Advisors must improve how they work with wealthy families

Much of the planning advice provided to wealthy client families is based on the faulty assumption that kids or grandkids are destined to squander their inheritance, says James Grubman, a psychologist and family office consultant in Lexington, Mass.

And advisors who base their advice on this fear could create a self-fulfilling prophecy. The wealth industry has “a self-interest by saying, ‘Yes, your kids are going to screw it up, you better give it to us, and we’ll take care of it,” Grubman said.

Instead, firms and advisors would better serve ultra high-net-worth families by adopting a more positive approach to advice that encourages inclusion and collaboration, driven by intention rather than fear.

While the industry has made great strides in recent years developing holistic services for wealthy families, including emphasizing shared decision-making and promoting financial literacy across generations, it still assumes that future generations will likely squander away wealth, Grubman said.

However, the most cited study purporting to support the idea may be flawed.

The 1987 book Keeping the Family Business Healthy by John Ward argued that most family business transitions failed within three generations. While Ward always stated this finding was based on a study limited in scope, subsequent researchers took the rule as gospel. Grubman and his colleagues found that later work by other researchers suggests that while a business may fail, the founding family continues to thrive as it moves into other ventures.

The industry would serve its clients better by having an open mind, Grubman said: “If we don’t know, let’s just say we don’t know. Let’s not use old data that is questionable — we need more rigour in research, more rigour in professional practice.”

Advisors could better serve clients through psychological training — including learning family dynamics — to encourage and support families. He also suggested advisors could teach financial literacy and establish charitable foundations in a way that engages the whole family in decision-making and management.

The goal is for the family to develop mutual trust and shared values, he said.

Grubman also emphasized the importance of allowing younger generations to give input into financial plans, rather than only allowing the wealth-creating generation to have a say.

This article was updated to provide more clarity about John Ward’s research.

Rudy Mezzetta

Rudy is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on tax, estate planning, industry news and more since 2005. Reach him at rudy@newcom.ca.