The proverb “shirtsleeves to shirtsleeves in three generations” is used to describe how wealth gained by the first generation is lost by the third. It also describes human nature and our behaviour towards money.
The first generation works hard and goes to work in shirtsleeves, from which their children benefit through better education, access to money and an easier lifestyle. By the second generation this wealth usually levels out. The third generation is usually raised with all the spoils of wealth. They typically do not witness the amount of work and sacrifice it took to create the wealth so the third generation consumes the family fortune and the fourth generation goes to work once again in shirtsleeves!
Behavioural science plays a major role in this cycle, research has shown that money transferred without purpose or a goal, such as an inheritance or winnings from a lottery, is easily squandered as money gained without a meaningful purpose can lead to ‘affluenza’. This creates an unhealthy relationship with money and can lead to a lack of purpose that often creates a sense of entitlement, encourages lavish lifestyles and overspending, with no concerns for the future or growth of the business that funds the lifestyle. This quickly leads to the money deteriorating.
Even if the financial wealth is not lost, the vision is frequently lost. Family members without an effective wealth transfer process typically have heirs working at cross purposes. Generational wealth is an aspect of financial planning that is geared toward passing down stable, significant financial resources to future generations.
It is estimated that 70% of wealthy families will lose their wealth by the second generation and 90% will lose it by the third. There are a variety of reasons why this happens:
- Generations are taught not to talk about money, it’s considered taboo or improper.
- The prior generations worry that the next generation will become lazy and entitled.
- Many have no clue about the value of money or how to handle it.
- Among the causes of the phenomenon are taxes, inflation, bad investment decisions and the natural dilution of assets as they are shared among generations of heirs.
- Generations and siblings of families are now also more likely to find themselves spread out across different countries, with regulation in different jurisdictions adding to the complexity.
- The structure of families is changing: second marriages mean second groups of children.
- Poor returns on investments or a lack of interest by heirs in managing the family fortune.
Despite economic volatility, wealth continues to grow in South Africa, with total private wealth increasing from $670-billion in 2016 to $722-billion in 2017. The New World Wealth’s 2018 South African Wealth Report shows that high net worth individuals’ wealth accounts for 42% of this. Given that 34% of South Africa’s high net worth individuals are over 60, a massive intergenerational wealth transfer should happen sometime in the not-too-distant future.
Research has shown that the majority of children don’t take on their parent’s financial planner when their parents pass away. However, with the vast amount of wealth transferring over the years, can financial planners afford to ignore their client’s heirs?
How do we ensure that we make the most of this once-in-a-lifetime opportunity for the next generation? Not just to protect the wealth, but to protect the future generation from being ruined by it.
Tip 1: Put a family roadmap in place
- Discuss family values, traditions and stories, everyone’s attitude to money and how it should be saved and spent.
- Include all the stakeholders in the plan, including lawyers, accountants, trust experts, trustees and beneficiaries.
Tip 2: Have a handover process
- Who will run the business and what do they need?
- What is the investment strategy, views on philanthropy, as well as key ethical and moral issues?
Tip 3: Wills, trusts and estate planning
- Engage with trustees to have a solid plan in place and save on tax expenses as well as estate duty.
- Make sure the client’s will is a true reflection of their desires and goals for their heirs.
Tip 4: Behavioural assessments
- Use behavioural assessments and profiles to understand the beneficiaries’ relationships with money.
- Discuss the results of these assessments openly with all parties to assist where there could be a potential breakdown in their relationships with money.
Tip 5: Conversations around money
- Open communication around money helps to build trust. Facilitate a discussion around money and what it means for different members of the family.
- Have regular coaching conversations with your clients and their beneficiaries to understand their thoughts.
Tip 6: Shared decision-making
- Involve beneficiaries in creating a financial plan. This builds trust and gives them an indication of the intent of the money.
- Trust them to take some financial decisions on their own and allow them to take ownership for their responsibilities. This will teach them how to handle money and make them aware of repercussion if bad decisions are made.
Source: Old Mutual Wealth Key Questions 10 June 2019
No respect for all forms of assets not personally earned . Not just money . When my mother finally had the means to live well , she would still walk 3 blocks to buy a couple of tomatoes to save one rand. She lived through the depression . Her once wealthy parents lost all waiting for ” the tide to turn”. It never did. She walked the streets of Kalk Bay with a basket selling vegetables to make a few pennies each day so that they could eat . That is the golden rule of how it works , If you did not earn it or have not been through dire financial constraints , then you will have no lasting respect for the value of anything you got for nothing, Of course , the majority of those who have received such handouts would not like it to be true . Not me !! 🙂 .