Pitcairn Update, May 2019
“The Great Wealth Transfer is coming!” – or so we’ve heard for almost a decade. There’s been a climatic build and anticipation over the massive amount of assets expected to flow from Baby Boomers to Generation X and millennials.
The idea of the Great Wealth Transfer has been around as long as Baby Boomers have been thinking about retirement. There’s no denying that the looming transfer of wealth will be great – the largest in history. With each passing year, however, the buildup seems to grow. The news coverage gets a little more sensational and the numbers get larger and larger. A few years ago, Accenture put the number at $30 trillion over the next three decades. Cerulli now says 68 trillion in assets will pass to rising generations in the next 25 years.
For all the hype and years of coverage, the Great Wealth Transfer is more like the Great Wealth Trickle.
Even as a Trickle, There’s a Better Way to Transfer Wealth
Call it what you want. But for wealthy families focused on preserving their legacy over generations, it’s impossible to overstate the importance of effectively transferring wealth. From decades serving wealthy families pursuing successful transfers of wealth, it’s become clear that the factors impacting those transfers play out on multiple fronts.
There’s the macro level and the large-scale forces impacting how wealth is passing to subsequent generations across many, many families. Today, an effective wealth transfer requires an understanding of the factors slowing the Great Wealth Transfer to a trickle. That big picture perspective frames the context through which an individual family should approach its transfer of wealth. On a more localized level, experience shows that a successful transfer demands a close understanding of the individual family and financial dynamics at play. A focus on leadership and family harmony is critical.
It’s worth a deeper dive into how these larger forces affect generational transitions and how wealthy families should prepare future family leaders to preserve family continuity.
Competing Forces Are Slowing Wealth Transfers
At a broad level, two trends are impacting the Great Wealth Transfer. At first glance, these forces appear to be at odds. Cumulatively, however, they’re reshaping how Baby Boomers are tackling estate planning and family succession.
The first force is longevity. As more affluent individuals live to see age 90, 95, and beyond, they’re rethinking their retirement plans and reallocating their portfolios. Individuals express that they want to spend more money on travel and leisure early after retirement while preparing for an increase in health care costs as they grow older. Wealth creators and family leaders are maintaining their wealth as they live to older ages. As a result, many inheriting Gen-Xers are confronting an unexpected reality – they may be close to retirement themselves when the anticipated wealth transfer finally takes place.
The second force is an “accelerated wealth transfer” that can be seen as a reaction to the growing trend of longevity. Many G1 family members are transferring some of their wealth sooner. Most wealth transfers tend to focus on significant events – the sale of a business, the passing of a patriarch/matriarch, etc. Wealthy families are increasingly realizing the impact of proactive transfers of portions of their wealth, sometimes around these family inflection points, sometimes not.
Longer life expectancies and smaller, proactive transfers of wealth are stymying the Great Wealth Transfer. The resulting trickle created by these big-picture trends will affect every family differently. As wealth creators and family leaders enjoy increased longevity and adapt their estate planning strategies, they must pay close attention to family relationships, assumptions, and expectations that could derail wealth transfers.
The Great Wealth Trickle Is Good for UHNW Families
Less than a third of business owners provide education to prepare family members for transitions, according to Family Office Exchange research. Feedback from families shows that this preparation is even more lacking on the family side of the equation.
This lack of preparedness often extends to the advisors and support system the family relies upon. As family leaders age, their advisors age with them. These advisors may not prioritize developing relationships with subsequent generations or offer services younger family members may want to see. What’s more, when that trusted advisor does finally retire, many families aren’t prepared, creating a talent crunch and a rush to replace trusted family partners who may be seen as irreplaceable.
The reality is, all aspects of transitioning legacy should be a trickle for wealthy families. This is especially critical in passing on the intangible elements of what makes a family unique. After all, a successful generational succession encompasses a lot more than assets. It’s a transfer of family vision, values, and outlook. It’s a shared commitment to understanding, evolving, and ultimately perpetuating a family legacy far into the future.
At Pitcairn, these family legacy components all fall under a singular focus - creating a unified family culture.
Family Culture Is Conscious
Few family leaders sit down and think, “It’s time to work on my family culture.” Maybe they should.
What many families struggle to realize is that a family culture can be crafted and clarified. It’s a daunting undertaking. It takes hard work and an effective strategy to unify a growing family under a single, shared culture. For family leaders, that work should begin long before end of life. Rising generations should grow up feeling a close connection to their family’s history and values. As they get older, focused leadership development and individual plans can help guide them toward family roles that suit skills and ambitions.
Working with countless families has revealed that this approach must be intentional. But real family culture often happens between the family meetings and planning sessions. An enduring family culture must be built at the intersection of formal communication strategy and impromptu shared conversations, memories, and experiences. As rising generations grow up and take on more knowledge and responsibility, family leaders must be prepared to accommodate a culture shift that honors past family experience while giving real significance to the passions and purpose of future family leaders.
Fostering a Better Advisor Ecosystem
A trusted advisor can often help to add structure around these family culture endeavors and can shepherd a family through generational inflection points. But not every advisor understands the importance of family culture, and even fewer are equipped to provide meaningful support in developing it. Families focused on sustaining a deliberate family culture must think differently about the partners they surround themselves with.
Successfully navigating The Great Wealth Trickle demands a different kind of advisor offering a different kind of services. With the right approach and buy-in from the right family members, families can develop a unified, resilient culture that supports and strengthens a generational transfer rather than working against it.
Turning on the Trickle
With this fortified culture in place, an effective wealth trickle can take place. Cultural authority, decision-making power, and family standing can begin to shift toward rising generations. It requires a literal give and take – family leaders must be willing to cede control, and the next generation must be primed and prepared to receive it.
When executed properly, a unified culture with evolving family roles can create a powerful framework for an effective transfer of legacy. Families can have open conversations about how societal trends impact succession planning. First-generation family members can share how longevity is shifting their thinking about spending or how their spending will be impacted by living with a chronic condition. Future family leaders can be more forthright about their plans for inherited assets or their ambitions within the family business. A shared family culture facilitates communication and brings obstacles and opportunities out in to the open.
Ensuring a Great Wealth Transfer
Smart families have been approaching wealth transfers as a trickle for a long time. They recognize that a proactive approach is essential to a smooth transition. These transfers do not happen overnight. They take years of planning and preparation. In serving families over multiple generations, large-scale trends have always been important to monitor and account for, but ultimately, they are only one part of the larger family equation that makes up a successful generational transition. For wealthy families, moving from one generation to the next is an ongoing exercise in family continuity and harmony.