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In a perfect world, high-net-worth families would focus on building reliable financial stability across generations. In reality, however, reports across the globe suggest that 70% of wealthy families lose their wealth by the second generation and a stunning 90% by the third.
The root cause for this problem lies in the lack of succession planning as well as a lack of trust between the generation that worked hard to amass wealth and the generations that follow. The older generation is wary of disclosing financial information to their children, believing it encourages laziness and engenders a poor work ethic. The common belief among principals of high-net-worth families is that the next generation is financially irresponsible and will frivolously waste their inheritance away.
Clouded by these misconceptions, families falter at succession planning and hence inadvertently set up the next generations to fail. To prevent family fortunes from being squandered, here are three measures that high-net-worth families can adopt:
Start early and educate the next generation
It is important to create an open environment where family members can comfortably discuss wealth. By proactively instilling financial literacy from an early age, misplaced fears or notions can be made irrelevant. One of the major contributors to bad investment decisions is a lack of financial awareness. It is highly unlikely that if children understand concepts like the power of compounding and the time value of money, they will recklessly spend their money. This advice is especially crucial in emerging markets like India, which have a high inflation rate. Family wealth managers must fully understand and communicate the need for future generations to beat inflation while demarcating the margin available for future spending.
Set clear goals & milestones
Families with complex wealth must treat their long-term wealth preservation goals like they would a business. Setting a collective vision for the future is paramount; a shared sense of core values towards wealth creation, saving, spending, and giving can act as a foundation on which other generations can continue to build a dependable financial eco-system. Additionally, the older generation can also set wealth creation milestones for next of kin that will serve as a roadmap to track financial progress and handle increasing responsibility over time.
Leverage technology to build a transparent & consolidated view
Ease of access to consolidated wealth information can be a family’s Achilles’ heel when it comes to its financial well-being. Moreover, data aggregation becomes increasingly complex as the family and its portfolio size continue to grow. Traditionally managed systems with physical documents and paperwork only add to the confusion. For the next generation of principals, having a complete picture and tracking the performance of each investment in such a scenario is extremely burdensome, and the answer to this is family office software.
Today, as a new era of tech-savvy inheritors takes control of their finances, they demand greater efficiency in terms of transparency, data management, and accessibility of information. Also, families need to secure their data and documents by recording them in a single secure family office software system to deal with any future emergencies. A recent report by PWC affirms that the global wealth management sector is lagging in the adoption of technology and many high-net-worth individuals prefer to rely on powerful digital solutions in addition to human contact. Technology remains the greatest enabler in this complex scenario, allowing families to have greater transparency and control over their wealth while ensuring future generations benefit from a smooth transfer of information.
Some of the most prosperous multigenerational families are steadily adopting a few practices to ensure the family legacy survives future generations. As per Capgemini’s 2021 World Wealth Report, the global high-net-worth individual population (HNWI) grew 6.3%, while HNWI wealth grew 7.6% in 2020, with North America emerging as the current leader in both categories. This growth has the potential to change the general attitude towards sustaining wealth across generations with technology-enabled family office software services leading the way. Since succession planning has always been an area of distress, high net worth families must ensure preparing the next generation for their financial future with these few measures becomes a high priority.
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