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This article was updated by Rashida Arsiwalla on 12 March 2018.
Many countries have unique ways of describing the loss of family wealth.
In Asia, we speak of going “from rice paddies to rice paddies” in three generations. In the US, they call it going “from shirtsleeves to shirtsleeves,” and the European expression goes: “from clogs to clogs” in three generations.
It’s easy to see why such expressions abound regardless of country or culture. According to a study by the Williams Group wealth consultancy, wealthy families across continents lose about 70% of their wealth by the second generation, and a stunning 90% by the third.
Why does this happen?
According to RBC Wealth Management’s APAC Wealth Transfer Report 2017, only 31% of the wealthy families interviewed said they have a proper wealth transfer plan in place. The report outlined a few reasons for this.
Wealthy families are able to acquire assets internationally, being no longer restricted by geography in an increasingly global world. This means such assets are bound by international regulatory jurisdictions, making it harder to plan for their transfer due to a lack of knowledge about the legalities. In an interview with the Singapore business Review (SBR), RBC’s head of wealth management for Southeast Asia Gea Hong Tho said, “Many are delaying putting in place a proper plan as it is not as straightforward and they do not have precedent knowledge on how to structure it.”
For some others, the problem of ineffective wealth transfer arises from cultural differences. Many high net worth individuals (HNWI) prefer to send their children overseas for studies, often to western nations. This leads the young to imbibe western values and ways of thinking. This difference in mindset can often be a hindrance in wealth planning because the subject requires open communication between parents and their kids, but conflicting values can often be a roadblock.
Often, people who have gone through the proverbial rags-to-riches path are highly motivated and even obsessive when it comes to accumulating and preserving wealth.
Lacking that drive, their children are usually better at spending than accumulating money. In fact, there are plenty of examples of young Asians who not only live the good life, but also document it on social media.
This is because the offspring of the super wealthy grow up in a privileged environment; they don’t understand the amount of hard work that goes into accumulating wealth. According to Tim Voorhees, a tax lawyer from WealthCounsel, “Heirs given money typically have a strong inclination toward spending the money on possessions, pleasures, or other purposes without lasting significance.”
On the flip side, sometimes such lack of knowledge is the result of the parents’ decision to hide their wealth from the kids. Their reason for doing so if often altruistic; they worry that if their children know how rich they are, they will grow up entitled and not understand the value of working hard.
Unfortunately, when kids suddenly receive significant amounts of money without any prior knowledge of how to handle it, they might not take the time or initiative to understand the values that helped accumulate the sum of the inheritance and may be inclined to spend it.
There are two main things that families can do to keep from losing their wealth: plan and educate.
Planning for the transfer of wealth from one generation to the next may seem daunting. However, for families with large fortunes to safeguard, this is essential. A multi-family office (MFO) can often help in such a situation. Depending on the family’s needs, the MFO can suggest a course of action. For instance, it could help the family set up a trust that can protect its assets on behalf of its beneficiary.
Education is another important aspect of wealth preservation. This is also something MFOs can help with. With proper planning, the MFO can advise families on the best methods of engaging the next generation in matters of wealth management. It can even work with the latter directly, having conversations with them around different types of assets, what they entail and how they can be managed. Such engagement gives the heirs hands-on experience with what to expect eventually, when they need to take over the reins.
Thus, with some careful planning and communication, families can ensure the sustainability of their wealth across future generations.