How do you preserve wealth for future generations? Start early

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Wealthy families are engaging advisers to prepare their children for the pressures and responsibilities they will face as rich young people — and they are starting at an early age, in an attempt to ensure their wealth is protected for future generations.

According to wealth managers, it is an approach that works. Many say that parents who talk to their children about the privileges and dangers of wealth when they are young stand the best chance of success.

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“Clogs to clogs in three generations is an age-old saying which most advisers in wealth management will be familiar with,” says Nji Lorimer, senior wealth planner at SG Kleinwort Hambros. It conveys the proven risk of first-generation entrepreneurs seeing their hard-won money squandered after it passes to their grandchildren — not through poor investments, but because of a lack of planning.

“The second generation within a family have witnessed the hard work and sacrifices undertaken by their parents and then guard and cherish the wealth,” explains Lorimer. “The third generation, however, who have only ever known affluence and prosperity, do not have the same perspective — and, so, without the right guidance, can end up in the same proverbial ‘clogs’ of their grandparents . . . once the wealth has been fully depleted.”

The answer to breaking this damaging cycle, Lorimer believes, is early coaching on how to protect, grow and spend wealth responsibly. “Educating the next generation on how to navigate the world with wealth is a job for all involved — from the wealth creators within the family, whether parents or grandparents, to advisers who counsel and guide them,” he says.

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While the day-to-day teachings will predominantly be the responsibility of the immediate family, wealthy families are also enlisting banks and wealth managers to help with more formal financial education, in the form of ‘Next Generation Academies.’

These programs educate the younger generation on the responsibilities that come with money and what it means to be a custodian of family wealth. Activities can include games, role playing exercises, and discussions, but also hands-on training for the workplace. They also offer children a chance to network and build relationships with their peers in a safe environment. Banks believe that the principles imparted can offer life-long benefits to younger generations.

UBS Global Wealth Management, for example, runs a number of educational programs designed to bring together NextGen investors of different ages and experiences, so that they can test the theory of investing in practice. These shared learning experiences are an opportunity to test and learn outside the family environment.

Viola Werner, head of global next generation solutions at UBS Global Wealth Management, says: “Next generation clients need to be included as early as possible in crucial conversations with their parents and other older family members about their expectations surrounding wealth transition and legacy.”

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She says she is seeing an increase in financial confidence, driven in part by the willingness of the ‘NextGen’ to learn from each other. “This is often by sharing their experiences of the first investments they made, first mistakes and common pitfalls,” Werner explains.

However, experts in financial education say it is important to create a two-way dialogue — so that the older generation can reassess their existing investment strategies while the younger generation learns about the family’s visions and approach to wealth.

Anna Jones, chartered financial planner at Progeny, says the firm hosts an annual week-long summer school for clients’ children. The programme offers an opportunity to learn about the value of financial planning and get an insight into other areas of professional services, such as investment management.

The key is to give children some autonomy over the family wealth, says Jones. “I have set up many trusts for my clients in order to pass money to their children and reduce inheritance tax liability,” she says. “We then look to assign segments to the children at the most tax-efficient time, often with the aim of this money paying for university fees or getting them on to the property ladder. A lot of planning goes into making gifts into trust for children and, when the money is moved on to them, it can be a good way to get them involved in investment decisions.”

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Annick Crisford, client adviser at Rothschild & Co Wealth Management finds philanthropy is an effective way of educating children, as it teaches them ‘value for money’, a sense of how fortunate they are, and a culture of ‘giving back’.

“Clients often fear that their wealth will cause their children to lack motivation or direction, particularly when they, themselves, are ‘self-made’ and have struggled to get where they are,” explains Crisford. “It can be beneficial to give children the opportunity to make mistakes early, and in a controlled way, so that they appreciate the importance of care.”

© 2024 The Financial Times Ltd

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