth. Understanding other family members' perspectives, engaging in regular communication and identifying the right support network are key.
If there is no vehicle dedicated to discussing family wealth and bringing family members onto the same page, different generations will go about making plans in isolation from each other. As wealth managers, striving to preserve and grow family wealth, it is imperative that break down those barriers and get a single plan in place.
A family charter has become a popular way of planning for the future and the process of creating it can be a powerful unifying force. It is in itself an acknowledgment that a family has overcome any behavioural dynamics in play and is willing to communicate effectively.
Succession planning is a long-term and ever evolving process. It’s about defining the needs of each family member, understanding those needs and then meeting them. It helps to ensure that children, their grandchildren and great-grandchildren remain wealthy and purposeful.
Planning for the transfer of wealth is an essential part of the Wealth Pathway we develop for our clients at Absolute Wealth Advisers. Each family come to us at different stages and we will introduce succession planning when the time is right.