Over the next 50 years, as much as $50 trillion in wealth will transfer from one generation to the next, according to a study by the Institute for Preparing Heirs. At the same time, studies have shown that more than 95% of inheritors are likely to change their financial advisors upon receiving their inheritances.
The institute, an educational organization, does not speculate on the transition in advisors, but this trend may suggest that sometime before receiving their inheritances, the clients’ children detached from their parents’ wealth management principles. This is a serious issue, as it posits polarizing perspectives on the proper preservation of wealth.
Many financial advisors are skilled experts when it comes to offering advice on the generational transfer of wealth, via such instruments as trusts and the establishment of limited liability companies. But they may not provide the same degree of specialized guidance when it comes to the generational transfer of knowledge—measures to preserve prosperity and increase wealth, as well as the risks potentially thwarting these goals.
While many young people are earnest in their quest to make a mark on the world, unless they are properly educated about the myriad exposures to their inherited wealth, they may inadvertently deplete it.
Jim Kane, president of personal insurance at the large Chicago-based insurance brokerage HUB International Ltd., works with many high-net-worth families in his role as a risk advisor. He wonders if part of the problem with the high turnover in financial advisors is because parents have shielded their children from both the means of their prosperity and the threats to it. The subject is taboo. As Jim put it, “The vast majority of families haven’t told their kids about their financial situations because they don’t want them to feel privileged. Then the kids grow up, go to college and start their careers with their own views on what is right.”
While many parents often point out the value of a diligent work ethic, discussions of wealth generation are rare. Equally atypical are conversations about wealth preservation. Jim says the general lack of knowledge about personal liability risks and whether or not they can be transferred is surprising. “I had a discussion about insurance recently with someone who inherited the family business,” he recalled. “It was our first meeting, and the young fellow said he was looking to buy an insurance policy in case the invested assets of the business failed to provide a significant return. I told him there was no such thing. He looked at me like I didn’t know what I was talking about.”
The Age 26 Limit
No one is criticizing high-net-worth parents, their children or their advisors for not adequately discussing wealth preservation. Indeed, most families fall into the same trap, regardless of their financial status. Yet the risks and financial consequences for all families are the same, although the degrees may differ.