News & Insights

  • Lack of Communication Killing Family Wealth

    Financial Advisor Magazine
    Jadah Riley
    June 6, 2018

    Lack of communication and trust has depleted 60 percent of family fortunes, according to a recent white paper from BNY Mellon’s Pershing entitled “Parent Trap: Avoiding Common Multigenerational Wealth Planning Pitfalls.” On the other hand, poor financial planning accounts for 3 percent of bankrupted family wealth.

    The survey’s findings highlight an opportunity for financial advisors to assist high-net-worth clients with unique challenges surrounding intergenerational wealth. HNW clients have frequent concern surrounding their families, the transfer of wealth and generational longevity.

    Many clients fear outliving their money and not being able to leave anything for their kids. They also worry about their children being entitled and not developing a sense of work ethic, says Carrie Gallaway, managing partner at YorkBridge Wealth Partners in New York City, who specializes in working with ultra-high-net-worth clients.

    Wealth transfer can be difficult for families to navigate. While the majority of wealth is lost due to conflict and interpersonal family dynamics, only 7 percent of HNW people with between $5 million and $25 million in investable assets believe these factors have a role in the deterioration of family funds, according to the report. The majority of HNW families (nearly 80 percent) believe the economy, investment strategy or financial constraints are responsible for permanent losses.

    “Wealth transfer tends to be a sensitive topic for many families,” says Katie Swain, director of financial solutions at BNY Mellon’s Pershing. “Most families are reluctant to address the topic to avoid inter-family conflicts. But putting off the inevitable is counterproductive to wealth preservation and is, in fact, the main reason why families experience an erosion of wealth over time.”

    BNY Mellon’s Pershing and Beacon Strategies interviewed financial and generational experts and evaluated the factors that lead to successful wealth transfers. The analysis also highlights issues advisors encounter, and less obvious traps to avoid.

    Key findings:

    Connecting The Generations

    The farther removed successive generations are from the wealth, the more difficult it is to maintain and manage the inheritance. Identifying shared values and getting family members involved in a plan to preserve the wealth can help connect the generations and create one united vision. Advisors can create a governance process that passes from generation to generation for consistent wealth transfer in the future.

    Shifting The Roles

    Matriarchs and patriarchs in wealthy families often struggle to relinquish control. However, this is a necessary step in creating a successful legacy. Advisors can benefit from transitioning elder family members from their leadership role into that of a coach or mentor to help stabilize and support the next generation.

    Advisors can also encourage clients to begin teaching the next generation wealth sustaining habits while they are young. One way is to be concise with kids from an early age when it comes to discussing money and individual values, says Gallaway from YorkBridge Wealth Partners.

    For example, getting paid for doing chores or “work”, discussing causes that are important to the family, and getting children involved in raising money and volunteering for those causes can help shape the next generation long before they receive an inheritance, she says.

    Gallaway notes that having family discussions based upon a clearly set investment and financial policy statement is key to sustaining family wealth and avoiding conflict.

    The Transactional Trap

    Gifting without a clear plan can lead to confusion and a waste of money. Gifts should not only be evaluated as a tax mitigation tactic, but should connect to a larger goal or purpose. Advisors should ensure clients have a vision for what they want to accomplish through gifting, and clearly communicate that vision to beneficiaries.

    Divorces and Deaths

    Higher divorce rates have made accidental disinheritance more common. Advisors should ensure beneficiary information is regularly updated to help safeguard against this consequence in the event of a divorce. Advisors can also help make estate-planning decisions to make the transition smoother after a death.

    “Advisors can’t simply check the box when working with their clients on estate planning,” Swain says. “As too many horror stories attest, the original intent can easily get missed, especially when memories and marriages have long faded.”

    Technical skill and tax minimization strategies are critical when working with HNW families. However, the emotional drivers of individual group dynamics dramatically influence the longevity of family wealth, the study finds. Advisors can benefit from understanding these relationships and incorporating them into their financial planning practices.

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