The Mega-Trend Dilemma
In the wealth management industry, it is well known that we are undergoing one of the largest generational transfers of wealth in known history – estimated at approximately $85 trillion over the next couple of decades. According to the Fidelity Center for Family Engagement, approximately 70+ million Baby Boomers currently own half of all private businesses in the U.S. and about 70% of investible assets. They are aging and will all be over 65 by 2030. Interestingly, despite their aging, 64% of these have not discussed the passing of assets with their families and 71% have never discussed this with their financial advisors. In fact, 68% of Americans have not had an end-of-life conversation with their families.
This lack of communication interestingly affects all strata of wealth. The 2023 UBS Global Family Office Report, which surveyed 230 family offices that manage on average $900 million of assets, found that globally just 42% of family offices have a wealth succession plan for family members; smaller family offices with $100 to $250 million of AUM are “especially likely to fall short of best practices.”
How are wealth managers responding? As an industry, wealth managers are tasked with managing wealth for either growth or preservation and working toward the most tax-efficient transfer of wealth to the next generation. Tools and technology have become more sophisticated, as have the strategies involved to maximize value and return. Clients that can afford it generally have access to the most promising investments, be they traditional or alternative, and also to the most experienced attorneys and accountants versed in the most optimized tax strategies of our day. The challenge, though, is that the wealth management industry is also being affected by this mega-trend. Financial advisors are aging and approximately 37% of them will be retiring in the next ten years, impacting the industry that is not seeing enough new entrants to replace these retirees. As such, consolidation is expected to accelerate in this industry.
In light of this mega-trend of wealth transfer, why are more families not better prepared for succession and why is the wealth management industry not doing more to better prepare families for this transition? Even in today’s media, shows like Succession portray the difficulties of transition in wealthy families, especially when business continuity and family continuity are inextricably linked.
First, succession and end-of-life conversations are messy, emotionally charged, and highly personal. The 2023 UBS Global Family Office Report put it this way:
Illustrating the difficulties of managing soft issues such as family governance, one London-based CEO commented: “How easily does your family talk about inheritance and hopes and dreams? These things are so personal that it’s very difficult, and especially so for the finance professionals who are used to dealing with less emotional topics.”
Finance professionals are trained to be impartial advisors and are generally equipped to remove emotion from conversations. This way, they can implement strategies that make sense and are logic- rather than emotion-based. This is referred to as financial discipline and is directly opposed to emotion which often lands investors in hot water when emotional investment decisions are made. Encouraging emotionally charged conversations is risky for advisors who do not want to lose the relationship or the assets under management. When reason and emotion conflict, emotion most often comes out ahead.
Moreover, feeling wealthy is comparative, not absolute. Therefore, everyone interprets differently the notion of ‘how much is enough’ differently. Most families agree that leaving an inheritance for the next generation is a good thing. However, when it comes to amounts, opinions vary. Warren Buffet famously said, “You should leave your children enough so they can do anything, but not enough so they can do nothing.” Charles Schwab’s 2023 Modern Wealth Survey provides some insight into the variance of this conundrum. The insight shows that perception of wealth is relative. 47% of Americans feel that being able to afford a similar lifestyle as their friends makes them feel wealthy, and 37% of Americans compare their lifestyle to that of their families and friends on social media. These percentages are significantly higher for Gen Z and Millennials. For ultra-high net worth families, the terminology simply changes to having “private jet wealth” or “non-private jet wealth.” Interestingly, when questioned to describe wealth, Americans generally choose non-financial assets such as having a fulfilling personal life or enjoying experiences to describe their wealth.
Lastly, planning is fraught with barriers. While families understand that a smooth succession requires a plan, many if not most families don’t even have a basic financial plan, let alone a family succession plan. According to the Schwab survey cited above, only about a third of Americans have a documented financial plan. Even for wealthy families with investible assets of $1 million or more, one in five don’t have a will. Reasons for this include the perception of not having enough money to need a plan (44%), the perception of complications in creating a plan (21%), or not having enough time to develop a plan (20%). Additionally, proper guidance and understanding from the advisors is lacking. The J.D. Power 2023 U.S. Full-Service Investor Satisfaction Study found that among full-service wealth management clients, only 57% say they have a financial plan. Of these clients, 29% say that they do not feel their advisor understands their financial goals and needs. Thirdly, laying out a succession plan, let alone taking steps to put one in place, is often hard for a business founder because this means relinquishing control. Switching from quarterback to coach is challenging as is bringing the whole family together to discuss, understand, or agree to a succession plan.
As Rod Zeeb of The Heritage Institute succinctly stated, “The goal in planning be it financial planning or succession planning is to simplify complexity and to prepare the next generation for inherited wealth.” As we discussed, the barriers are many and these can be categorized into three general categories: Wealth planning in general or the lack thereof can cause significant anxiety and worry; wealth in general but especially significant wealth can cause a distorted view of life; comparing our wealth status to that of our peers is a slippery slope. Here are some approaches that we have found to successfully address these challenges.
