By Nirdev Desai
The adage of “shirtsleeves to shirtsleeves in three generations” is backed up by a recent Harvard Business Review report finding that 70% of wealthy families studied lost their wealth within the second generation and 90% within the third.
It is clear from such research that wealthy families do not appear to be well equipped to build on the financial success of previous generations and that a re-framing of how to ensure sustainable wealth for generations to come is needed.
In spite of the inability of the 90% to successfully transfer their family wealth, there are still 10% of families who are successfully creating and passing on lasting legacies, and these legacies often become the backbone of economic growth the world over.
It is this 10% that creates long-term value to global productivity.
According to the latest research by the Family Business Network, family-owned assets account for 70% of global GDP.
What are the 10% getting right, and how can we apply key learnings to intergenerational financial planning?
Ensure you are benefiting from the scale of your family’s assets.
Increasingly, families support one another with investment products for minors and individuals who are starting their careers still have to build up an asset base that will attract better fees based on higher asset values.
Family aggregated pricing is a key component of holistic financial planning for families and refers to fees based on the collective assets of a family rather than on the assets of a single portfolio or the assets of an individual investor. Fees charged on larger asset bases are often more competitive.
Families that share a common vision and objective for family wealth have an advantage.
Having a collective ownership of the meaning of wealth isn’t learned overnight. Much of it is gained through sharing experiences, earning trust, and showcasing sufficient individual responsibility to sustain future intergenerational wealth. This includes preparing future beneficiaries for their responsibilities, mentoring, understanding individual needs, and co-crafting a common vision. This can be a difficult task in times of increasingly complex family structures over multiple generations who may currently live off a family’s collective wealth. But a continued commitment to successfully address these issues enables easier discussions around the financial planning technicalities of timing, structures and amounts to ensure that family members are well prepared.
Ensure that the privacy of individuals is respected.
While aggregated pricing for families can be advantageous for a family, individuals within that family may want to pursue additional personalised and private financial advice separate from that of the family, including assurances that financial affairs are kept personal. Advice is personalised and nuanced, and there is a need to balance the benefits of aggregating assets at a family level with catering to the needs of the individual members of the family.
Align your financial plan with your risk profile.
Just as there is a need for family financial plans to cater to the needs of a family unit as well as the individual members of that family, there is also a need to plan for nuanced differences in risk profiling and how these change over time. Bluntly applying a single risk-profile to multi-decade investment horizons does not acknowledge a family’s cash flow requirements in the short-, medium, or long term, nor does it cater appropriately for cash flow or financial planning needs of individuals within families. It is crucial that financial plans unpack, plan and implement suitable strategic asset allocation at both individual and product level.
Speak to your financial adviser.
Holistic financial planning for families is complex, but a robust and flexible plan that caters for the needs and aspirations of family units as well as their individual family members in a complimentary way is invaluable.
Nirdev Desai is head of sales at PSG Wealth.
BUSINESS REPORT