They have no experience in the field, let alone a basic knowledge of day-to-day business functions. There is great likelihood a company will not succeed under these conditions, and realistically, you would never trust these individuals with even one dollar of your hard-earned wealth. Unfortunately, this is exactly what you are doing with your estate if you do not take the necessary steps to prepare your heirs for the responsibilities that lie ahead.
But … like other parents you are naturally worried about the impact that telling your kids about your wealth will have on them.
- Will they be treated differently by society? Will others take advantage of them?
- Will having access to money lessen their motivation and their desire to work?
- Will they consume the wealth in wasteful ways or make poor investment decisions?
- Will they have nothing left to pass on for their own children and grandchildren?
Unfortunately, the answer to these questions is most often “yes.” This is the scenario for most families of wealth as 70 per cent of families fail to successfully pass their wealth on to the next generation. Successful transition is defined as “wealth remaining under control of the beneficiaries”.
If the asset ownership changes form (eg. the business is sold) or the wealth is redistributed voluntarily through a philanthropic decision, it is not measured as a failure. How is this possible? Studies show that the primary causes relate to reasons other than investment performance or poor estate planning – 60 per cent of the time it is because of a lack of communication and trust within a family, and 25 per cent of the time, it is due to ill-prepared heirs.
However, you have the power to change that outcome!
You have the capability and resources to equip your family to increase the probability that the wealth sustains, grows and benefits many future generations. And it all begins with two core principles: communication and education.
The Path of Good Intentions
Most parents want to give their children a better life than they had, and wealthy parents are often in the position to do so. While the intention is good and sincere, the end result often causes more harm than benefit to the children.
Some parents take the approach of exposing the children to any and all opportunities without limitation. The result may be children who feel entitled, or do not understand and appreciate the value of a dollar. They have no sense of boundaries and do not understand why others react with jealousy or negativity to their sense of entitlement.
Recently a parent was struggling over the choice of encouraging their university-age child to undertake some work experience over their holiday period or to spend the summer travelling (for the third year in a row) on a family vacation. Despite the good intention of providing unique experiences to a child, the parent could inadvertently detract from their future professional opportunities and life experiences by encouraging the vacation.
Other parents take the opposite approach, and provide only necessities. They communicate a “scarcity” mentality and do not discuss the family wealth in an attempt to shelter the children.
Again, the intention is honourable, but this results in children who are unprepared for a future with wealth, who lack knowledge of managing the family business or family wealth. In addition, children may not take advantage of opportunities such as starting a business, pursuing a career that is most satisfying to them regardless of salary, or making an impact on society through charitable giving because of this lack of knowledge.
The ideal, of course, is to find balance somewhere in the middle. It is possible to provide a comfortable lifestyle and expose children to value-added experiences while at the same time set appropriate boundaries. It is also possible to communicate openly and honestly with children about wealth and the business or circumstances that created the wealth. We strongly recommend families educate the next generation to be productive, contributing owners and successors of wealth. With that said, we believe it is also important to recognise that it is never too late to create a positive shift in behaviour and mindset.
Next month we will explore some of the key principles and tools in meeting many of these objectives.
Mr Scott has been in the finance and investment industry since 1986 and has a background which includes relationship and investment management, commercial, private and investment banking, philanthropic advice and family governance. All of this experience has been focussed towards affluent and multi-generational families in the fields of business, sport and entertainment.
As a former executive director at Goldman Sachs JBWere, Mr Scott established and managed the Private Wealth Management business for Queensland and formed part of the national management team. Prior to his years at Goldman Sachs JBWere, Brad had 12 years commercial and private banking experience with one of Australia’s major banks across various roles and responsibilities.
- Practical advice for improving your cyber security
By Rob McAdam, Pure Hacking
- Blockchain: why it’s time for accountants to get on board
By Ben Scull, Thomson Reuters
- How to stop the ‘hire and fire’ burnout
By Louise Pope, Aequalis Consulting