How to prepare the next generation for wealth

What you need to know

Providing for your family and ensuring they have access to better opportunities in life is crucial for many people. Does this mean wealthy families have succeeded before the game has even started? Not necessarily. While money can open many doors for the next generation, it does not 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 must carefully navigate these complexities through preparation, 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.

Amid the general perception that wealth automatically equals success, it's especially difficult for the 'next generation' to find a sense of fulfilment and purpose. Living up to a family legacy can be a heavy burden, and a fear of failure is not uncommon.

For those that do succeed, their achievements may be attributed to inherited advantages rather than skill and effort.

Parents are also keen to avoid raising a ‘spoilt child’ who does not appreciate the value of money, or who fritters wealth away.

Most families want to use wealth to help their children succeed in life but are conscious of spending it wisely.

Common ways to pass on wealth include helping children pay for school fees or buying a first home, rather than handing over a large sum of cash.

Some of our clients have structured their finances so that their children are only passed wealth if they are being productive members of society. This is an example of using goals-based criteria to structure family finances. In this case the children must be in education, running a business, building their career or working with charitable causes in order to receive parental wealth.

How to talk to your family about wealth

It’s often said that British people have an awkward attitude towards money. Even the wealthiest in society can find it difficult to discuss financial matters.

A report by the government-backed Money and Pensions Service in 2020 found that 52% of adults do not feel confident talking about money.² The report said the main reason for avoiding discussing financial matters was that they felt doing so was impolite.

A lack of discussion can have a devastating impact on families with significant wealth, yet many of the challenges associated with wealth can be overcome through careful conversations.

Parents do not have to bear this responsibility alone. A good relationship with a wealth manager or trusted adviser can let families lay strong foundations, articulate your goals and make decisions during times of transition. At Rothschild & Co we have helped many families put the right support structures in place.

Teaching your children about wealth

It is 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.

When they are older, explain investing and give them motivation for growing your money over a long time. Children can then view wealth as a positive enabler rather than a curse.

Encouraging children to be independent and achieve on their own is of the utmost importance. Wealth should therefore not only be seen as a symbol of success, but also as a tool to help meet goals. In our experience, a unifying purpose that will bring the family together and represent values the family cares about can be extremely helpful.

The whole family should be involved in this discussion, as younger people will often have different ambitions and perceptions 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.

How to pass on wealth efficiently

Once the family is comfortable talking about their wealth, a natural next step is to start discussing how to preserve it.

Wealth is not something that can 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 down to poor wealth management and a lack of understanding about money by subsequent generations.

As a family-controlled business in its seventh generation, now under the stewardship of Alexandre de Rothschild, we are especially well positioned to advise our clients on wealth preservation, applying the key concepts of longevity, unity and resilience that we have learned over that time.

We can use our experience to engage with the next generation and help them gain the knowledge and confidence they need to manage wealth.

It is important to establish a framework that allows you to use wealth for multiple purposes, such as lifestyle spending, giving money away, cash management, growing a nest egg and business spending.

Families often use trusts, companies or similar structures which allow money to be used for a specific purpose. Many of our clients who have sold a business have established a Family Investment Company to organise their finances, to provide for their children and grow their wealth. These structures can be viewed as the family business and can be used to educate their children without giving them free reign.

Of prime importance to passing on wealth efficiently, is to have a plan and to appreciate that that plan will change over time. Ensure you have discussed how much liquidity the family needs, target returns and risk tolerance. It is also important to come back to the plan and reassess periodically, always considering the needs of your wealth and the next generation.

It’s about building and nurturing relationships with families and individual family members that will stand the test of time. This is the key to achieving a happy and fulfilling life, while preserving and growing their nest egg.

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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