Taking a long-term view is critical when it comes to family wealth planning and there’s no escaping the importance of the NextGen in that dynamic – how succession planning is managed and how wealth can be passed on efficiently to future generations are vital considerations.
Figures put the scale of this challenge in context. With families facing the prospect of imminent large scale NextGen wealth transfer – Cerulli Associates suggest that a total US$84.4trn will be transferred by 2045 – and for families currently experiencing significant liquidity events, these questions are becoming increasingly important.
Indeed, one survey by The Economist Intelligence Unit (EIU) and commissioned by RBC Wealth Management, ‘New Wealth Rising’, found that 75% of high net worth individuals (HNWIs) believe it’s more important than ever to future proof one’s wealth.
But at what point do patriarchs and matriarchs need to engage properly with the NextGen? And are families doing a good enough job in educating them around what lies in store?
Communication
Overall, evidence suggests that families are failing to plan effectively for the future. A well-cited study of families by wealth consultancy Williams Group shows that 70% of wealthy families lose their wealth by the second generation, and 90% by the third.
Backing this up, a recent study by Deloitte Private indicates that, while four in ten families are set to undergo generational succession in the next decade, 41% do not currently have a leadership succession plan in place (Deloitte Private’s inaugural Family Office Insights Series – Global Edition).
So what are the barriers preventing effective succession planning? In some cases, older family members are simply reluctant to relinquish control of family assets; in others, younger family members are simply detached from family wealth through choice.
Our experience is that the NextGen are often disengaged from family values and the family strategy. Frequently, they are unaware of their family wealth, having had limited interest or exposure to it when growing up. In some cases, parents have deliberately led modest lives or tried to instil a sense of ‘normality’ on their children. We have worked with a number of families where younger siblings have, for various reasons, been quite happy to remain passive in family affairs.
But there is a clear need to help them understand why family wealth is relevant to them. The last thing a family wants is for those standing to inherit considerable wealth to be put under pressure or be completely unprepared for what is in store.
Helping them to become more aware of their future obligations is really important. And engagement is a good place to start. A report by Family Capital focussing on family office investment, for instance, found that 80% of families believe communication and education are key to ensuring effective governance in a multigenerational context.
Creating a safe, open and transparent family forum is a good way to spark those conversations. Doing so can provide all family members with a reality check, raise important questions, and help multigenerational mutual understanding. It also empowers the NextGen to understand that, just as inheritance brings responsibility, so too can it present real opportunity.
Good communication can also help mitigate future family disputes. One area we have found resonates in particular with the NextGen is around sibling equality – it stands to reason that siblings will want to be treated fairly in the future, and that is often a sufficient nudge for them to engage now so they are adequately represented in the future.
It's a carrot and stick approach – there’s reward in engaging, but also danger in not doing so.
Innovative structuring
Beyond good communication, there are some more concrete steps a family can take as part of a NextGen education programme too. Often this can revolve around basic financial literacy and, if the wealth is held within structures, how these work.
For instance, where family assets are held within a trust, it is important to explain the parameters in which a trustee must exercise their duties, as well as how and to what extent family members can expect to benefit from a trust – particularly where specific conditions or circumstances may influence this.
Creating a ‘training ground’ for the NextGen to gain experience is a good option too – an environment where they can be handed a level of responsibility to learn from real life scenarios, and channel their personal interests.
It’s notable that 52% of HNWIs say their beliefs about wealth are very different from their parents (New Wealth Rising), so creating structures where they can pursue their own agendas, within certain parameters, is a good way for them to build up financial literacy in areas that are of interest to them – whether that’s ESG investing, philanthropy or a business venture.
For instance, we’ve seen NextGen family members being put on the boards of investment committees or private trust companies (PTCs) so they can input into the real world of their family endeavours, but in a focused way that aligns with the family’s values and purpose.
Alongside this, maintaining a long-term view is important too. A NextGen education programme can provide a useful opportunity for a family to revisit its structures to ensure they accommodate multigenerational requirements, including setting out a clear succession plan.
Boundaries
The question really is not so much should a family embark on a NextGen education programme, but rather how they do it.
Timing and method are critical and independent, experienced third-party advisers can add real value here, helping to put the wheels in motion, ensuring the family is joined-up, engaged and well set up for the future.
For advisers, there is a question around how far they can go in developing an education programme. Where are the boundaries? Talking about succession can be a highly sensitive issue for some families and advisers need to be sensitive in return, to make sure they deliver enough, but without overstepping the mark.
The answer to that really lies in the fact that all families are different. One common question we hear, for example, is around the optimum age to initiate an education programme – and the answer to that is nuanced.
A study from RBC Wealth Management, for example, found that the average age to receive structured financial education in Canada was 26. But we’ve seen cases where families have started education programmes much younger, and cases where family members are already well into adulthood before receiving structured education. It all depends on dynamics and circumstances.
This reinforces just how important it is for an adviser to have a strong relationship with the families it works with, to really have an in-depth understanding of how those families work so an education programme can be tailored accordingly – whether that’s a softer approach to initiating dialogue, or a more concrete structured programme.
Either way, opening up a conversation about this important issue sooner rather than later is a prudent approach to take. Putting in place a good NextGen education programme could well be the difference when it comes to leaving a lasting and enduring legacy.
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