A Plan Prevents Worries
Worrying is meditation on the wrong things and can be mitigated with proper planning. Benjamin Franklin said, “By failing to prepare, you are preparing to fail.” So, take the first step of creating a financial plan that defines your goals, your priorities, and your desired lifestyle. View this as the guardrails of your life that will prevent you from overspending and running out of money before you pass away or alternatively living too miserly to enjoy life but passing with a massive sum of money under your mattress. Have an honest conversation with a wealth advisor that you trust and verbalize how you think and feel about money and what aspects of your lifestyle are your priority. We have found this is a very rewarding experience for those who take the time and ask the right questions. When done together with a spouse, this allows both individuals to get on the same page regarding finances and retirement – sometimes for the first time in their marriage!
Taking the time to create a financial plan regardless of wealth size is the precursor to a holistic review. The financial plan with desired goals and objectives will lead to the review or development of both the estate plan and risk management. These are not “once-and-done” reviews; they should be discussed and reviewed regularly, especially as life events such as births, deaths, weddings and divorces occur in a family. It is amazing how many families with established plans do not review them on at least a yearly basis to keep even simple things like beneficiaries up-to-date. It is critical to continually focus on five areas: wealth maximization, tax minimization, wealth transfer, wealth protection, and philanthropic maximization. Managing these promotes peace of mind and helps families sleep a little better at night.
Once these are in place, we recommend that all family members come together to openly discuss the family’s values and purpose, which is incorporated into a family mission statement. This guiding principle will define the family culture and allow the family to more harmoniously discuss family governance structures and succession. While sometimes difficult conversations to have, doing this “prep work” is often the heavy lifting that leads to smoother subsequent discussions. In all of this, we recommend that you hire a facilitator or moderator who is personable and knowledgeable and can firmly set the rules for engagement in all discussions. This helps greatly in preventing or reducing conflict.
Definition Prevents Deceit
Reflecting on your wealth and defining how you want your wealth to benefit your family and your community is vitally important. This becomes your purpose. Your purpose, in turn, should incorporate your values – those beliefs that motivate you to act one way or another. Ultimately, your values define you, are of greater importance than your wealth, and will ultimately define your family culture.
Author and leadership guru Simon Sinek famously said, “Happiness comes from what we do. Fulfillment comes from why we do it.” He also spoke of the importance of keeping this ‘why’ at the top of mind when he said, “All organizations start with why, but only the great ones keep their why clear year after year.” This is relevant for families as well. All families, regardless of the level of wealth, should ask themselves: “Why do we have this wealth and what impact do we want our lives to have?” If you died today, how would you be remembered and is this how you would want to be remembered?
Stories are powerful. So, think of stories from your own life that you could share that represent your values and your intentions for your wealth. We encourage you to discuss this openly with your whole family, write it down, and make it your family mission. You may be pleasantly surprised by the feedback you receive from next-generation family members. This will also provide alignment among family members of all generations, which can then be incorporated into family governance and estate planning to achieve continued alignment. Nothing destroys a family like unequal estate distributions that had been cloaked in secrecy until the death of a parent and nothing destroys a person like the receipt of great wealth that the person is unprepared to handle. Both situations can be mitigated if handled properly. On the flip side, I am convinced that a family that gives together (on mission), stays together.
Good Counsel Keeps Desires in Check
Having proper counsel in your life helps improve the probability of success (defined as achieving your desired goals). We have found that this industry attracts many phenomenal advisors including financial advisors, attorneys, accountants, and consultants of various kinds. These can be relied on for their expertise and provide valuable and much-needed services related to wealth management and the passing on of wealth. Harness their knowledge and resources for your benefit. However, require that they take the time to truly understand your situation and keep your and your future generation’s best interest in mind. You don’t want your advisors working with limited information in their respective silos.
To be especially effective, find someone to represent you in the space between the family and the advisors, whose role it is to enable all parties to pursue the family’s purpose, values, and mission in all decision-making. This is both a relational person and a knowledgeable person – a quarterback per se – that truly understands the family, their values, and the answer to why they have been entrusted with their wealth– the ‘familyness.’ There is no such thing as an independent financial decision; instead, every decision affects everything and everyone else. As families realize this, they will begin to seek out and incorporate this role into their lives.
So what are the characteristics of an advisor that drive family satisfaction? We have found the following: First, this person must be trustworthy – a person of integrity with relevant expertise or credentials. Secondly, this person should understand your financial needs, goals, and preferences and prioritize these above anything else. It takes time and relationship-building by the advisor to really get to know each person in the family. Lastly, the advisor should be able to take on the role of an educator to promote understanding among all family members and align all goals and priorities.
Ultimately, our goal as wealth advisors is to prevent families from going ‘from shirtsleeves to shirtsleeves in three generations.’ This refers to the unfortunately common pattern of the first generation creating entrepreneurial wealth, the second generation managing the wealth, and the third generation squandering the wealth. It does not have to be this way. Plenty of families effectively succeed and empower future generations, who are often eager to participate and contribute in some way. It is the methodology and the steps that are taken along the way that determine success. As mentioned above, many pitfalls exist. However, the good news is that these can be prepared for and mitigated once their reality is admitted as well as everyone’s vulnerability to succumb. We have seen successes and continue to see successes. Families are engaging and experiencing the fruits of their labor. So, engage your family, get a second set of eyes to evaluate your legacy readiness, surround yourself with effective advisors who take time to get to know you and your kids and have your best interests in mind, and be informed of best practices in this field. Your future generations will thank you.
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EisnerAmper Wealth Management & Corporate Benefits