John Waldron of Waldron Wealth Management in Pittsburgh agrees that establishing a sense of responsibility in heirs is vital. “Many have little or no self confidence,” he says. “A lot of stuff that normal people do has been done for them.”
Waldron holds regular family meetings that include the heirs at some point, often when they go to college or when they graduate.
“Families have to have open and honest communication about where the money came from and what it means to the family,” he says.
The Merrill Lynch report indicated there is a disconnect between what people say they believe and what they do when trying to pass on their financial values. Sixty-eight percent of the respondents said discussions about a family’s wealth should begin before an heir’s 18th birthday, but only 45% actually have the discussions that early. Only 29% said families should wait to have these conversations starting at the age of 18, yet that’s when 48% actually do it.
Open Discussions
“Parents avoid discussions about the extent of their family’s wealth with their children in fear of dulling their ambitions or creating a sense of entitlement,” says Michael Liersch, head of behavioral finance for Merrill Lynch, commenting in a press release about the reports. “While important to reveal such sensitive information in the right way and at the right time, outright resistance may be viewed by the next generation as a sign of distrust or lack of faith in their judgment, which can lead to a lapse or collapse in communication.”
Communication is considered so important at Charles D. Haines LLC in Birmingham, Ala., that the firm holds family meetings on talking and listening techniques. “Effective communication is key in any relationship,” says firm founder Charles D. Haines.
But Haines notes that the meeting room can only go so far in solidifying a family relationship, and that actions are just as important.
“Children learn as much from what you do as what you say,” he says. “If the parents are not modeling the values they are trying to transfer to their children, it is not going to happen.”
It’s also important for advisors not to make any assumptions about clients’ attitudes about wealth transfers. For example, not all families want their children to inherit the wealth, says Domenic DiPiero, president of Newport Capital Group in Red Bank, N.J. “The first question you have to ask a client is do they want the money to last,” he says. “Some want to give it to charity.”
For those who want to pass on their wealth, DiPiero can speak from personal experience. He and his brother hold second-generation wealth and they both have their own successful careers.
To help the clients create a sense of self-worth in the potential heirs, Newport Capital hires clients’ children as interns.
“More and more wealthy people want their children to be productive. It could be in any career,” DiPiero says. “Just giving the money to the heirs unencumbered is not in favor now. Families want to make sure their money does good. For heirs to succeed, they need to know how the family got the money and how easy it is to lose it.”
Many people have unrealistic notions about what constitutes a sustainable spending strategy that preserves their wealth for several generations, according to the Merrill Lynch study. Thirty-nine percent believe a portfolio can last forever with an annual distribution rate of 6% or more, while another 20% have no idea what an appropriate distribution rate is.
In reality, Merrill Lynch says, data suggests that even for the wealthiest families, wealth sustainability may require an average distribution rate as low as 2% per year, a fact understood by only 16% of those surveyed.