How to prepare the next generation for wealth

What you need to know

Few things motivate us more than the desire to provide our families with a better future. But does wealth alone mean success for the next generation? Not necessarily. While money can open doors, it doesn't always lead to a fulfilling life.

Former US President Franklin D. Roosevelt warned in his inauguration speech that "happiness is not in the mere possession of money; it lies in the joy of achievement, in the thrill of creative effort".¹

This statement is as true today as it was in 1933, as many parents fear wealth will cause their children to live without motivation or direction.

Whether your family has passed down wealth through many generations or has enjoyed more recent financial success, you should carefully navigate these complexities through thoughtful planning, counselling and honest conversations.

The psychology of growing up wealthy

There's no denying that growing up in an affluent household often brings significant advantages. Yet wealth can also create many emotional and psychological challenges if managed incorrectly.

The assumption that wealth automatically equals success can leave the next generation struggling to define their own path. Living up to a family legacy is a heavy burden, and a fear of failure is common. Even for those that succeed, their achievements may be attributed to inherited advantages rather than skill and effort.

Many parents, especially those who've created wealth themselves, want their children to grow up grounded, with a healthy respect for money and an understanding of how to use it wisely. They want them to appreciate the value of money and avoid the risks of squandering it.

Rather than handing over large cash lump sums, families can support the next generation in more purposeful ways, such as helping with school fees, buying a first home or contributing start-up money for a business. Some of our clients have also put in place conditions that mean their children will only receive wealth if they are productive members of society.

This is an example of using goals-based criteria to structure family finances. In these cases, the children must usually be in education, running a business, building their career or working with charitable causes in order to inherit wealth.

How to talk to your family about wealth

It's often said that the British have an awkward attitude towards money, and wealthy families are no exception. Some 52% of adults do not feel confident talking about financial matters.² The main reason? People believe that doing so is impolite.

For those with wealth, additional concerns can come into play. Some worry that knowing too much about the family finances will foster a sense of complacency or entitlement in the next generation. Others feel that early disclosure could complicate their children's personal or romantic relationships, increasing the likelihood of wealth being lost through divorce or outside influences.

These concerns are entirely reasonable. However, in our experience, withholding too much information often does more harm than good. A lack of transparency can lead to confusion, conflict and other unintended consequences.

So, when is the right time to talk to the next generation about wealth? Sadly, there isn't a one-size-fits-all answer to that question. Every family is different, and we believe that parents are best placed to know when the time is right, based on their children's age, maturity, aspirations and circumstances. Still, earlier is often better.

We have seen instances where people who expected to inherit little were suddenly faced with the reality of receiving millions, or even billions, of pounds. That kind of surprise rarely sets the stage for sound financial decision-making, particularly during an already emotionally fraught time, such as the loss of a loved one.

Deciding how and when to talk to the next generation about wealth can also create tension between parents. It's not uncommon for spouses to hold strongly opposing views on the right approach, sometimes leading to lasting strain or a family rift.

Fortunately, many of the challenges associated with handing down wealth can be overcome through careful conversations. How these discussions are framed is important, but parents do not have to bear this responsibility alone.

A good relationship with a wealth manager or trusted adviser can help you articulate your goals and lay strong foundations for the future. For example, are the next generation expected to be custodians of the wealth they are growing up with, or simply a beneficiary? At Rothschild & Co, we often work closely with families to initiate these conversations and establish any necessary support structures.

Teaching your children about wealth

It's crucial to educate your children from an early age about money. Start young and introduce concepts like value, purpose, and how to spend and save.

As they get older, teach them the importance of investing as a way to grow and preserve wealth over the long term. Children can then view money as a tool to achieve their goals rather than a source of anxiety or uncertainty.

Having access to thoughtful, impartial guidance in these early years can help younger generations feel more confident as they gain greater financial responsibility. For example, we offer education programmes and regularly host events focused on the 'next-gen', where they can meet peers in similar situations, as well as a range of wealth professionals.

That network has been invaluable for many of the younger generations we work with, particularly those who have come into wealth suddenly or unexpectedly. It allows them to form lasting relationships and friendships with people who understand what they're going through.

Involving future generations in the day-to-day management of family wealth is another way to help wealth transitions happen more organically, better preparing children to take full control when the time comes.

This might include helping with a family business, or simply being present during conversations with wealth managers and advisers. We often encourage using philanthropy as a way of educating children, teaching them the value of money and a sense of how fortunate they are, while reinforcing a family culture of 'giving back'.

Whatever path you choose, finding a unifying purpose that brings everyone together and reflects the family's values can be extremely helpful. The whole family should be involved in these discussions, as younger people will often have a different idea of what success looks like.

Adult children may perceive sustainability and environmental matters to be more, or at least as important as making profit. They may also prefer to use the money to achieve a positive social impact or seek to invest in areas with higher growth potential, such as technology firms or start-ups.

Our view is that parents shouldn't be afraid to trust the next generation with responsibility, even if they do things differently. They may surprise you. Importantly, give them the room to make their own decisions and mistakes, as these can be valuable learning experiences.

How to pass on wealth efficiently

Wealth isn't something that should be taken for granted. An astonishing 70% of wealthy families lose their wealth by the second generation and that number rises to 90% by the third generation.³

Often, these losses are the result of poor wealth management and a failure to adequately prepare the next generation. So once a family is comfortable talking about their wealth, a natural next step is to discuss how to preserve it.

As a family-controlled business in its seventh generation, now under the stewardship of Alexandre de Rothschild, we believe we're well positioned to assist with wealth preservation and multigenerational wealth transfers.

We use our experience to engage with our clients and the next generation, acting as a sounding board for their financial questions, while helping them gain the knowledge, skills and confidence they need to prepare for the future.

An important first step in passing on wealth effectively is having a clear plan. Start by talking through the essentials: how much liquidity the family will need, what level of risk feels comfortable, and the level of returns you're aiming for. Revisit this plan regularly to make sure it still reflects your goals, and those of the next generation.

It's also helpful to establish a framework that allows your wealth to serve specific purposes, such as lifestyle spending, charitable giving, cash management or growing a nest egg. Families often use trusts or similar structures to set aside money for these specific goals.

A Family Investment Company (FIC) is another option. Many of our clients who have sold businesses set up FICs to organise their finances, grow their wealth and provide for their children. These structures can function much like a family business, offering a way to involve younger family members in decision-making while retaining control.

Ultimately, we firmly believe the most effective wealth plans are shaped in partnership with the next generation rather than imposed. That collaboration, built through regular conversations and a shared vision for the future, gives families the best chance of preserving both wealth and relationships over time.

Citations

Cover image: Lord Rothschild's Maxims, 1911. A handwritten note, summarising the family's philosophy towards money and life. Includes the advice to ‘consider well, then decide positively’ and to ‘respect the counsel of your parents’.

¹ The Inaugural Address of FDR on 4 March 1933, ABC News, 8 January 2013

² Money & Pension Service, 10 November 2020

³ Generational Wealth: Why do 70% of Families Lose Their Wealth in the 2nd Generation?, Nasdaq, 19 October 2018

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