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The Impact of Wealth on South African Families: Managing Next Gen Expectations

29 July 2019 Stonehage Fleming
Layve Rabinowitz, Partner in the South African Family Office division at Stonehage Fleming

Layve Rabinowitz, Partner in the South African Family Office division at Stonehage Fleming

The everyday challenges faced by South African families in bringing up children can be further complicated by the presence of substantial wealth, according to international family office Stonehage Fleming. In South Africa, a country with the highest Gini co-efficient in the world[1], being born into privilege can potentially signify a mark of shame. The Gini co-efficient measures income inequality, ranging from 0 to 1, and South Africa’s latest figure is 0.63 (2015).

Partner in the South African Family Office division, Layve Rabinowitz says that while there is no typical ultra-high net worth family, the South African Next Gen have a decision to make in how they embrace or deny their wealth in a South African context. In his advisory role to many South African client families, he identified three common family approaches to wealth.

Certain families embrace their wealth as an opportunity to do good through social and charitable causes. Wearing it as a banner of pride, they see a chance to embrace change and put family money to good use.

On the opposite side of the spectrum, Rabinowitz sees families where the next generation has become dislocated from the realities on the ground. These children don’t understand what it means to live in South Africa and are content to exist in their wealth bubble, with little comprehension of the value of money or the idea of limited resources.

In the middle of these extremes lie families who are unsure of what to do with the burden of their own wealth. As a result, they may even deny it. In this context, Stonehage Fleming has encountered children who are completely oblivious to the extent of their family wealth.

“There is no doubt that wealth has both an enabling and potentially destructive power, depending significantly on how relationships are managed,” says Rabinowitz. “Having a considered approach to the impact of wealth on the family is probably the best way forward; where the purpose of the family’s wealth is agreed upon and all parties are aware of their roles, rights and responsibilities.”

The Challenges of Expectation

The main expectations from children of wealthy families surround inheritance and the future role and status of each child in the family. Where there is an opportunity for children to follow their parents into a leadership role within a family business, most families in more stable geographies can look longer term. South Africans, on the other hand, are prone to build a business and sell it prematurely in order to realise liquidity. This enables the family to move assets offshore to diversify currency exposure and political risk.

Rabinowitz believes this trend will continue for the foreseeable future, due to low South African business confidence and ongoing political uncertainty. What this means for the next generation is that many children inherit cash assets, without having to go through a traditional ‘start at the bottom’ tutelage before taking helm at the head of the family business.

Managing Expectations

While there are many options on how to deal with expectations and intergenerational wealth transfer, Rabinowitz says that the one most commonly adopted in South Africa is the most self-destructive. That is, the ostrich ‘head in the sand’ approach, where the patriarch / matriarch denies the issue or insists that the next generation will figure it out. It is almost assumed that if wealth is not talked about, there will be a natural progression.

However, his experience confirms that not making a decision is in effect a decision in itself and has knock on consequences. He recommends parents not to shy away from reality and rather help the next generation come to terms with wealth from an early age to ensure that they understand both its positive and negative power.

“How a family decides to deal with wealth also helps to give the next generation a sense of purpose to do something useful with their lives and their money, rather than remaining passive beneficiaries of the work of their ancestors,” he concludes.

The inevitable deduction is that whilst wealth brings many benefits, it adds complexity to the already demanding role of being a parent. The management of expectations plays a critical role in avoiding the most obvious pitfalls, but this is no easy task.”

Source: https://data.worldbank.org/indicator/SI.POV.GINI?locations=ZA

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