The old line about how families can go from "shirtsleeves to shirtsleeves in three generations" may not be always true, but it has enough force to be something that keeps business founders and heirs awake at night. This article gets into some of the strategies and data around the topic.

The following article comes from René Páez, wealth manager, at EisnerAmper Wealth Management & Corporate Benefits LLC, part of EisnerAmper. This article explores the wealth
transfer and related topics that form the background to so many conversations among HNW families, and advisors. The editors of this news service are pleased to share these views and invite readers to respond. The usual disclaimers apply. Email tom.burroughes@wealthbriefing.com

In the wealth management industry, it is well known that we are undergoing one of the largest generational transfers of wealth in known history - estimated at approximately $85 trillion over the next couple of decades. According to the Fidelity Center for Family Engagement, approximately 70+ million Baby Boomers currently own half of all private businesses in the US and about 70 per cent of investible assets. They are aging and will all be over 65 by 2030. Interestingly, despite their aging, 64 per cent of these have not discussed the passing of assets with their families and 71 per cent have never discussed this with their financial advisors. In fact, 68 per cent of Americans have not had an end-of-life conversation with their families.

This lack of communication interestingly affects all strata of wealth. The 2023 UBS Global Family Office Report, which surveyed 230 family offices that manage on average $900 million of assets, found that globally just 42 per cent of family offices have a wealth succession plan for family members; smaller family offices with $100 to $250 million of AuM are “especially likely to fall short of best practices.”

How are wealth managers responding? As an industry, wealth managers are tasked with managing wealth for either growth or preservation and working toward the most tax-efficient transfer of wealth to the next generation. Tools and technology have become more sophisticated, as have the strategies involved to maximize value and return. Clients that can afford it generally have access to the most promising investments, be they traditional or alternative, and also to the most experienced attorneys and accountants versed in the most optimized tax strategies of our day. 

The challenge, though, is that the wealth management industry is also being affected by this mega-trend. Financial advisors are aging and approximately 37 per cent of them will be retiring in the next ten years, impacting the industry that is not seeing enough new entrants to replace these retirees. As such, consolidation is expected to accelerate in this industry.

The dilemma
In light of this mega-trend of wealth transfer, why are more families not better prepared for succession and why is the wealth management industry not doing more to better prepare families for this transition?

Even in today’s media, shows like Succession portray the difficulties of transition in wealthy families, especially when business continuity and family continuity are inextricably linked.

First, succession and end-of-life conversations are messy, emotionally charged, and highly personal. The 2023 UBS Global Family Office Report put it this way: Illustrating the difficulties of managing soft issues such as family governance, one London-based CEO commented: “How easily does your family talk about inheritance and hopes and dreams? These things are so personal that it’s very difficult, and especially so for the finance professionals who are used to dealing with less emotional topics.”

Finance professionals are trained to be impartial advisors and are generally equipped to remove emotion from conversations. This way, they can implement strategies that make sense and are logic- rather than emotion-based. This is referred to as financial discipline and is directly opposed to emotion which often lands investors in hot water when emotional investment decisions are made. Encouraging emotionally charged conversations is risky for advisors who do not want to lose the relationship or the assets under management. When reason and emotion conflict, emotion most often comes out ahead.
Moreover, feeling wealthy is comparative, not absolute.

Therefore, everyone interprets differently the notion of ‘how much is enough’ differently. Most families agree that leaving an inheritance for the next generation is a good thing. However, when it comes to amounts, opinions vary. Warren Buffet famously said, “You should leave your children enough so they can do anything, but not enough so they can do nothing.” Charles Schwab’s 2023 Modern Wealth Survey provides some insight into the variance of this conundrum. The insight shows that perception of wealth is relative. 47 per cent of Americans feel that being able to afford a similar lifestyle as their friends makes them feel wealthy, and 37 per cent of Americans compare their lifestyle to that of their families and friends on social media. These percentages are significantly higher for Gen Z and Millennials. For ultra-high net worth families, the terminology simply changes to having “private jet wealth” or “non-private jet wealth.” Interestingly, when questioned to describe wealth, Americans generally choose non-financial assets such as having a fulfilling personal life or enjoying experiences to describe their wealth.

Lastly, planning is fraught with barriers. While families understand that a smooth succession requires a plan, many if not most families don’t even have a basic financial plan, let alone a family succession plan. According to the Schwab survey cited above, only about a third of Americans have a documented financial plan. Even for wealthy families with investible assets of $1 million or more, one in five don’t have a will. Reasons for this include the perception of not having enough money to need a plan (44 per cent), the perception of complications in creating a plan (21 per cent), or not having enough time to develop a plan (20 per cent). Additionally, proper guidance and understanding from the advisors is lacking. The J D Power 2023 US Full-Service Investor Satisfaction Study found that among full-service wealth management clients, only 57 per cent say they have a financial plan. Of these clients, 29 per cent say that they do not feel their advisor understands their financial goals and needs. Thirdly, laying out a succession plan, let alone taking steps to put one in place, is often hard for a business founder because this means relinquishing control.

Switching from quarterback to coach is challenging as is bringing the whole family together to discuss, understand, or agree to a succession plan.

The solution
As Rod Zeeb of The Heritage Institute succinctly stated, “The goal in planning be it financial planning or succession planning is to simplify complexity and to prepare the next generation for inherited wealth.” As we discussed, the barriers are many and these can be categorized into three general categories: Wealth planning in general or the lack thereof can cause significant anxiety and worry; wealth in general but especially significant wealth can cause a distorted view of life; comparing our wealth status to that of our peers is a slippery slope. Here are some approaches that we have found to successfully address these challenges.