The latest Nuveen Wealth Inheritor Research Study has been attracting lots of attention throughout the advisor community. Why? Because it dispels the conventional wisdom that young people who inherit wealth won’t stay with their family’s advisor.
According to the study, four out of five wealth inheritors (80%) who first meet the family advisor as a child or teen will decide to keep working with the advisor—compared to just 54% of those who first meet the advisor as an adult or young adult. What’s not covered in the study, unfortunately, is how few families even have discussions with their children about family finances and wealth.
The client retention numbers above seem much higher than what I’ve seen throughout my 40-year career. But let’s give researchers the benefit of the doubt, because I’m sure the methodology was rigorous. Since trillions of dollars of wealth will be transferring to younger generations in the years ahead as record numbers of Boomers retire and/or exit their businesses, it’s important for wealth advisors to get all the facts.
As the researchers concluded: "Advisors should look for such opportunities to connect with children and teens by including younger generations in social events” and by taking time to understand their interests to form genuine connections. Agreed, but what studies like these keep overlooking is that building rapport with young inheritors (and presumably retaining them as clients) is not enough. We need to prepare young inheritors to receive their windfall and the responsibility that comes along with it.
Anyone who’s a fan of the TV show “Succession” knows how disabling inherited wealth can be without proper context and training. How do you set kids up so that their inheritance doesn’t disable them?
Unfortunately, too many advisors have little or no relationship with the kids of their clients. They don’t meet with them. They don’t talk to them. They don’t include them in discussions with the parents. They don’t ask how they can bring the kids in or make them aware of what’s coming or how to make them responsible. Instead, they just drop a large financial windfall in their lap and hope for the best. How do we let parents understand how vitally important this is? These are questions that keep my team and me up at night. I wish more advisors felt the same.
In my practice, we bring in professional facilitators to work with families to prepare the kids to receive the wealth. We prepare them to be responsible with their windfall (however large) and to understand the magnitude of it. For many families, we create “family governance structures” and “family mission statements.” There are many other ways for advisors to work with high-net-worth (HNW) families, especially as their wealth becomes significant.
During the early stage of our planning engagement with a HNW family, the parents conceded that none of their three children were financially responsible. Of course, the family’s planning was designed to distribute their estate outright to the children by the time each turned age 35. Ultimately, we implemented a much more effective and disciplined plan. We brought in a facilitator to explain the planning changes to the children and began a dialogue with the kids about the impact of their wealth. After some initial reluctance the kids agreed.
Both parents are active in local charities, holding key leadership roles. Yet, they had never discussed the “why” of their giving with their children. That alone was a good starting point for further family discussions.
Today, after three or four facilitated family meetings, the parents are seeing a real change in both the actions and attitudes of their children. They now have a deeper understanding of the financial windfall coming their way and the responsibility that comes along with it.
For all family meetings and discussions, we not only suggest having facilitators on hand, but make sure the rules for engagement are established. It’s common for the matriarch or patriarch of the family to tell everyone else what to do and how to do it, especially if they were the originator of the family’s wealth. But most families aren’t likely to have discussions like these on their own; they need to be moderated by an impartial third party, so the meeting doesn’t devolve into a shouting match around the Holiday dining room table.
If families don’t have frank and open discussions about their wealth, with next steps and action items to follow, you can easily have unintended consequences. The kids can blow all the money, or bicker constantly or just stop talking to each other.
I’m not suggesting that wealth advisors must become facilitators or family wealth counselors, but they certainly have the ability to spot the issues. It’s up to the advisor to bring issues to the surface and talk to the family about them and see if they could benefit from facilitation.
A Rock Solid Estate Plan Isn’t Enough
A family might have top-notch estate planning attorneys who can draft airtight trusts to transfer family wealth and greatly mitigate tax erosion. But if the plan is to dump a ton of money into kids’ laps without preparing the kids to receive it the kids are highly likely to squander the money and/or squabble with each other. It’s like having an elite quarterback on your football team who can throw the ball 70 yards down the field with pinpoint accuracy. If none of his receivers knows how to catch the ball, the team won’t be successful and ultimately the quarterback won’t be considered any good.
For advisors, it’s not just about getting your clients’ kids to stay with you, it’s about getting the kids to think about what to do next when it comes to their inheritance. When I give talks to advisors, I tell the audience never in my 40-year career have I heard a family elder say: “When I die, I want to be sure my kids never talk to each other again.”
I know that sounds ridiculous. But when you look at how many families set their plans up and keep them cloaked, that’s exactly what could easily happen. I’ve worked with families in which siblings stop speaking to each other because one took a family portrait that the other one wanted. Or one child got mom’s fine china or jewelry and the other one didn’t. Or the siblings living close to their late mother swooped in and took everything out of their parents’ house before the out-of-town siblings could arrive. Imagine what happens when large amounts of inheritance are involved. The situation is likely to get worse as there’s less and less communication between family members and they don’t live near each other anymore.
When it comes to inheritance, kids not only need to be prepared to receive it but should have the ability to voice their concerns and suggest ideas. What 22-year-old is ready to be responsible for $100,000, let alone several million dollars, if they’ve never had experience with that much money before? They’re more likely to ask: “What can I buy?”
As the Nuveen research showed, seven out of 10 inheritors (69%) who are working with an advisor prefer to oversee some aspects of their financial plan personally. “This underscores the importance of a teaching relationship to support them in making informed decisions,” researchers asserted.
Amen to that.
When you pair a highly skilled wealth receiver with a highly skilled wealth quarterback, there’s no limit to what they can accomplish. As Warren Buffet famously said, he would give his children “enough money so that they would feel they could do anything, but not so much that they could do nothing.”