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How, Why Generations Should Discuss Wealth Transfer
21 October 2019
Recent studies from a number of wealth management organisations worldwide have highlighted a problem: families are not talking enough together about their money, how to transfer it, and their future plans. The challenges to the wealth management industry posed by intergenerational wealth transfers loom large. The figures bandied about are in trillions of dollars. Fears of AuM loss and an inability to relate to the next generation have troubled the industry for a while. Yet, for a trillion dollar problem, there are no clear solutions. This article looks at some of the reasons behind this, and suggests how the wealth management industry can move forward.
For all the noise around modern technology and how everyone is supposedly connected, these connections appear not to be happening where they ought. And that’s a big deal when, in the US alone, an estimated $30 trillion is due to leave Baby Boomers’ hands in the next few years.
Some of the problem may come down to how families aren’t confident in how to broach what can be difficult subjects. Someone who knows how to address this issue is Dennis Harhalakis, of . (We recently interviewed Dennis for our regular WEALTH TALK interview.) Dennis lays out some of the main issues. We are most grateful for this material and invite readers to send in their comments. Email firstname.lastname@example.org and email@example.com
-- Existing processes within wealth managers tend to focus on educating clients on structures, vehicles and tax;
-- Our lack of understanding of the emotional component to wealth undermines our stated desire to support clients fully; and
-- Money Coaching bridges that gap and gives advisors the skills to shape difficult conversations about wealth.
-- By helping families to communicate about money in a more effective and healthy way, WMs have a unique opportunity to engage with the next generation and truly connect with their clients.
The recent white paper produced by The Merrill Center for Family Wealth highlighted that 65 per cent of participants lack a formal structure for communication and 61 per cent never have formal family meetings to discuss wealth. While it may be possible that family wealth communication takes place informally, it is unlikely. The 2019 Credit Suisse Next Gen YIO survey reported that 59 per cent of Next Generation inheritors wish they had more open discussions about wealth and 69 per cent say their families would benefit from more communication tools.
None of this is new; the wealth management industry has been talking about the challenges of intergenerational wealth transfer for some time, yet wealth managers still haven’t worked out how to overcome the communication challenges. That’s because as a society we don’t really talk about money at a personal level. And so wealth transfer is treated as a technical challenge, to be solved with structures and tax planning.
But not talking about money with the next generation, how we feel about it, how it makes us feel, what is important to us, will lead to problems. Not just for the wealth management industry, but also for ourselves as people with families. Inadequate communication and inappropriate messaging in families are two of the main reasons why a lot of wealth doesn’t last more than three generations. We have to talk about money but we don’t know how to.
The Merrill report recognises this and introduces some interesting ideas about how to structure the discussion and decision making processes. Understanding the need for decision making, and how to structure that decision making process are incredibly important. But knowing that you need to discuss wealth openly and going about it are very different things. At a very fundamental level, most of us find that talking about money with our children is really challenging. Some people fear they’ll raise money-grubbing kids. Others don’t know where to start and are intimidated by the enormity of the topic.
People whose parents didn’t talk about money, or told them that it was evil or something that families didn’t talk about will struggle to even think about discussing it. Very often there are differing views about money among parents, so establishing a baseline "family" view can be difficult. If the children have existing (or potential future) partners this adds more complexity. And, unlike investment decisions, when doing wealth planning, clients are forced to look at themselves, their lives and their families. They may need to face some hard truths and make some difficult decisions. Consciously or not, everyone avoids talking about topics that make them uncomfortable or that seem too complicated to explain. Or, as the Merrill report drily puts it: "The interplay between parenting and family wealth management creates substantial complexity".
So how do we move forward? We need to start by explicitly acknowledging that our relationship with money is primarily emotional. This recognises that talking about money will produce subconscious reactions in those participating in those discussions. These reactions are usually driven by fear and most people will need help to understand their emotional drivers. Only then can you start to build a healthy communication framework.
This framework aims to break the cycle of reactivity that usually comes with difficult discussions by acknowledging the emotional responses that these discussions trigger, and by making each participant aware of the effect they have on each other. Once somebody gets triggered, it’s almost impossible to have a rational discussion with them. Understanding how this process works and how it can be managed is the key to healthy and fruitful communication on difficult topics.
Once you have this in place, families can learn to navigate their internal and familial money dynamics from a place of self-awareness, trust, and accountability. They can discover new ways to work together to support the highest good of both individual and family needs, desires and shared endeavours; this is the framework that drives successful wealth planning.
The skillset to support families in this way does not normally sit within wealth managers. As one of the Merrill report authors wrote: “Advisors are often wonderful at working with clients about managing their reactions in markets but in family communication issues they can be a bit flat-footed”. Money coaching closes this gap by working directly with families or by giving advisors the necessary skills to support their clients.
Money coaching looks at our behaviour patterns associated with money and uses this understanding to build healthy communication frameworks. All of us have an emotional connection to money that we don’t fully understand. Yet we still expect our clients to make logical and rational financial decisions over money, even in times of stress or emotional challenge.
For wealth managers, understanding how your clients make financial decisions is the key to successful relationships. Money coaching is the way to take that relationship to a whole new level of understanding and connection.
Recent studies from a number of wealth management organisations worldwide have highlighted a problem: families are not talking enough together about their money, how to transfer it, and their future plans.
The challenges to the wealth management industry posed by intergenerational wealth transfers loom large. The figures bandied about are in trillions of dollars. Fears of AuM loss and an inability to relate to the next generation have troubled the industry for a while. Yet, for a trillion dollar problem, there are no clear solutions. This article looks at some of the reasons behind this, and suggests how the wealth management industry can move forward.