Planning for a smooth succession to the next generation is one of the biggest challenges facing any family of substantial wealth.
There are a host of issues at play, such as how to discuss family wealth with next gens, what education they need to allow them to manage their inheritance, and the relationships between family advisers.
Today the subject is complicated by the fact that younger generations have grown up in such a different communications landscape to their parents: email, Skype, and social media are second nature for the next generation.
The Morgan Stanley Private Wealth Management/Campden Wealth Next Generation Wealth Report 2014, Next Generation Wealth: Defining A New Direction, looks at the views of next gens concerning many of these subjects.
Based on surveys and interviews with 87 ultra-high net worth 18 to 40-year-old inheritors in North America, the report notes that an important factor is “how best to communicate with the next generation and when to start informing them about specific details of their wealth”.
Some of the report's findings could be seen as surprising. For all today's focus on social media, next gens are reportedly not jumping on the internet bandwagon when it comes to dealing with family advisers.
They certainly enjoy going online when it comes to checking investments: 59% have online trading accounts different to their main investment accounts, while just 2% use office visits to check on their finances; computers, tablets, and smart-phones are much preferred.
But when it comes to communicating with family advisers, traditional methods still hold sway: 75% engage with advisers in person, while 66% communicate by telephone. Email is used by 62%, but social media is employed by a mere 6% and internet video services such as Skype by just 2%.
That is not to say next gens are shunning technology completely when dealing with advisers. For almost a third text messaging is important for communicating with them, while instant messaging is deemed important by almost a quarter of next gens.
Compared to other studies, the finding that new media are of secondary importance when it comes to dealing with advisers “wouldn't be expected,” says Professor Peter Schaubach of the Competence Centre for Family Office, EBS Business School, Germany.
“However, the results aren't surprising for me. Wealth management is a high-touch service, which can't be easily replaced by high tech. In that point, the younger generation doesn't differ from the older one,” he said.
Working with family advisers often begins early: for 79% of participants, this happened when the next-gen family members were still in their late teens or twenties.
“At 15-18, it's a great time because there is a comfortable awareness of the world and the impact of what you do,” a 26-year-old participant says in the report.
As many as 49% are “highly likely” to retain their family's advisers which, the report notes, is much higher than typically seen with such research.
Rather than simply changing advisers with a change of generation, a better strategy might be to bring in a new adviser after a family office closes a major deal, suggests Sascha Klamp, managing director and chief investment officer of London-based CITE Investments.
Although “keeping the advisers on the payroll gives some degree of stability”, he said there were downsides.
“If advisers get too close, they feel they own the whole thing,” says Klamp, who has extensive experience of working with a family office.
Just as important – and potentially more problematic – than dealing with advisers is intergenerational communication within the family. The degree to which this happens varies widely.
One participant says he “was raised to know about family wealth”. By contrast, another participant only realised the extent of the family's means when his parent died. In a grave warning, one said putting off discussions means “there is chaos waiting to happen”.
“I want to push my parents to loosen up more. It makes sense for me to start understanding, in depth, the detail regarding our family wealth,” says a 23-year-old participant.
In 62% of families, meetings between older and younger family members to discuss family wealth are taking place as often as next gens feel they should.
Among next gens, 55% said elder principals are unwilling to reveal details about the family's financial circumstances, although younger parents tend to be more open. Despite the concerns of many next gens about being kept in the dark, 89% of participants aged 30 to 40 strongly or somewhat feel they are ready to take over their family's wealth.
At the same time, many next gens prefer to take a step back from family affairs before reconnecting later on, says Klamp. When it comes to succession planning, “there's no right or wrong answer”.
“Some families want the whole family close, some don't,” he says.
Rather than just passing on details of their family's wealth, many parents try to inculcate a set of values. Almost half (46%) of next gens learned the value of money from their parents, while 57% received “a great deal” of counselling on family values. The importance of philanthropy was key for many families.
Instead of waiting to absorb learning from their parents, many next gens educate themselves, with 60% saying blogs and other internet sources are important sources of financial advice and news, while 70% said the same about newspapers and magazines.
Just over half, however, use more formal channels, such as conferences and college courses, and 33% took part in programmes run by financial services firms.
Professor Schaubach recommends that a mix of such structured education and the passing on of information by older family members is ideal.
He says there should be a “strategic process within the family” to introduce the younger generation to the family's wealth management. Younger generations should take a “next generation” programme of the kind offered by universities, but “all theoretical knowledge has to be trained in practice”.
“Responsibility and wealth should be transferred step-by-step and with close guidance by the older generation,” he concludes.