While there are very tangible issues associated with sudden wealth, people often go through unexpected emotional and psychological experiences which must be understood to prevent problems later, according to Signature's Chris Rusbuldt.

While there are very tangible issues associated with sudden wealth, people often go through unexpected emotional and psychological experiences which must be understood to prevent problems later, Chris Rusbuldt, a principal at Signature, recently told Family Wealth Report.

Signature is a $2.8 billion (in AuM terms) Norfolk, VA-based independent family office and high net worth wealth management firm. It has built a niche working with new wealth, as highlighted by the fact that 85 per cent of its clients are business owners and entrepreneurs who have experienced, or are on the brink of experiencing, one or multiple liquidity events.

While not an actual diagnosis, “sudden wealth syndrome” is a term that was coined by those who work with individuals on their issues pertaining to sudden wealth. In some cases, wealth will have been created very quickly and thus will come as more of a shock. In other situations, wealth might have accumulated gradually, meaning some of the changes in lifestyle will be more subtle over time.

But there is one issue which Rusbuldt said sits at the very top of his clients’ list of concerns: they want to ensure that new wealth is transitioned to the next generation in a way that safeguards the family’s values. He described it as one of the items that has been “coming up a fair amount recently,” but which has always been a topic.

While acknowledging that each client/family is unique, Rusbuldt highlighted that there are similarities and consistencies in terms of the complications that new wealth presents and how it affects children and family lifestyle.

“You want to be careful on how you plan to transition the money to your children – it has to be planned and timed appropriately. You have to decide what is an appropriate level to have transitioned to them, and when,” he said. “What we see with that first generation is that you wake up one day and things have changed in terms of what’s in your checking account, what your liquid assets have become from owning a private company that was not necessarily liquid, but that made up the vast majority of your net worth.”

Rusbuldt explained how a prospect once told him that he had experienced a “wealth hangover,” in the sense that he expected the feeling of sudden wealth to be happier.

“What he [the prospect] was met with instead was a high level of concern that the wealth was going to change who he and his family are. He was worried about maintaining the same values that allowed him to successfully build that business. He was concerned that the ‘remember where you came from’ would be lost.”

Introducing wealth

Even if a family hasn’t yet experienced the liquidity event, the fact that they imminently will is often a great cause of concern, Rusbuldt said. And the next generation might not necessarily be very young - sometimes you’re looking at small children, and other times you’re talking about middle-aged adults.

From the perspective of a younger child, maybe all they're able to remember is a larger house, nicer vacations, a second home or private schooling, etc. On the other hand, a 16-year-old will probably have observed the building of the business, and thus be more familiar with the values, work ethic and sense of “remember where you came from,” which the matriarch and patriarch want to so desperately maintain.    

“That can happen at a very young age in terms of understanding – it could happen at your classic lemonade stand. Or it could involve middle school classes in economics, or upper school classes in investments,” Rusbuldt said.

An effective way in is to help the next gen understand investments and the diligence behind investing, the risks involved and potential returns involved, so they understand that money doesn’t just “fall out of the sky,” he continued.

Ultimately, parents must realize that if they don’t want their life to change dramatically then they need to be willing to in some ways implement “tough love” – much of which boils down to finding the time to discuss how the wealth was created and what you want to be carried on beyond that liquidity event. It may be more obvious to the older child, while from the perspective of a five-year-old it’s much different and a time when you want to create a system at home. Giving children an allowance for having duties, obligations, for example - as simple as it sounds - is one certainly one way of ingraining family principles. 

Philanthropy - another way of engaging the next gen

Rusbuldt said he has observed that a meaningful tool for parents to initiate the education process and “bring them into the fold” is through philanthropy. This could be done via estate planning, for example, with the end-goal being to ensure that the wealth gets into the hands of the second gen “properly and diligently.”

Likewise, Chris Chandler, head of portfolio implementation and
investment experience at GenSpring Family Offices, previously talked to Family Wealth Report about how working with family offices on their investment and
philanthropic endeavors serves as a “great education platform” for
involving the next generation in important issues such as governance and
administration (view here).

For a lot of newly-minted entrepreneurs, “it’s not just about getting across the finish line,” Rusbuldt said. “It’s important for the next generation to see that you haven’t just given up and moved to an island – that you’re still actively engaged, whether it’s in another business or in some other cause.”

Typically, when wealth is created by the first generation, it’s “largely gone by gen three,” Rusbuldt said. Indeed, a recent white paper pointed to “widespread sense” that around 80 per cent of families with significant wealth or businesses will succumb to the “shirtsleeves to shirtsleeves” phenomenon.

But Rusbuldt pointed to the fact that some of the most famous multi-generational families at some point built that wealth, and how the fact they’re now in gen four or five demonstrates that they’ve effectively managed and planned the process of transferring wealth further down the line.

“It can be quite complex, but it’s something that takes time and needs to be well thought-out,” he said. “What we’re talking about here is making sure that the emotional and psychological aspect is a positive one…that you look back and are happy that your children have gone through this process and have come out well, and may be on the road to being a business-builder themselves.”