Market research tells us that nearly 70% of intergenerational wealth transfers fail by the third generation and almost 90% by the fourth. These are compelling statistics which have become top of mind concerns for many families as they plan their wealth transition to the next generation. We explore three of the key challenges faced by Australian families transitioning wealth and what they are doing to beat the statistics and ultimately succeed.
1. Preserving family harmony & unity
Poor communication within families is the greatest challenge by far and, if ignored over a long period of time, it can cause a breakdown of trust among family members and often, severe conflict. Once they reach this point, how can family members expect to work together, make decisions and unlock the true potential of their wealth in a united manner? They often don’t, which has a devastating impact, not only on the family’s financial wealth, but the family members themselves. To manage this, successful families have been investing time to improve their communication such as:
- Strengthening their interpersonal relationships by just spending time together and investing or working in areas of common interest. Life is busy and finding time to spend with the broader family can be challenging. Family members need to make this commitment for it to work.
- Understanding their unique family dynamic and how the family communicates. Each person’s communication style is different, so understanding and respecting these differences is key to effective communication.
- Ongoing coaching and mentoring family members as to how they can communicate better with one another and the family. A key aspect of this is learning to respect differences of view in a constructive way. I.e. it’s ok to disagree.
- Conducting family meetings with an independent chair and a clear family agenda to drive better decision making and outcomes.
2. Preparing the next generation for responsibilities of wealth ownership
Failing to prepare inheritors is one of the primary reasons for failure of wealth transfers. If the next generation are not included in decision making, learning about family affairs and undertaking roles of which they are passionate, but also roles that allow them to “practice by doing”, how can we honestly expect them to step up and take over the reins successfully when the time comes?
How then does the family leader eventually step back and pass the legacy to future generations? Handing over exclusive control can be fearful. The next generation are also carrying some fear and anxiety due to the immense responsibility that comes with managing family wealth and passing on the family legacy in better shape than they found it. Shifting the mindset from fear to trust is the first step in building a foundation for transition.
Consider determining what role each family member should play in the governance and decision making of the family to ensure the next generation of leaders can best use their wisdom, yet are given the space, autonomy and empowerment needed to be their best.
It is not necessary to hand over all the keys to the castle at one single point in time, and it’s important the family leader remains involved in the long-term direction of the family in a clearly delineated role.
Research shows that, by defining clear roles for each family member in the present day, but also in the future, alongside the implementation of an engaging education plan, will optimise the family’s chance of success. Each family member should feel empowered and be able to fulfil their personal aspirations. If the family can get this right, they will have won half the battle.
3. Aligning the family around the purpose of their wealth
In recent times, it has become more common for the family leader to share their thoughts on their wealth transition plan and start the discussion around the purpose of their family’s wealth.
Research shows that families that do not have a clear purpose and a plan to activate that purpose, will often lose their way over time and unfortunately, in most of these cases, the family wealth dissipates in a generation or two.
Our experience shows that if families can have alignment around a clear purpose for their wealth that empowers the next generation, they will have a better chance to experience a successful wealth transition. A clear purpose will provide future generations with a great reference as to why the family exists and improves family connection over the long term.
So, what is the purpose of our wealth and why do we exist as a family?
Many families invest much time thinking through these questions and will often undertake a thorough process that can take many years to uncover their purpose and obtain true family alignment around that purpose.
This process normally entails:
- Defining the family values – which once clear will permeate through to the way they invest, work together, contribute to the community.
- Defining the purpose of their wealth which can be financial and non-financial in nature. For example, some elements that may form part of a family’s purpose could include;
- Preserving and/or creating a Family Legacy such as a philanthropic foundation, operating business and/or a unique property like a farm.
- Education which can be formal and informal
- Entrepreneurial opportunities that have social impact
- Sustainability; ensuring the family balance sheet can support the growing family
- Financial support to provide a safety net for lifestyle, housing etc.
- Health & Wellbeing of all family members
- Articulating a family vision with a long term, intergenerational perspective over a 30-50-year horizon.
- Implementing the right governance structure to activate the family’s purpose. This may include a structure for the family on the wealth they choose to manage as a collective but also a structure for individual family members who seek independence but also wish to retain strong ties with the family.
- Defining the role of the family office to support the family. Detailed roles, responsibilities and accountabilities should be defined for family members and family advisors. Creating a role for a family member to simply provide that member with something to do, without the necessary skills, experience or passion, can be detrimental to both the family member and the family assets.
This is only a high-level overview, however once there is clarity and alignment across the family in these key areas, we believe the family can only then implement a wealth transition plan that empowers all family members to unlock their true potential.
About the author:
Jeff Steiner, Head of Family Office, Mutual Trust is one of Australia’s most experienced and respected family advisors. Jeff has spent many years working with successful families and dealing with intergenerational change. He regularly works with the wealth creators and their families in an executive capacity to develop strategies to achieve their goals across all aspects of their wealth, including their family office, businesses, investments, philanthropy and family members. Jeff is an independent board member of various family councils and foundations.