Did you hear about the financial advisor who got off on the wrong foot with the children of his clients? It cost him $10 million in assets.
The clients were “an advisor's dream,” as author and consultant Susan Bradley tells the story. The wife was in her 60s when she inherited farmland that they went on to sell for $3.5 million. By the time of the death of the last parent about 20 years later, the estate had tripled in value. It came as a surprise to their two adult children; the parents had withheld knowledge of the windfall, feeling it would compromise the children's self-reliance, Bradley says.
The advisor had never met the children, but he had clear ideas about how the money ought to be handled. Bradley says he told the daughter, who was 61 and unemployed, that she needed to keep looking for a job and work until she was 70. The son was a doctor who wanted to use the inheritance to allow him to change careers and teach; he was at odds with his wife, who wanted the money to go to their children. The advisor sided with the wife and was prepared to set up accounts to facilitate the transfer.
The advisor's relationship with the heirs was short-lived. “He didn't get to know them,” says Bradley, author of Sudden Money, Managing a Financial Windfall and a consultant who works with advisors on wealth transfer issues. “He was treating it like it was his old clients' money, not the new inheritors' money. He didn't make the shift. He kind of assumed he had done such a good job [with the parents], he was sort of the family financial steward. … But it didn't wash with the kids. He didn't appreciate where they were at, and he didn't know how to ask them questions. He was telling rather than asking.
“And you know what? He doesn't know what he did wrong,” Bradley adds. “He knows he did something wrong because he lost the money. He doesn't understand, he really doesn't.”
Wealth on the Line
The fortunes at stake when estates transfer from parents to children are staggering. Research by Cornell University economists Robert B. Avery and Michael S. Rendall estimates that $10.4 trillion in wealth will pass via inheritance to Baby Boomers between 1990 and 2044. That sum should give financial advisors pause. Many often have relationships with high-net-worth clients that span decades. Sadly, those relationships often “pass on” when the clients do. There are many reasons why heirs reject their parents' advisors. Sometimes it's simple geography; the advisor is headquartered near the parent-client, whose children have moved hundreds or even thousands of miles away. There may be discord in the family over the terms of the will, and, as a result, the heirs distrust their parents' advisor. And sometimes the advisors mishandle the relationship, focusing on the clients at hand and neglecting the next generation. “Advisors need to build a relationship [with the entire family],” Bradley says. “Otherwise they can kiss that money goodbye.”
It's a trend that has industry leaders worried. Merrill Lynch's top wealth management executive, Sallie Krawcheck, told a Barron's conference in Florida last month that when a parent dies in an advisor's client household, the advisor retains management of the assets just 45 percent of the time; when the second parent dies, the outcome is far worse — the advisor retains management just 2 percent of the time.
The asset managers aren't the only ones who stand to lose when their clients' wealth heads off into the sunset. The heirs themselves often struggle with the consequences of inheritance. The Williams Group, which works with wealth-transitioning families, estimates that 70 percent of estates fail to pass successfully to beneficiaries — usually because the heirs are not prepared to handle the wealth, or because long-simmering sibling rivalries erupt into litigation over the terms of the will. It's nothing new. “Riches, in spite of the most violent regulations of law to prevent this dissipation, very seldom remain long in the same families,” Adam Smith wrote more than 200 years ago in The Wealth of Nations.
L. Scott Pann of the Pann/DeYoung Wealth Management Group, a UBS Financial Services practice in Colorado Springs, Colo. with $185 million in AUM, says he was talking recently with a client who works as a litigation attorney. “I said, ‘Where do you see the big work being done now?’ He said, ‘It's family litigation, challenging wills and trusts. There's a lot of beneficiaries that either are excluded from the will or they don't feel like they got enough.’”
Suffering from “Affluenza”
Part of the problem for the affluent and the financial professionals who advise them is the conflicting feelings that wealth engenders. HNW parents often don't want to disclose their net worth to their children, fearing they'll lose initiative. Parents also may not want to deal with the consequences of their decisions on how they will divvy up their wealth among their progeny. “You don't want to sit down with your children and say, ‘Look, I'm disinheriting you.’ Then you've got to deal with the anger that's going to erupt from that child until you die,” estate attorney Gideon Rothschild says. “Parents usually don't want to face that up front.”
Yet this conflict within the client can provide an opportunity for a financial advisor to manage the relationship in a way that will offer some options to the client while allowing the advisor to build a bridge to the heirs. Taryn Sievers, a Morgan Stanley Smith Barney advisor in Oakland, Calif., with more than $400 million in AUM, speaks publicly about preparing heirs.
“A lot of high-net-worth clients really have issues, internal issues talking about money with their children,” she says. “Other than just managing the money, which we all do — and hopefully well — I try to clarify my clients' priorities and personal goals that help me assist them in controlling their family capital legacy. I'll have questions like, ‘What really are the most important issues in your family other than money? What do you want your children to be left with, monetarily and otherwise? What kind of family do you want to be, and be known for?’”
