They say the family who plays together stays together, but when it comes to maintaining and increasing wealth from generation to generation, it’s hardly so simple.
It’s no secret in wealth management that the longer a family has substantial money the more difficult it is to maintain both family dynamics and the wealth. In fact, the dissipation of wealth from one generation to the next is often dramatic: research shows that, on average, 70% of wealthy families will lose their wealth by the second generation – and 90% will lose it by the third.1
With barriers aplenty across family structures and shifting priorities from generation to generation, a lack of effective communication and insufficient education are key culprits in dwindling wealth. When many millions of dollars are at stake, and there are businesses, real estate and jointly owned structures to consider, conversations are sometimes difficult. In such scenarios, the investment professionals in a family office can help.
“Discussions around finances and who’s going to take over the business or who’s going to manage the portfolio can be very complicated, which makes effective communication all the more critical,” says Joan Crain, Senior Director at BNY Mellon Wealth Management.
To ensure a smooth transition of wealth across generations, it’s important to not only make the youngest family members aware of the family legacy and wealth, but to also help them see the responsibility they inherit as something they can channel toward their passions.
Here’s how family offices can play a role in that process.
With people living longer today, the broad range of ages within families can be a barrier. When the oldest generation – grandparents, or in some cases even great grandparents – have a majority vote, there likely will be a communication gap between them and the second or third generation that have grown up in a digital environment. This can make it difficult for a family that still owns an operating company, for example, to determine how and when to start preparing a newer generation to take over.
“We advise parents to start the conversation early and keep it going,” says Crain. “Having frequent dialogue allows parents an opportunity to take advantage of teachable moments because it won’t seem odd that they are suddenly talking to the kids about things they don’t usually talk about.”
It’s in those teachable moments that family values and the expectations of young people can become part of the discussion, according to Vincent Hayes, Head of Global Family Office & International Wealth Management, BNY Mellon Wealth Management.
“Understanding expectations in relation to family values is important to a sustainable legacy. When a difficult situation arises, it can open the door to positive teaching moments, providing the older generation the opportunity to incorporate family values into the discussion. In turn, this can lead to acceptance, adherence, and an effort to sustain the family’s legacy by the younger generation,” says Hayes.
Turn generational divides into common ground
Next-generation family members are likely to have priorities that differ from previous generations and those who have advised them. For example, younger generations may be more passionate about sustainable investing, and that can put the investment professionals at the family office in the possibly unfamiliar position of having to craft and present investment strategies that go beyond maximizing returns.
“Wealth management firms have integrated a broad spectrum of investment solutions that cater to family members with varied interests, and younger generations are taking an active role in their family’s investment decisions. Wealth managers will be positioned to provide support if they understand what drives the younger generation’s decisions. Such an understanding is developed through active client engagement,” Hayes says.
A good start is asking each member of the younger generations what matters most to them. From that point, family office professionals can become a resource for helping younger family members find suitable solutions that reflect their values.
Another way to find common ground is to share examples of other wealthy families whose dynamics allow them to continue to build up their wealth. “An understanding that each generation is a steward of the wealth for the next generation is a key,” says Hayes. “When you combine that sense of stewardship with a purposeful mission that includes honoring the family’s past, educating and engaging family members in the present, and securing the family’s future you create a greater likelihood of sustaining multi-generational wealth and the family legacy.”
Professionals in the family office can help facilitate engagement with younger family members by encouraging them to become involved in philanthropic and community-related endeavors that the older generations are also passionate about. Crain, for example, is involved with a community foundation where she has seen this approach pay off. In that scenario, the main donors are older generations who make traditional investments that fund whatever grants they choose to make. Experience has shown, however, that in order to get younger generations to eventually donate they must first feel involved. One path to involvement is to encourage young people to volunteer for community projects that support causes they are passionate about.
“If we don’t capture their attention with something they are interested in, we’ll lose them,” says Crain.
In addition, the foundation’s investment committee has instituted an ESG-oriented fund. Crain acknowledges that some older members of the committee are a bit skeptical about how many investors it will attract. However, she says, they are missing the point. “It’s not about younger generations having tons of money to fund it. Its primary purpose is to demonstrate we have shared interests and passions, and as younger generations move into leadership roles in their families, the foundation will be positioned to have a strong relationship with them.”
Establish trust across generations
A key goal for professionals and advisors in the family office is to establish an ongoing and trusted relationship with every generation of the family. Trust, of course, takes time to build.
“It’s no secret that you have to earn trust, and you do that by consistently listening and then providing real solutions that demonstrate you are, in fact, listening. We know that roughly 80% of advisors end up losing their relationships once the wealth passes from one generation to the next, so making a solid connection in the early stages of the relationship and continuing to stay connected matters,” says Hayes.
Trust can be engendered through a shared sense of belonging. Ideally, a family office would have a team that mirrors the family itself in terms of age and experience. At the very least, the younger generation should feel there is someone within the family office who is a champion for their point of view.
Trust can also be fostered through providing the younger generation with opportunities to become more involved in financial decisions. For example, when a family member turns 21, an investment account might be established in their name for which they have sole responsibility – but only in collaboration with an advisor. Such a process can be more impactful if the young family member has to use the proceeds to pay for something that the parents had covered up to that point, like their cellphone bill or auto insurance.
“The point is they have skin in the game and have to pay attention,” says Crain. “Some parents might resist the idea of giving a young adult a few hundred thousand dollars or so, but it’s money well spent, even if the kids make mistakes.”
Lay a foundation of financial literacy
Every family is different, and each member of it absorbs and processes information in a unique way. However, there are some foundational takeaways that should be included in next gen education.
