The term “generational wealth” refers to any assets passed down by one generation of a family to another. These assets can include stocks, bonds, real estate, family businesses and any other investments.

In fact, only one-third of families succeed in maintaining their wealth into the next generation. Nine out of ten wealthy families lose all their wealth by the third generation. This happens for a lot of reasons, but it’s mainly because people do not talk about money or teach their children how to manage it well.

Approximately $14 trillion is expected to transition from first-generation baby boomers to next-generation leaders in the 2020s alone. Inter-generational wealth transfer and preservation is therefore a priority topic for most family offices across the globe and a key concern for first-generation entrepreneurs who invested a large part of their lives building a successful family business. Unfortunately, statistics indicate that it is highly likely for first generation wealth to be significantly eroded by the time it is in the hands of the third generation, a trend that will continue into the future if we repeat the mistakes of the past.

Taking an approach of defending and ring-fencing generational wealth is a sure way to cause disharmony and erosion of wealth over time. The reality is that the business landscape is evolving so quickly that agility and an entrepreneurial, innovative mindset is key to maintaining wealth across generations. Current leaders, therefore, need to look beyond the immediate priority of wealth preservation and genuinely embrace the value that a fully immersed, integrated and invested next generation can bring to a business. The truth is that a family legacy cannot be solely centred around wealth. Lasting legacies are built by families who have embraced family culture and values and who have established a shared sense of purpose that all members are aligned to.

Building a lasting legacy of wealth

Historically, sustaining wealth into the future has been difficult, often caused by mismanagement and a lack of education. However, families and those UHNWIs looking to establish their own generational wealth/succession plan now have the advantage of being able to manage their wealth in a better, more structured way from the outset. The characteristics of successful multi-generational families can provide a roadmap for modern families to build a lasting legacy.

Why most generational wealth transfers fail

Below are four common pitfalls to look out for to avoid becoming a 3rd-generation statistic:

1. Successfully stewarding wealth across generations requires a unified mission and shared goals that successive generations can buy into. Failure to achieve that sense of aligned purpose is a common reason for fracture and disunity. It is therefore wise for a family to periodically review business and investment goals to ensure that they remain relevant to the evolving priorities of new generations. In recent years, there has been an obvious value shift amongst the next generation, driven by social and environmental concerns that reflect their need to leverage wealth for the betterment of the world. Disregarding this intent as misguided or naïve alienates the younger generation and destroys an opportunity to integrate their passions into the family business model and build business acumen in the process.
2. As indicated above, alignment of goals and building a shared sense of purpose is essential for a family to remain unified. However, this is often not achieved due to inadequate focus on relationship-building and not creating open channels of communication across all family segments. A sense of connection is built organically over many years and relies heavily on there being formal and informal platforms to share information and collaborate. Emphasis needs to be placed on pulling the family together and ensuring that all members, including the next generation leadership, are encouraged to participate and give input into the strategic vision and priorities of the family.
3. One of the most sensitive and challenging issues that families have to confront is managing expectations, especially when it comes to roles and responsibilities that junior family members assume will be handed over to them. Open and honest dialogue is necessary to ensure that everyone understands the specific skill sets required within the family structure as well as the succession plan and the business rationale behind it. Failure to effectively and transparently manage expectations is a common reason for relationship breakdowns with next generation leaders. Conversely, current leaders shouldn’t fall into the trap of assuming that the younger generation will be willing and able to take on the responsibilities they wish to hand over.
4. Taking on the responsibility of managing significant wealth is no small task. Equipping the next generation with the right skills and knowledge to make sound, informed commercial decisions is absolutely critical. There are numerous examples of significant wealth being squandered due to new leaders not having the necessary exposure and experience to properly assess risk vs return. Financial literacy and a sound understanding of business management principles is a minimum requirement for next generation leaders. Combining traditional education programs with practical experience and exposure gained within the family set-up is ideal. Participation in family meetings and projects is a great stepping stone to leading projects and managing your own sub-fund, laying the platform for bigger responsibilities that lie ahead.

What, then, according to family offices, are the solutions for making the wealth transfer to the third generation and beyond?

Build family culture
Families that focus on building an authentic, value-based culture and are able to rally all members behind a mission or purpose are far more successful in functioning as an effective unit and achieving multi-generational wealth transfer. Significant effort is invested into building trust, encouraging collaboration and creating a sense of belonging, all which drive cohesion and healthy cross-generational relationships. Differences in priorities and skill-sets are recognised and accepted, with members assuming different roles in support of a shared objective.

Embrace the next generation
The next generation may bring a different set of priorities and values to the table which can be challenging to manage. However, they also bring unique skill-sets e.g. digital, finance or legal skills which can be used very effectively to support the family office. By leveraging these skills, the next generation is given the opportunity to learn, grow and develop a sense of personal connection to the family enterprise as well as add value to the family cause.

Prioritise communication
Regular intra-family communication maintains cohesion and connection amongst family members and keeps everyone aligned and focused on shared goals. Interaction is often enabled through regular forums, both formal and informal, and sometimes facilitated by external consultants. This provides an open platform to discuss family dynamics, review processes and share successes and challenges. Communication is key to driving the necessary trust, familiarity and support needed for when a new generation takes the reins.

Organise family events
A regular program of family retreats or get-togethers can be very beneficial in bringing together members who reside in different locations. They help to build emotional bonds, culture and cohesion and can be an excellent way of communicating formal business updates, educating the next generation and having a lot of fun. Coming together in a neutral setting encourages social connection and provides a great opportunity to reinforce family cultural identity.

Encourage participation
For the next generation to be properly equipped to lead, they need to be given the opportunity to learn. A common approach by families who have successfully managed wealth transfers is the creation of sub-funds, with a separate allocation of assets, that can be managed by the junior generation. Significant learning can be achieved through taking full responsibility for asset allocation, determining investment return parameters and having to report on progress in the family boardroom.

Governance is critical
In the context of multi-generational wealth transfer, governance becomes an increasingly complex challenge. Decision-making is the most difficult aspect to address which is why many successful multi-generational families have established family charters and family councils, with voting rights, to ensure a well-governed decision-making process. Family offices can play a vital support role in providing independent oversight of governance structures and processes relating to board appointments and effective succession management.

Caravel Partners' work is, in essence, that of generational wealth transfer. Talk to us about all of your planning needs and about the investment and savings options needed to get you there.