Communication, trust & stewardship: the key elements of a successful wealth transfer

Coyne_Headshot-150x150John Coyne, Vice Chairman

Ask any advisor who has been at it for a while, most clients come to them having spent more time planning vacations than planning for retirement. Similarly, parents spend their working lives preparing money for the family, but don’t prepare the family for the money.

Research supports both sentiments. Forty-five percent of parents remain close-lipped on the topic of wealth, while only 4 percent of those surveyed indicated they hold regular family meetings where money is the main topic.

Whether talked about or unspoken, the next generation stands to inherit a good deal of wealth. Industry experts estimate between $30 to $41 trillion will transfer from the Baby Boom generation to Generation X and Millennials over the next 30 years. Another reality is that in the majority of instances, seven out of ten, the second generation loses the wealth it inherits. In 90 percent of families studied, the money disappears by the third generation.

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Research cited in a 2014 Forbes article set out to better understand the shirtsleeves to shirtsleeves paradigm. It found that communication and trust played a far more influential role in predicting the success of the intergenerational transfer of wealth than planning or investments. Six out of ten of those who lost their family fortune blamed their condition on a lack of communication and trust in the family. Nearly a quarter of the respondents indicated their heirs were not prepared financially to inherit the wealth. Interestingly, only 3 percent attributed the losses to poor planning and investments.

The more the next generation knows of your hopes and dreams for the assets you’ve accumulated and plan to leave behind, the better positioned they will be to conduct themselves as financial stewards. Heirs inherit assets. Financial stewards assume the responsibility of caring for the wealth to benefit the family.

Below are five ways to encourage financial stewardship among heirs:

  1. Introduce the concept of family wealth planning. Begin to explain how family values contributed to the creation of the wealth, and how financial resources helped past generations achieve individual and family goals. Emphasize the notion that in order for wealth to serve multiple generations, family members must talk openly, trust each other and act as financial stewards.
  2. Create a family mission statement. Like a corporate mission, a family mission defines the full scope of the family’s wealth, its values and why money is important.
  3. Expand decision-making powers. The education-by-inclusion approach has proven quite successful in preparing the next generation for the assets it will one day inherit. Instead of you and/or your spouse making all of the financial decisions, you could gradually involve the next generation. Philanthropy and family vacation planning are the most common places to expand the decision-making dynamic in the family. To start, you provide parameters, set a budget, and establish your voting authority, but later take a step back and let your heirs develop a plan.
  4. Conduct regular meetings. Make legacy discussions part of your family’s calendared events so you have a forum for an open dialogue about your family’s values and vision for the future. Many families plan these discussions around events intended to create a shared experience, make memories and have fun. The activity doesn’t matter. Rather, building trust, cultivating harmonious relationships, having candid discussions and creating a healthy decision-making environment matter.
  5. Introduce your advisory team. Include your financial advisor in family meetings so children and grandchildren know where to turn when the time comes. A financial advisor can help set achievable investment goals and maintain reasonable performance expectations. When an advisor monitors, tracks and communicates progress toward goals, family members can more easily refrain from acting on short-term market conditions.

For 30 years, Brinker Capital has served financial advisors and their clients by providing the highest quality investment manager due diligence, asset allocation, portfolio construction and client communication services. Brinker Capital Wealth Advisory works with business owners, individual investors and institutions with assets of at least $2 million. To learn more about the services available through Brinker Capital Wealth Advisor, click here.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, Inc., a Registered Investment Advisor.