Hayes suggests that the pre-teen years are a good time to help children start to understand how much things cost and how money can be potentially earned – and perhaps establish a savings account for them. There are apps now that allow kids to do small basic transactions with their own money and gain an understanding that money has a source – and it isn’t endless.
Young family members should also learn the process of setting goals, working toward them, and achieving them. An always popular choice for an advisor to work with young people on is purchasing a new car. Beyond that, as young family members near completion of their higher education, it’s a good time for advisors to help them understand more sophisticated financial analysis – what it means to have a mortgage and purchase a house, for example, and financial planning for their own potential family.
For advisors, it’s vital as part of the education process to understand the goals a younger family member wishes to achieve with money. Having a conversation about goals will lead to discussions about how to allocate holistically to achieve a goal rather than getting bogged down in individual stock picking – and most of the basics on stocks and bonds will naturally be covered during such talks. As part of the educational process, advisors should also lay the groundwork for the necessity to minimize taxes and discuss how a trust works.
“A trust can feel like a mysterious concept,” says Crain. “If you’re going to get money from a trust, you have some duties to fulfill. At BNY Wealth Management, we have a workshop we offer to family offices about what beneficiaries should expect from their trustee and what they need to do to make the trust work.”
Emphasize family governance
For many family offices and their clients, educating the next generation is part of the broader process of preparing all family members to collaborate and establish guidelines for family governance. It’s important to note family governance is distinct from the governance of the family’s business interests. There can be family leaders who are devoted to philanthropy, for example, or training the upcoming generation, or advancing the family legacy without being connected with the business.
Family governance expertise isn’t commonplace, so it can be helpful to partner with firms that have dedicated and trained family governance specialists.
“I’ve worked with family offices that are very interested and passionate about overseeing family governance themselves, and in my experience that’s sometimes the best approach,” says Crain. “If the family office isn’t interested in leading that effort or would like to partner on it, we’ll conduct family meetings and lead them through exercises that identify joint family values.”
What emerges from those exercises is translated into a statement on what the family legacy currently is and should be in the future. Perhaps the most important aspect of family governance is that it helps family members get along with each other by recognizing every person’s communication style and value.
“Good family governance ensures each family member’s voice is heard,” says Hayes. “In a scenario where a member of a younger generation reveals they don’t wish to participate in the family business, for example, good family governance prevents that person from being treated as if they offer no value to the family’s endeavors. Family governance acknowledges that in some way every family member brings value to the table.”
1 The Williams Group, Preparing Heirs, 2003.
This material is provided for illustrative/educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice. Effort has been made to ensure that the material presented herein is accurate at the time of publication. However, this material is not intended to be a full and exhaustive explanation of the law in any area or of all of the tax, investment or financial options available. The information discussed herein may not be applicable to or appropriate for every investor and should be used only after consultation with professionals who have reviewed your specific situation. The Bank of New York Mellon, DIFC Branch (the “Authorised Firm") is communicating these materials on behalf of The Bank of New York Mellon. The Bank of New York Mellon is a wholly owned subsidiary of The Bank of New York Mellon Corporation. This material is intended for Professional Clients only and no other person should act upon it. The Authorised Firm is regulated by the Dubai Financial Services Authority and is located at Dubai International Financial Centre, The Exchange Building 5 North, Level 6, Room 601, P.O. Box 506723, Dubai, UAE. The Bank of New York Mellon is supervised and regulated by the New York State Department of Financial Services and the Federal Reserve and authorised by the Prudential Regulation Authority. The Bank of New York Mellon London Branch is subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details about the extent of our regulation by the Prudential Regulation Authority are available from us on request. The Bank of New York Mellon is incorporated with limited liability in the State of New York, USA. Head Office: 240 Greenwich Street, New York, NY, 10286, USA. In the U.K. a number of the services associated with BNY Mellon Wealth Management's Family Office Services– International are provided through The Bank of New York Mellon, London Branch, One Canada Square, London, E14 5AL. The London Branch is registered in England and Wales with FC No. 005522 and BR000818. Investment management services are offered through BNY Mellon Investment Management EMEA Limited, BNY Mellon Centre, One Canada Square, London E1C 5AL, which is registered in England No. 1118580 and is authorised and regulated by the Financial Conduct Authority. Offshore trust and administration services are through BNY Mellon Trust Company (Cayman) Ltd. This document is issued in the U.K. by The Bank of New York Mellon. In the United States the information provided within this document is for use by professional investors. This material is a financial promotion in the UK and EMEA. This material, and the statements contained herein, are not an offer or solicitation to buy or sell any products (including financial products) or services or to participate in any particular strategy mentioned and should not be construed as such. BNY Mellon Fund Services (Ireland) Limited is regulated by the Central Bank of Ireland BNY Mellon Investment Servicing (International) Limited is regulated by the Central Bank of Ireland. BNY Mellon, National Association is not licensed to conduct investment business by the Bermuda Monetary Authority (the “BMA") and the BMA does not accept responsibility for the accuracy or correctness of any of the statements made or advice expressed herein. BNY Mellon is not licensed to conduct investment business by the Bermuda Monetary Authority (the “BMA") and the BMA does not accept any responsibility for the accuracy or correctness of any of the statements made or advice expressed herein. Trademarks and logos belong to their respective owners. BNY Mellon Wealth Management conducts business through various operating subsidiaries of The Bank of New York Mellon Corporation. The information in this paper is as of April 2021 and is based on sources believed to be reliable but content accuracy is not guaranteed. © 2021 The Bank of New York Mellon Corporation. All rights reserved.