Strategies for successful intergenerational wealth transfer must look beyond financial capital

In the last 20 years, we have seen extraordinary wealth creation following the internet boom. Now, fortunes are being amassed at a faster rate than ever before. And over the next 20 years, it is expected that over 30 trillion dollars will be transferred to the next generation.

The challenges of transferring wealth from one generation to the next are well documented. It is widely known that 70% of wealth is typically lost by the second generation and that up to 90% is lost by the third [generation].

Threats to wealth are internal rather than external, research shows

Interestingly, it is the non-financial risks to wealth that are deemed by families to be far more important than the financial. This is according to research gathered by Stonehage Fleming from 2013-2018 that is based upon information, surveys and face-to-face interviews with over 150 different intergenerational families and their trusted advisors across the UK, Europe and SA.

The research shows that it is the failure to prepare the next generation or conflict within a family that can destroy wealth rather than the more commonly perceived external threats of politics, economics and capital markets.

Johan van Zyl, Chairman and Partner of Stonehage Fleming in SA, recently shared some of the research findings and shared insights around strategies for intergenerational success during a webinar that formed part of Standard Bank’s ‘Phenomenal Families’ series. Standard Bank Wealth & Investment partnered with key players within the family office space, including Stonehage Fleming, to launch the thought leadership series.

“Risk was one of the key themes that emerged from our research findings,” says Van Zyl, who advises several High-Net-Worth Individuals (HNWIs) in SA. “What we have seen over the last four years is that succession planning has taken over as the number one risk and concern for families. This has replaced capital preservation.”

Out of the top five risks that came out of the survey, none spoke to financial capital. Around 68% of respondents cite family disputes or break ups, 67% a lack of planning, 61% failure to engage the next generation, 60% lack of future family leadership and direction while 52% cite a lack of appropriate training for the next generation.

This is despite the industry focusing most of its resources on dealing with financial capital. In response, Van Zyl says that as an industry, and as advisors, we need to challenge this conventional thinking and focus more on the non-financial risks.

An interesting aspect that came out of the survey is that by and large, risk management is being neglected by families and their advisors. Up to 35% of respondents indicated that they have no formal process for managing risk. While only 6% of respondents said they had a process in place, which is significantly low.

Shift to values-based investing in theory rather than practice

The third theme that arose from Stonehage Fleming’s research is the shift from value to values-based investing. “This increased focus on socially responsible investment is largely being driven by the next generation. However, we are seeing a noticeable gap between intention and action. Over 75% of respondents acknowledge a preference for responsible investment but only 21% are actively incorporating a values-based approach in their portfolios. This means there is still much work to be done.”

Covid-19 brings challenges and opportunities to HNWIs

In terms of reputation and contribution, the research reveals that insufficient time is being devoted to the deployment of social and cultural capital. Only 10% of respondents have a formal process for agreeing and appraising their contribution to the community and wider society.

“However, during Covid-19, we saw a call to action with many families wanting to contribute to their fellow human beings and communities to get them through this crisis. It placed focus on giving strategies and made clients realise that without a proper plan in place around their philanthropy, they were not in a position to act as quickly as they wanted to.”

Van Zyl says that it has allowed HNW families to put giving strategies in place for the future to have a greater impact on their communities.

“The turbulent time from Covid-19 has had a severe impact on businesses and the economy but families have used the crisis as an opportunity to take stock. We have seen in our client base, improved communication due to video platforms such as Zoom, Teams and Blue Jeans. It has allowed families that are dispersed across the globe to come together more frequently to discuss their affairs and bond as a family. In the past, they would typically wait for in-person gatherings while we are now seeing more regular interaction.”

Insights from dealing with the world’s leading international families

Van Zyl says that the most successful clients build a set of values around which decisions will be made in future and that clear, transparent communication is key to family harmony.

“The next aspect we have seen used by successful families is having a structured and disciplined approach to managing affairs. This may include a regular review of documents, discussions with family members on important strategic matters and creating a forum of transparency to ensure everyone is on the same page.

“We have also seen philanthropy used as an important tool in succession planning as it allows every family member to have a voice, whether they are financially literate or not. And finally, we have seen successful families be discerning about the advice they receive and advisors they work with, they are weary of professional advisors with their own agenda or who tend to take an isolated view.”

The research conducted by Stonehage Fleming has evolved into a practical framework that has aided client families in identifying and managing all aspects of their financial affairs.

“What we have seen from the most successful long-term families is that they applied the four pillars of capital diligently to all aspects of their affairs: financial, intellectual, social and cultural capital. The families that do this very well and consistently meet all four pillars of capital are the ones that can effectively articulate the purpose of their wealth. That is the cornerstone upon which the four pillars are built,” he concludes.