Fear hinders effective transfer of wealth: SEI

A recent SEI Wealth Insight Initiative roundtable suggests that fear of negative outcomes and a lack of confidence in heirs are two of the biggest barriers to families sustaining and growing wealth over time. The roundtable gathered small groups of wealthy families—those with more than $5 million in investable assets—to discuss their experiences and offer insights related to creating and sustaining generational wealth.

The roundtable showed that high-net-worth families are preoccupied with avoiding the negative outcomes that often come with passing wealth to future generations. But the discussion also showed they have a desire to learn how best to instill the values required to build upon families’ current successes.

“Since very few creators of wealth actually inherited wealth themselves, they often doubt that their heirs have the same motivation or ability. Family leaders come to the table with that fear and often end up playing not to lose rather than playing to win,” says David McLaughlin, senior managing director for the SEI Wealth Network.

“The challenge in passing wealth to future generations is not simply to avoid failure, but to actually aim for success. Family leaders need to transfer the skills and capabilities that led to the creation of wealth in the first place. The reality is that if future generations don’t have the desire or ability to create wealth themselves, it’s just a matter of time until the family no longer has any wealth to pass on.”

McLaughlin says it’s critical to craft a wealth creation and preservation strategy with a view to the different life stages of heirs. “And the earlier you start, the more of an impact you can have,” he says.

With young children, McLaughlin emphasizes teaching the good old-fashioned values of hard work, education and charity. Children should also be provided with “modeling around fiscal responsibility and budgeting,” he adds.

For teens and college-age children, the focus should shift to financial literacy, investing and the trade-offs made when investing. At this stage it’s also a good idea to start involving children in business discussions, which will help them build collaborative decision making skills. McLaughlin says philanthropy is an excellent tool for imparting these lessons because “it involves collaboration and trade-offs, and you can do it as a family.”

Once heirs move into the late- or post-college stage “there’s an accountability issue that can be taught and then used to develop an entrepreneurial character. The accountability is to the family—the wealth has been created, and this generation is now accountable for doing something with it as opposed to just spending it,” McLaughlin explains.

The final stage comes when the heirs get married and have kids. “They’re bringing in people from outside the family, and that’s really a different initiative. Then it’s a question of collaboration, how the family can continue to work together once spouses get involved,” McLaughlin says.

He also emphasizes the critical importance of communication, and in particular overcoming the taboo that often surrounds discussing wealth-related matters.

“We believe the taboo comes about because the creators of the wealth don’t really have a model to follow on how and when to communicate to the younger generations. They’re stuck in a mindset that says, ‘If I discuss it, my kids are going to lose their work ethic,’ ” McLaughlin explains, adding that “countless studies show how wealthy families keep their children in the dark about their money until very late stages in life.”

Helping wealthy families get comfortable with having this discussion as early as possible is a key role for the advisor, McLaughlin concludes.

Does this sound familiar? Do you have a client who worries about their heirs? Tell us how you helped them with their wealth transfer planning in our Comments section below.