Most family wealth is fleeting, lasting only a handful of generations, but advisors can be the key to stopping that trend, a UBS advisor said.
To help families retain their wealth, financial advisors have to initiate sometimes challenging conversations around a family’s history, it’s values and philanthropy, said Bill Sutton, UBS senior strategist for family and philanthropy advisory, on Monday at the Investment and Wealth Institute’s 2019 Annual Conference Experience in Las Vegas.
Sutton said that UBS’s research supports the commonly held view that family wealth tends to dissipate in three generations: The first generation earns it, a second generation has it but depletes the wealth, and the third generation doesn’t have the wealth at all.
“Only about 9 percent of families are able to go from generation one to generation three and increase their assets,” said Sutton. One of the main reasons so much wealth is depleted through three generations is that approximately 70 percent of estate transactions, where wealth transitions from one generation to another, fail."
While many families have issues with taxation and financial rules, and some failures can be linked to declining family businesses, the most common cause of failure in estate planning is the inability of a first generation of wealth earners to pass down their values to their children and grandchildren, he said. Around 60 percent of failed wealth transfers are caused by the failure to transmit values.
Another 25 percent of transfers fail because heirs are inadequately prepared.
“The children are never trained to receive that money, and the first generation has never had a conversation with the family about that wealth,” said Sutton. “Many people never want to talk about the money with their kids because they’re afraid it will mess them up.”
Sutton recommended that wealthy families bridge this impasse by adopting a glide path for their family money conversation, where early talks about the wealth are more values-driven and gradually heirs are exposed to dollar amounts.
Families who successfully transfer, maintain and grow their wealth across generations share a few common traits. One, they establish plans for the transfer and discuss those plans with each other, said Sutton.
“They don’t just fill out forms and put them in a vault. They actually have conversations with their family,” says Sutton. “The end result is, if they squabble, it won’t be because of the valuable stuff, it will be because of an heirloom that mom didn’t assign to someone in her will.”