When it comes to wealth planning, there's no centralised curriculum for educating the next generation and no standard wealth transfer strategy to study and emulate. Instead, transferring financial literacy to heirs requires a multi-layered approach, both structured and informal.
RBC Wealth Management's 2017 Wealth Transfer Report, which surveyed more than 3,100 individuals in Canada, the UK and the U.S. with an average of investable assets worth US$4.5 million, found that structured financial education typically begins around 27 years old. However, 66 percent of those who began learning about wealth planning and finances before the age of 18 rate themselves as confident in their knowledge.
The research found while respondents think the late 20s is too late to start learning about finances, only 53 percent of those surveyed have begun to educate their children on budgeting, investing and wealth transfer.
Ben Taylor, a managing director in relationship management at RBC Wealth Management in London, says there's no question that engaging your heirs early is critical to ensure a smooth wealth transfer further down the road.
“If someone is gifted a tremendous amount of money, it's very hard to understand what that money can do to you or for you if you've never experienced the ability to create value yourself," Taylor says.
There is no one way to provide wealth planning education to the next generation, but there are myriad elements to consider when it comes to closing the knowledge gap.
Know the risks
Receiving a significant amount of wealth without being taught the basics of finance and investing can lead to unwanted outcomes.
“The implications can be huge," says Matthew Hunter, an associate director in relationship management at RBC Wealth Management in London. Throughout his career he says he's encountered a number of high-net-worth individuals who were ill-prepared for managing inherited wealth.
“They just live off these huge incomes from trusts," he says. “They'll invest in schemes that their friends have recommended; they'll put their money into properties they shouldn't buy — there's a lot that can go wrong."
More than two-thirds of wealthy families lose their legacy by the second generation, and that number grows to nine-out-of-ten by the third. Taylor says there's a lingering, albeit counter-intuitive, fear that talking about the family's wealth, even within the context of education and financial management, might discourage heirs from wanting to work.
“The more the family knows, the easier the transition is," he says.
Start the conversation
Your annual financial review with your advisers may provide a perfect opportunity to bring the next generation into the fold, Taylor says.
“We can start talking to them about the assets they have and how they operate," he says. “Sometimes it's just striking that conversation up in the first place which breaks the ice between the parents and the children to allow them to have an open discussion."
The discussion can also address potentially emotional conversations like succession planning in a neutral environment.
“I don't think that's any different whether you're dealing with a relatively small amount of money or dealing with a much larger amount of money," Taylor says.
Involve the next generation in managing assets
The assets you hold can serve as a tool for educating the next generation, Hunter says. For example real estate is a strategic investment for many high net worth families in the UK.
“Property is a very British thing; owning your home — you can't get out of that — that's part of British culture," he says. “A huge part of that wealth transfer is letting them build up their own property portfolios; handing them down enough so that they can develop properties, and then helping them and passing down your expertise."
While allowing the younger generation to learn through guiding their own investments can be a valuable teaching tool, involving your heirs in the transfer of current assets can also boost their confidence and money management skills.
Taylor suggests operating businesses or structures such as trusts can provide opportunities to talk to children about why these assets are being put into the structure. This arrangement provides oversight for you to mandate how the assets are used, while giving the next generation a role in influencing that money, business or philanthropic management.
“You can have a professional trustee in that situation who will be providing the guidance and the oversight with ad-hoc education along the way," Taylor says.
Engage your heirs by engaging your network
“One problem with engaging your heirs in your business is they might not necessarily be interested," Hunter says. "They might have other ideas about what they want to do." Transferring your values — how you see the world — is one thing, but a good way to alienate your heirs and hinder the conversation is to force them down a certain path.
If heirs aren't interested in pursuing the family business, Hunter recommends introducing them to people in your network who could provide guidance in the paths they are considering.
“It's about understanding from a wider spectrum of people," he says. “That's a really powerful way of helping them develop and helping them understand that there are a lot of things you can do in life."
Hunter likens it to a mentorship relationship, but points out it is also a valuable tool in their development around the ways to use their wealth.
Let your wealth manager play a role
When a client is young, it's a critical time not only to learn to make financial decisions, but to also understand why they're making those decisions.
“Having someone other than their parents to bounce ideas off is really valuable — someone outside their family, who can give them a more impartial view," Hunter says. He says a good adviser will not preach or try to teach. “Try to understand what the client is trying to achieve and make suggestions, give them ideas as to what other people are doing, and do it in a way that doesn't come across as patronising."
After all, the next generation is comprised predominantly of Millennials and Generation Xers, two groups entrepreneurial by nature and raised in the information age — a time of transparency and continuous learning.
“They take pride in where they work and who they work with — they want someone advising that has those same outlooks," Hunter says.
Taylor agrees, and suggests a main reason for educating Millennials and Gen Xers financially is to prepare them for the time when previous generations pass away.
“No one likes talking about that," Taylor says. "But we can aid that — build the conversation. Right now is the time to share the information with your adult children – start the conversation about how much wealth is there and what's going to happen with that wealth in time."