Core Financial Skills For The Younger Generations
The “shirtsleeves to shirtsleeves” phenomenon is an age old trend in which the vast majority of family wealth is dissipated by the third generation. This result is usually rooted in lack of preparation.
Transferring wealth to others is relatively easy; we have many legal tools. However, transferring the skills to manage, maintain, and grow family wealth is dramatically more difficult. Wealth education involves proactive planning and teaching the younger generations core financial skills so they may be capable stewards of a family legacy. The key risk areas to consider:
Taxes. Advance structuring to reduce ongoing taxes (i.e. income and capital gains) and special event taxes (i.e. estate, gift).
Overconcentration. No single asset class is suitable to be the bulk of any family’s investments and measures to diversify and mitigate risk.
Overly-Broad Management. Too many family members in decision-making is unwieldy and strains relationships. An efficient and manageable board of decision makers is the usual path.
Poor Investing. Many inheritants are ill prepared to manage significant assets and the intricacies of larger and more sophisticated assets. The family needs to develop a clear investment plan, goals, risk tolerance, and vision along with management hierarchy and accountability.
Professional Coordination. The younger generation needs to its professional team, not just in choosing those familiar with wealth issues, but also in coordinating efforts.
Lack of Preparedness. Many details and daily tasks are handled by others leaving an experiential gap that school and other resources cannot fill. Few people are ready for a leadership role when it is thrust upon them without relevant experience. On the job learning, especially when stakes are high, can have serious wealth consequences, thus some grooming and practice make success much more likely.
Wealth education is less of a mini-MBA and more of a broad overview. Primary goals include understanding what comprises the family wealth, family ideals and goals, and developing a working understanding of core financial concepts. Core concepts often include (a) limits of family resources, development and management of income and growth, (b) consequences of financial decisions, budgeting and spending, (c) use of reserves and contingencies in planning next steps and how those steps impact other plans and family members, (d) borrowing, (e) investing and asset allocation, (f) risk profiling and mitigation, (g) understanding asset and liabilities and performance; and (h) how to use financial information and professionals effectively.
Preparation. Expose children early and often to wealth issues so the foundation is in place and all else they learn has context. A major distinction that takes time to internalize is that wealth is not limited to money but a variety of factors comprising a whole.
Management. Management exclusively by family members loses the vital neutral outside view. Most company boards have members from outside the company, and outside the company product field, specifically to engage a broader and less emotional viewpoint.
Expect More. Being part of the family business or management team should come with an expectation of success. If we expect very little we often get just that. The bar should be set high to create a healthy climate to succeed and grow. Not that failure is frowned upon, but rather it is part of the road to better things.
Wealth education is a continuing process and works best when designed to fit the individual participants. A variety of tools are available; family mission statement, family meetings, hands-on management roles, and individual coaching. Business and entrepreneurship can be an excellent platform to teach children business lessons, as it is learning by doing. Wealth education is also a balancing act, to encourage wealth creators and holders to consciously prepare the next generation for their eventual role as contributors to the family legacy as active, eager participants. From understanding the problem and raising awareness of the preparation gaps to improving communication, articulating expectations, and understanding risk. With this business base and experience, children will be empowered to succeed, preserving family legacy through the transition of wealth to the next generation.
by Adam Chodos, Esq., CPA