According to Investopedia, “generational wealth refers to financial assets passed from one generation of a family to another. Those assets can include cash, stocks, bonds, and other investments, as well as real estate and family businesses.” In this article, we delve into the statistics that family offices are up against as well as the strategies they deploy to ensure family wealth is passed down to the younger generation.
The stats
It’s widely known that the role of family offices is to grow and preserve generational wealth. But, before we go into the role that family offices play in preserving family assets, let’s take a look at the stats that they are up against. Several challenges can arise when transferring wealth and planning for succession. In fact, the infamous stats show that a significant portion of wealthy families struggle to maintain their wealth across generations, with 70% losing their wealth by the second generation, and 90% by the third.
That staggering statistic is what brought about the “Shirtsleeves to Shirtsleeves” adage, which describes how multi-generational wealth tends to diminish over time. According to this saying, wealth typically dissipates within three generations, and many grandchildren struggle to manage the wealth inherited from their grandparents and parents. This issue has loomed over the world’s affluent families for decades, posing a threat to the continuation of their legacies.
Why family offices?
As alarming as the generational wealth transfer stats are, they are nowhere near compared to how fast money flies from lottery winners or even how often professional athletes go broke after retirement. Hence, family offices popped up as an antidote to the spiral cycle.
One thing that separates family offices from other wealth preservation structures is that they deal with more than just financial wealth. In addition to poring over spreadsheets and Quickbooks, they also deal with family dynamics and involve family members. Key services provided by family offices typically include investment management, succession planning, philanthropy, estate tax, and governance.
Four Strategies
To bring the wealth down to the future generation, family offices have to perform some of these tasks:
Investments: This involves spreading investments across a wide range of asset classes, such as stocks, bonds, real estate, and alternative investments. This strategy reduces the impact of any single investment’s poor performance on the overall investment portfolio. They embark on long-term investment planning, focusing on gradual wealth accumulation and resisting the urge for short-term gains, which often involves higher risk.
Legal structures: Family offices use trusts and foundations as effective vehicles for managing and preserving wealth across generations. These legal structures offer tax advantages, protect assets from creditors, and ensure that wealth is distributed according to the family’s wishes. They also provide a framework for legacy planning and philanthropic endeavours.
Education: Equipping future generations with the knowledge and skills to manage wealth responsibly is paramount in legacy preservation. To avoid the shirtsleeves-to-shirtsleeves curse in the third generation, the future generation needs to understand investment strategies, budgeting, tax implications, and the importance of philanthropy. Holding family meetings and educating heirs about family values empowers them to make informed decisions and preserve the family’s wealth for the long term.
Philanthropy: Finally, and counterintuitive, is the practising of philanthropy. Strategic charitable giving can have a positive impact on wealth preservation. By giving to causes they are passionate about, families can create a lasting legacy while potentially also enjoying tax benefits. Philanthropy, done well, can give a sense of purpose and instil values of social responsibility in future generations, ensuring that wealth is used for the betterment of society as a whole.
To sum it all up
In conclusion, preserving generational wealth is a complex endeavour that requires careful planning and strategic execution. Family offices play a pivotal role in addressing the challenges associated with the transferring of wealth, ensuring that legacies endure for generations to come. By employing diversified investment strategies, using legal structures, fostering financial literacy, and philanthropic endeavours, families can safeguard their wealth and create a lasting impact on future generations.
For further reading, catch up on our guide that dives in and answers the question, ‘What is Generational Wealth?’