It’s estimated that 90% of high-net-worth families lose their wealth by the third generation, which means that family offices need to be proactive about tackling the inevitable obstacles that these family businesses encounter – especially as it pertains to succession and preserving multi-generational wealth. When approaching these issues, family offices need a clear understanding of the challenges and risks the family may face and learn how to manage and mitigate them.
Three common issues can lead to family wealth erosion, but with the right mindset, they can be easily managed.
Preserving multigenerational wealth starts with engaging the next generation
In many cases, family wealth erodes due to a lack of trust, transparency and communication between current leaders and their heirs. Oftentimes, the biggest concern is that the future generation isn’t fully capable of leading the business into the future, nor managing the family’s wealth. Inevitably, this becomes a self-fulfilling prophecy as future leaders aren’t given the necessary exposure to the inner workings of the business and family financial matters, which doesn’t grant them an opportunity to learn properly. Without this crucial understanding of the business, they’re also unable to show how they can make a positive contribution.
Today, the business landscape evolves so quickly that companies must learn to operate with increased flexibility and a purpose-driven, innovative approach. Because of this, there’s a clear case for family offices to acknowledge the entrepreneurial impact that the next generation can have on the business – especially those with a strong digital and global mindset.
A study written by the Wise Council that examines family enterprises that span over 100 years, highlights how a positive attitude toward the rising generation will ultimately benefit the business. It goes on to explain that there are countless reasons for the current leadership to embrace the different priorities, values and goals that exist amongst these future leaders. Preserving multi-generational wealth starts with overcoming the potential challenges that may arise between those generations.
Start them young and build trust proactively
The first step to preserving multi-generational wealth is ensuring the next generation is equipped to take over in the future. This means that family leadership should start to involve the younger generation from as early as 16, in family meetings where the family estate’s structure is being discussed. This ethos of transparency can help align expectations and encourage open discussions around the approach to investment and wealth transfer.
Provide the right education
If you feel younger family members need to improve their hard and soft skills and knowledge of the business, then place a strong focus on experiential development to educate them further. These could take the form of internships on family boards or in the operating business or even managing an entirely independent venture. When considering formal education, it’s worth exploring a more hybrid, cooperative education program focused on applying academic learning in workplaces as part of the qualification.
One of the best, hands-on ways to engage the next generation, while understanding the goals and priorities they might have, is through mentorship. More than just an important tool for engagement, mentorship can provide them with the necessary opportunities and exposure to grow and develop their own space within the business environment.
Embrace purpose and impact
When the Deloitte 2018 Millennial Survey report was released, one of the key findings was that millennials “want leaders to more aggressively commit to making a tangible impact on the world.” If family offices want to attract and retain next-generation talent successfully, it’s abundantly clear they must become authentically purpose-driven. Unsurprisingly, impact investing is also a top priority for the next generation and offers a great platform to keep them engaged and inspired, while still learning crucial business lessons along the way.
Next, consider governance
In today’s complex business environment, the success and longevity of modern enterprises are hinged on a strong governance framework and family offices are no exception. Without clear governance, business continuity is at risk, which can lead to inefficiency and disruptions – especially when members exit the business, be it voluntarily or involuntarily.
To mitigate these risks, families must be proactive in developing a continuity plan. This ensures that the right people develop into the right roles. It is also important that successors can seamlessly occupy a vacated role that is well-defined in how it functions and supports the business and has a clear mandate in terms of decision-making responsibilities.
Preserve wealth by ensuring proper financial planning
Preserving wealth across generations can become increasingly difficult as the family progresses. One big reason for this is the dispersion that occurs as the inheritance is distributed across a broad range of heirs and complex geographies. Those with control of the family money could take unnecessary risks or choose to put money into very low-risk investments only to find the wealth is eroded by inflation. Poor tax planning can also contribute to many wealthy families experiencing a loss in wealth over time.
To help mitigate these issues, here are some measures to put in place:
- A well-drafted will is essential. It must also take diverse tax regimes and legislation, where assets reside into account.
- Establish a trust and appoint an impartial trustee. Having a neutral and objective trustee can help to ensure that wealth is properly managed and distributed, without any emotional influences impacting their choices.
- Create a family constitution. This helps instil values and limit conflict and can encourage consensus on investment strategies and philanthropic vision.
- Employ a financial planning professional. They can assist with creating investment and wealth management roadmaps to show how wealth will be managed and invested into the future.
Protect your legacy
By embracing the next generation and actively involving them from a young age, family offices can shift beyond preserving multi-generational wealth and move into growth and transformation. With a robust governance framework, coupled with sound financial planning, family businesses can build the foundations of a lasting legacy of wealth.