Warren Buffett once told Fortune magazine that when it came to passing on wealth to his adult children, he wanted to give them “enough money so that they would feel they could do anything, but not so much that they could do nothing.”
Indeed, many of the clients that Tom McCullough advises aim to strike a similar balance.
“The issue with large amounts of money is they can derail people, and this worries parents we work with,” says McCullough, chairman and chief executive officer of Northwood Family Office in Toronto. He is also the author of Wealth of Wisdom: The Top 50 Questions Wealthy Families Ask, in which experts offer advice to the next generation on being good stewards of wealth.
Although the primary charge of family offices is managing wealthy families’ vast assets and related administrative tasks, an increasingly important duty is educating the next generation.
It’s not just about improving their financial literacy. Family offices also prepare young adult children to lead the family businesses, become engaged philanthropists and, more broadly, develop a strong sense of responsibility regarding wealth.
“It’s an extremely important role,” he adds.
Parents have good reason to be concerned. The foremost study on wealth transfers among generations of wealthy families – a 25-year survey by the Williams Group of more than 3,200 families, published in 2002 – found that 70 per cent of wealth transitions from the first to second generation failed, as defined by an involuntary loss of control of the assets.
What’s more, the study showed that the cause was a breakdown of communication and trust among family in 60 per cent of cases, while the inadequate preparation of heirs was the culprit in 25 per cent.
A new role for family offices
The two are connected, says Patrick O’Connor, president of Blackwood Family Enterprise Services in Winnipeg. “Communication and financial education go hand-in-hand … and the sooner parents start with their kids, the better.”
While family offices are being called on more often to help, this role is relatively new. Some larger family offices handle the task in-house, he says, but many contract out these duties to specialists that include Blackwood. The firm is among a handful in Canada specializing in managing the dynamics of wealthy families.
Communication and financial education go hand-in-hand … and the sooner parents start with their kids, the better.Patrick O’Connor, Blackwood Family Enterprise Services
Blackwood also helps families establish a robust dialogue between parents and children about the family fortune. That’s critical to educating children because parents are the primary role models, he notes. The creation of family councils allows parents and adult children, usually as they enter their late teens, to discuss family values regarding wealth, including philanthropy, he explains.
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Steve Legler, a Montreal-based facilitator for high-net-worth families, says the notion of family offices educating children and, more broadly, managing the psychology of wealth is more common in the United States, where the pool of ultra-rich families is larger.
Yet even there, it’s quite new.
“It was only about 10 years ago where the family offices got religion on this,” says Legler, who is a consultant who provides financial literacy and facilitation services for families often via referral from family offices.
A service in-house or outsourced
Many family offices struggle to provide in-house services because the cost does not fit neatly into the compensation model of fees charged as a percentage of assets under management, he says. “It’s really the highest-touch service, and that can be costly.”
Some family offices cover basic consultation with his practice, but if families want more they can pay for his services directly. His work involves more than teaching young adult children to read financial reports; he also enables them to “come to the shareholders meeting and ask intelligent questions.”
Somewhat ironically, he often teaches them the business basics that their parents learned while building their fortune – budgeting, applying for a mortgage and pursuing a career. The children often did not have to learn these things because of the family wealth.
Parents’ concerns go beyond whether their children are squandering wealth on lavish lifestyles, Legler notes. They also worry their children could overspend on political or social causes. “Their kids are increasingly looking at fixing and saving the world,” he says.
The issue with large amounts of money is they can derail people, and this worries parents we work with.Tom McCullough, Northwood Family Office
Children donating to worthy causes is indeed desirable for most parents. But an adult child putting significant sums behind fringe movements or religious groups is another.
Yet instilling sensible values takes time. “‘Incremental’ is a word I use a lot,” Legler says. “That’s because teaching kids to understand responsibility of wealth involves many small steps over several years.”
As such, planning to prepare the heirs can be as involved as planning to preserve and grow the assets, which is the primary role of most family offices.
Even then, sometimes problems arise as parents plan for the family instead of planning with them, Mr. O’Connor says. Parents set up trusts to protect adult children from misspending the wealth, but they sometimes do that without first talking to the children.
The result is that they “can create an over-burdensome structure,” Legler adds. And then elder children, for example, find themselves in charge of administering trusts for younger adult siblings after the parents have died.
Confidential advisory services
“That’s not a fun position to be in,” he says, adding that it can lead to family strife. “I encourage parents to figure it out with the kids as much as possible … and then go to the lawyers.”
Advisors can also help adult children gain financial independence by providing them with confidential advisory services, he adds. “Sometimes, that starts with opening a TFSA account, teaching them how to invest for the long term.”
In other cases, it’s coaching them about the family businesses, should they want to pursue those opportunities.
The services offered to families are diverse, from mentoring opportunities with financial experts on behavioural finance and venture capital to connecting families to mental health and addiction services, McCullough says.
“We’re not trying to take on the role of parents, but because of the experience we have working with so many families that are blessed – or cursed – with money, we have a lot of knowledge for them to lean on.”