Pann has similar conversations with his clients. “It's somewhat of an awakening for them,” he says. “Often when you mention the word wealth, people only think about material wealth. But yet if you have a client who's suffering from cancer, their material wealth is not important to them. What they're concerned about is … how things are going to transfer to their children, what kind of legacy they're leaving for their children.”
One way to nudge clients into a more candid relationship with their children is by testing their interest in whether they want their children to serve as estate executors. Pann recalls a client's wife had been tapped for the part, but she had no interest or capacity for it. He was able to make a case for letting an adult heir step into the role, which opened the door for filling the heir in on what to expect in the estate.
Sometimes a meeting between the parent/clients and their heirs can be productive if the estate attorney who prepared the will attends, Pann says. The attorney can explain why the terms were written the way they were — assets are kept in trust because of their vulnerability to attachment in the event that the heir is sued, for example, or in the event of divorce, the assets need to remain within the family. “What's helpful is if you have the attorney presenting it, it takes a little bit of the pressure off the parents, because the attorney can answer the questions a lot more effectively than the parents can,” Pann says. Sometimes conflicts emerge in such meetings anyway, but they provide an opportunity for discussion and possible resolution well ahead of the parent's illness or death, when outcomes become clouded.
“It might be the kids have an impact on the parents and say, ‘You know, I appreciate your concern about this, but I don't need my assets kept in trust for life. Why don't we keep those assets in trust until I'm 45?’ or, ‘Why don't I become a co-trustee with a professional trustee for four or five years so I can get the experience of how the trust works before I take over on my own?’ ” Pann says.
Sievers says that, unfortunately, there aren't any rulebooks to address an adult child's sense of entitlement. She sometimes suggests family philanthropy as a way for parents to reach across to their heirs — to establish a family foundation or a donor advised fund. Even parents who are not philanthropically inclined may choose this path if they see it as a pathway to ensuring that their wealth doesn't change their heirs' lives for the worse, she says. One client with whom she's working has been persuaded to try this, although Sievers says it hasn't been easy; it took about a year-and-a-half of discussions with him and his wife to get to this point.
She's known the family for more than 20 years. The parents don't believe their children have an understanding of the size of the family fortune. Sievers says she's told them, “At some point you're going to have to disclose this wealth. Suppose something happens to you both, God forbid? And they realize the extent of the family's wealth, and you're not here to explain it. The children could very well feel, ‘You didn't trust me enough to tell me? Why didn't we know this?’ And then it's too late.” The case she makes to her clients: waiting too long to share the information with the heirs may result in an outcome that the parents may not want.
Some organizations specialize in helping advisors facilitate the sometimes-difficult discussions between generations over wealth disposition. Sharna Goldseker directs 21/64 (www.2164.net), a division of the Andrea and Charles Bronfman Philanthropies that focuses on next-generation and multi-generational strategic philanthropy. One of the tools that 21/64 uses is “Picture Your Legacy,” a set of 52 image cards whose colorful illustrations can direct conversations over how family members perceive their values.
“In asking people to describe their top choices, it evokes the language that you can't often address directly. The pictures are metaphorical, they're evocative of who we aspire to be, and help to reflect that back to the user,” Goldseker says. For example, a picture of two skydivers can evoke the response, “I'm willing to take risks,” or “I like to look at the world from a 50,000-foot vantage, I like to see the forest through the trees,” she says. Or a family member might choose a card with a photo of a coach with his arm around his athlete and say, “I really believe in playing a supporting role, being a coach. I want to make sure my legacy enables my next generation to be supported to do what they want to achieve.” (The image cards are available in an iPhone application, so family members living around the globe can easily share their top choices and notes on their thoughts with each other, Goldseker says.)
Advisors looking to reach out to heirs often organize client events that can appeal to multiple generations. Last year Sievers hosted a breakfast at a country club for HNW clients and arranged for a college admissions advisor to speak. Sievers' clients who were grandparents were accompanied by their adult heirs, whose own teenage children were getting ready for college. In January, Sievers is planning an all-day women's wellness and wealth symposium, aimed at HNW women clients and their mothers, daughters and sisters.
John “Jeff” Erdmann III, a Merrill Lynch advisor based in Greenwich, Conn., says the status of their clients' children is a regular topic at his practice's Monday morning staff meeting. “If I can help a parent with his kids, there's nothing more important to him,” Erdmann says. Among other things, he offers job-hunting advice for heirs who have just graduated from college. If a family and their advisor have started planning “from day one” about wealth transfer, he says, there isn't a problem. But most advisors are reluctant to discuss the clients' children with them, he adds; some believe the client doesn't want to talk about it, or the advisor may feel it's none of his or her business. Many are intimidated by the prospect of the conversation, an aversion that can be headed off if the advisor teams with a partner, Erdmann says.
Pann says he's found that sometimes the heirs have advisors of their own with whom they prefer to do business. “There's not much that you can do in that case. It's going to go to them,” he says. “But if you show a lot more interest, you're involved with the family, you're holding events, you're trying to educate them, you're doing everything you can ahead of time, then in reality you've done everything you possibly can. Then it's really up to that next generation, whether they're going to hire you or not. We try to make every effort that we can.”