This month’s column explores how families can instill the importance of financial education, which will help prepare the next generation for wealth accumulation and retention.
Shirtsleeves to Shirtsleeves
As the famous old saying regarding wealth goes: “The first generation creates, the second inherits and the third generation destroys.” Tellingly, in the U.S. we have adopted a similar phrase, -- “shirtsleeves to shirtsleeves in three generations.” It is estimated that this pattern of wealth accumulation, spending and loss, occurs in more than two-thirds of families that have created significant wealth.
One prevalent theme is evident with this pattern -- great effort and energy is invested in the accumulation of wealth, but far less attention is paid to its maintenance and transfer. Candidly, families tend to fall short when it comes to generational wealth transfer, and passing on wisdom and education about managing wealth. Warren Buffett once remarked, “I want to leave my children enough so they can do almost anything, but not so much that they do nothing.” Indeed, a focus on both educating children about money, and empowering them with the necessary attributes to continue to build on their family’s successes is paramount in the maintenance of generational wealth.
Experts generally agree that there is a two-fold process to educating the next generation in regard to responsible wealth management: the family needs to take a genuine interest in how they manage their money to help meet their objectives, and younger family members must be groomed to be ready for the responsibility of inheriting, investing and managing wealth. Of course, they also should understand that investments are not FDIC-insured, are not bank guaranteed and may lose value.
Establishing a solid legacy plan and framework is important to help ensure that wealth is preserved for future generations. Many financial professionals share the following advice with clients:
- Develop a Family Mission Statement that has “Emotional Value”
When creating a mission statement, which operates as a guiding principle on how you handle your finances, consider incorporating the entire family’s beliefs and values. Keep in mind, the older generations should not be the only voice heard in the conversation -- listen to younger family members to provide a sense of ownership, inclusion and shared values. Creating a mission statement for the next generation and openly discussing core values should produce a statement that has the right balance of emotional and actionable ingredients.
- Instill Appropriate Values and a Strong Work Ethic
To instill responsibility and accountability among the younger generation, many experts believe that families need to integrate four elements into a wealth preservation plan: (1) self, (2) relationships, (3) work/productivity and (4) engagement in the community at large. The challenge with wealth is to safeguard against over-entitlement and complacency in the next generation. Successful families view wealth as a resource that requires constant care and stewardship, and that is accompanied by responsibility. Thomas Aquinas once remarked, “To work well is to live well.” Engaging in a meaningful occupation is necessary for self esteem and for making a contribution to society, regardless of the wealth a family may have.
- Make Wealth Management a Primary Concern
It is essential that parents share and impart to their children day-to-day life experiences of handling money, from chores and allowances to encouraging participation in the workforce. While your children are young, consider discussing the function and utility of money and how it is made. As your children grow older, consider expanding the reach of your day-to-day financial conversations to include the economy, investments, taxes and estate planning. Invite young adults to meetings with the family’s financial advisor and give them considerable access to information on your holdings.
- Create a Living Legacy
Many successful families create and document their family stories in order to establish a living legacy, or a narrative process in which important events, experiences, successes and failures are recorded, remembered and passed on. Consider doing so with your own family to ensure that your lives -- financial and otherwise -- are documented and accounted for so that mistakes can be teaching opportunities and successes can be celebrations.
Consider creating a living legacy in the most literal of terms -- generating a family philanthropic vehicle that mirrors the values and ideas of your clan. As families grow in age and numbers, a common philanthropic fund is a great way to encourage dialogue and bring family members together for a common purpose. Your financial advisor can advise you on ways to invest your money with an existing foundation or how you could set up your own.
Participation in philanthropic events can span across generations -- for young children, volunteering at a charity is often a great way to introduce them to the concept of sharing and giving back. Older generations can contribute by helping manage the decisions about how the funds are directed.?
Timing is Critical
Clients often ask the crucial question: “When should I discuss inheritance with my children?” If you’re asking the question, it’s probably time. As mentioned previously, it is beneficial to engage children with games, talk to teens about saving and sit down for estate planning conversations with young adults to groom them for financial responsibility. Giving family members a say in their own financial inheritance helps build trust and confidence. Including their spouses in the discussion is important to build family unity and cohesion.
Besides fostering openness, it is also incumbent on parents to set boundaries so children respect the value of money and hard work. This is often better done by example than solely preaching the values of prudence and enterprise. As always, before you impart your financial wisdom to the next generation, discuss ideas on how to broach the topic with your financial advisor as they have a wealth of experience working with families like yours with similar needs.
Raj Sharma, managing director of iInvestments, is a private wealth advisor with the private banking and investment group, a division of Merrill Lynch, Pierce, Fenner & Smith Inc., a registered broker-dealer, member SIPC, and a wholly owned subsidiary of Bank of America Corp. He can be reached at his Boston office at (800) 926-5579 or firstname.lastname@example.org.
Excerpts from this article originally published in India Abroad on August 26, 2011.