Addressing the Wealth Transfer Problem Through Communication

A whole lot of money is set to change hands over the next few decades. The next generation is projected to inherit about $36 trillion from their parents and grandparents over the next 30 years. And what will heirs do with this massive influx of cash? Will they succeed in passing that windfall to the next generation? 

Research indicates that this is unlikely. Familial wealth has a tendency to disappear at terrifying speeds. The Williams Group found that 70% of families lose their money by the second generation, and 90% of them lose it by the third generation

It’s a vicious cycle, and a whole lot of wealth disappears in the process. But it isn’t inevitable. A few key social factors perpetuate this financial folly, and financial advisors can play a major role in preventing this intergenerational loss of wealth.

Why Inheritances Fail

Most people who have worked hard for their money understand that it serves a greater purpose than just paying for vacations and nice houses. Building an estate with your own sweat and blood teaches you just how hard you have to work to have a comfortable life. 

That spurs most to help their children and grandchildren achieve their own successes in life. For many people, that’s the whole point of accumulating assets and leaving them for the next generation after death.

But there’s often a disconnect between the generation that built wealth and the generation that inherits that same money. If a massive amount of cash falls out of the sky and onto an heir’s lap, they’re unlikely to be prepared to put it to good use. Because few families cultivate the skills necessary for proper wealth stewardship, heirs squander inheritances at alarming rates.

This is a major problem for obvious reasons. If wealth disappears, it can no longer continue to uphold and strengthen a family. Money that is passed on is meant to help multiple generations, not just one. 

This is also a problem for financial advisors. CNBC reports that around 80% of heirs immediately change advisors after inheriting a family member’s assets. And even for the 20% that stick around, the money often evaporates quickly. This leaves the advisor with a dwindling pile of assets to manage.

How Families & Advisors Can Solve the Wealth Transfer Problem

It’s clear that something needs to change if we want family wealth to persist across generations. The average wealth transfer for trust funds in America is over $4,000,000. Many heirs have never been taught how to handle that level of wealth. And because they were not involved in any financial decision-making, they don’t have a solid understanding of the values and principles that helped build the wealth. Without knowing the purpose behind the wealth, they may see no reason to avoid spending their share quickly.

How can advisors help with that? 

The answer is relatively simple: advisors need to bring the rest of the family into the financial planning process. In having these conversations, the next generation can see firsthand how to make proper decisions when it comes to money. They will be directly involved, and they will consider themselves a part of the wealth rather than a lucky recipient. This breeds a deep sense of responsibility.

There is also a major benefit for the advisors who decide to make wealth planning a multi-generational process. They develop relationships with the entire family, showing the heirs just how useful their services are. This helps address the intergenerational retention problem in an organic and natural way.

Advising is never as simple as it sounds, though, and this is no different. You can’t solve the wealth transfer problem by simply inviting the kids along and having them watch as you lecture their parents about the latest stock market trends. A more holistic approach is necessary, and it actually begins with the generation that’s preparing to leave its wealth behind.

Facilitating Family Conversations

For starters, it’s important to recognize that the older generation — which dominates financial advisors’ books of business — often fails to have financial conversations with their children at all. 

More than 90% of families fail to have regular conversations about money, and 80% of parents believe their children learn everything they need to know about money in school. But financial education is sorely lacking in schools. More than 90% of students say that their knowledge of money comes primarily from their parents

The disconnect is clear. Parents rarely engage meaningfully with their children on financial topics, and schools fail to fill the void. This explains why the vast majority of heirs are woefully unprepared to be good stewards of family wealth: 60% of wealth transfer failures can be directly attributed to poor communication.

According to a survey conducted by Withers LLP, wealthy Americans’ second-biggest fear is that their children won’t work hard because of their inherited wealth. It’s clear that families need to talk about money and their values around it, but very few parents ever confront this issue head-on. It’s an uncomfortable conversation, and many simply don’t know how to start these conversations with their heirs.

There’s a gap to be bridged there, and financial advisors are in a perfect position to do so skillfully. By acting as a catalyst for financial conversations between your clients and their children, advisors can alleviate awkwardness and remove barriers to family communication.

There are plenty of ways to begin this process. The bottom line, though, is that advisors work towards solving the wealth transfer problem when they actively facilitate family conversations. By doing so, financial advisors can stand out in the marketplace, and they greatly improve the stability of their own business as assets pass from one generation to the next.

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