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Bringing children into the family wealth: an Investment Manager’s observations

Here are my thoughts on how to bring your children into the conversation in a balanced, informative way.

hand stirring a cup of tea

by
Louis Coke

in Features

29.10.2020

One concern that wealthy individuals often have is that by being born into or growing up amongst wealth, their children may feel entitled to it and might behave differently to their parents and indeed to the vast majority of society. As a wealth manager, we often get to see this dynamic at work first-hand and can discuss with our clients the ways in which they may want to approach introducing their children to the family’s wealth.

Here are my thoughts on how to bring your children into the conversation in a balanced, informative way:

  • Understanding the ‘wealth pyramid’ in the UK

Context and perspective are always useful. Rather than going straight into the fine detail, we often find it is advantageous to start with the high-level view.

The average (median) wealth in the UK is £286,000 according to the Office for National Statistics. This means that if we look at the wealth of all households in the UK, the person in the middle is worth £286,000 when taking into account pension, property and financial assets. If you are reading this article it is likely that your wealth is significantly above this level. By comparison, the top 10% of households in the UK have an average net worth of some £2.5m, with many of course exceeding this by some considerable margin.

Giving your children an understanding of the fact that the majority of the population are less fortunate in wealth terms than them helps to bring home the idea that they have a duty to maintain and grow the family’s net worth from this rather advantageous starting position. It also helps to drive home the notion that not everyone has the same ability to consume, spend and invest as them and they might want to be sensitive to this.

  • ‘Custodian’ rather than ‘consumer’

A client once described himself to me as the custodian of his family’s wealth, not the owner of it. Legally the client is the owner of the investments in this case, but I agree with his sentiment - he saw his duty as ensuring the preservation and steady growth of the family wealth following a business sale completed some decades previously.

There is a general observation that quite often, wealth is made and then lost within three generations. The reasons for this are rather broad however I would focus on three main elements:

  • Increasing income and capital demands on the investments across the generations
  • Absence of a common and open strategy across the family to consume and replace wealth
  • Families growing faster than the level of wealth

All the above are relevant to frame discussions with your children. Taking the first point, whilst the generation that created the wealth may be careful with how much they spend, this concern can diminish as the years pass and generations come and go. It is important to reiterate that the funds are not just for the current generation, but for several yet to come.

The absence of a common strategy can lead to the family wealth fracturing and being deployed across different strategies. This may work for the individuals concerned, but if we view family wealth as exactly that – a family store of value, it must be treated as such in terms of investment strategy. This tends to give the best results and economies of scale.

The final point made above relates to something which is often not fully understood. Let’s say that some years ago a business was sold, and the net proceeds were £10m. The family at that time consisted of 4 people - the ‘creator’ of the wealth, their spouse and two children. If we fast forward a generation, we now have the creator and spouse, two children and a let’s assume a further 5 grandchildren. Fast forward through time another 20 years (not long in the grand scheme of multi-generational wealth) and the grandchildren have had a further 7 children between them.

Our original family of 4 has grown to 16 in the space of 4 generations. At the outset, our original family had a wealth per individual of £2.5m. For the sake of simplicity let us ignore inflation for this example. For the family to maintain the same £2.5m per member wealth, the investments would have to have grown to £40m after costs and withdrawals. Assuming in our example that the business sale and subsequent family expansion took place over a period of 30 years, that would be mean the family wealth would have to have grown by almost 10% per annum after deductions.

Understanding this concept can really help current and future generations get a high-level view of the long-term goals and objectives and the impact of eroding the family wealth in their lifetime. The idea is to strike a balance between empowering the children to use the wealth for their benefit, but not to be excessive and to always retain a long-term focus.

Finally, one of the big determinants to the success of preserving and growing family wealth over the long term can be the choice of advisers. There is no one size fits all here, it comes down to a number of different factors including how involved the family members wish to be, the complexity of the family’s arrangements, location and domicile of the family members, assets involved and perhaps above all else, personalities. In choosing your advisers you will want certain bases covered including accounting and tax advice, financial planning, investment management and some form of confidant or trusted go-to adviser. Sometimes there are specific people for each of these roles, sometimes they can be merged.

There are some hygiene checks to perform on your choice of advisers and I would always recommend looking at areas such as the following:

  • Membership of a professional trade body
  • Financial checks - is the firm sound and stable?
  • Fees - every individual has their view on fees for professional advice. In my experience, the best fee is often not the cheapest or the most expensive, but a fair fee for the level of work involved
  • Ability to work with other advisers without ego or conflict. This can often be key. The various advisers need to be able to speak to and work with each other. Often, we find that firms may offer competing services to other advisers. It is important that everybody understands the scale and limitations of their role and that there are clear lines of communication between them

For more information on how Charles Stanley could help your family, read our stories on how we’ve supported families through multiple generations.

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