How to introduce the next generation to the family wealth

When is the appropriate time to initiate discussions with children about financial matters and to incorporate effective methods into the management of family wealth?

George Lyall, Client Services Director with Traditum discusses how to foster a sense of values and responsibility for the next generation and offers expert guidance for high-net-worth families.

1. Start young

To ensure your children are well-prepared for financial responsibilities, it’s advisable to introduce them to the concepts of money and budgeting at an early age. Typically, younger children possess minimal, if any, understanding of the family’s financial status. The appropriate timing and extent of their involvement in financial discussions should be carefully considered, taking into account their level of maturity and your openness as parents. Generally, it’s recommended to begin this educational process during their early years for optimal understanding and awareness.

2. Let them learn about investing

To facilitate the financial education of your children, it’s beneficial to engage them in practical investment experiences. For those with children in secondary school, consider assigning them the task of managing a hypothetical investment portfolio. Provide them with a scenario where they select a diverse range of stocks, totalling a notional value of £1,000, and then track the performance of these investments over time. Their objective would be to enhance the portfolio’s value through strategic choices.

In the event of their success in increasing the portfolio’s value, you could offer two options: either they can use the ‘profits’ for personal expenditures (in which case, you will need to provide the equivalent amount in actual funds), or they can reinvest these gains into additional shares. This exercise serves as a practical demonstration of the effects of market dynamics, as well as the principles of compound interest and earnings growth.

To further engage and motivate them, you might propose a friendly competition among siblings, fostering a spirit of healthy competition and collaborative learning in the realm of investment.

3. Encourage them to become observers

To effectively integrate the younger generation into the family’s financial and philanthropic endeavours, it’s advisable to progressively involve them in various aspects of these activities. Initially, this can be facilitated by allowing them to observe meetings with your financial advisors, providing them with direct exposure to the decision-making processes. Participation in the management of the family’s charitable trust offers an excellent starting point. This involvement not only imparts practical knowledge about the operational intricacies of the trust but also conveys the foundational values of the preceding generations who established it.

Over time, their engagement can be expanded. They may assume roles as ‘ambassadors’ for the trust, gradually taking on greater responsibilities, and eventually, they might be prepared to serve as trustees. Given that charitable trusts typically enjoy tax-exempt status, this environment offers a safe learning space where the consequences of any potential errors are minimised, particularly in terms of tax implications. As their proficiency and understanding deepen, they should be encouraged to participate in broader business discussions, further enhancing their experience and preparation for future leadership roles.

4. Educate them on family finances

It’s advisable to contemplate the organisation of a workshop, facilitated by your experienced advisors, to clarify the intricacies of family trust funds, investment companies, and the operational mechanisms of the family business. This session should also aim to clearly delineate any existing rules, restrictions, and regulatory considerations.

The primary objective of this initiative is twofold: it serves as an educational platform to impart business knowledge to the younger family members and simultaneously dispels any prevalent misunderstandings. An example of such a misconception is the belief held by some offspring that they are automatically entitled to assume control of the family business, a prospect that may not be feasible due to factors such as trust structures or the presence of external shareholders. By providing this education, the workshop helps in setting realistic expectations fostering a more harmonious and understanding family dynamic.

5. Have a family charter

Implementing a family charter or constitution is an effective method for educating children about the foundational principles governing the family’s operations. This document typically outlines the family’s core values, long-term aspirations, and the responsibilities of its members. It often includes specific guidelines regarding philanthropic endeavours, delineating the types of charities the family supports. Additionally, it may detail the family’s investment strategies and articulate policies concerning the remuneration of active participants in the family business, as well as provisions for passive shareholders.

Such a charter plays a crucial role in setting clear expectations and understanding within the family. By clarifying the basis on which decisions are made, it aids in pre-empting potential disappointments and mitigating future disputes. This approach ensures that all family members are aligned with the collective vision and understand their roles within the family’s framework, thereby promoting more cohesive and harmonious family relations.

6. Make them earn their position

When planning for the next generation’s involvement in the family business, it’s essential to ensure that their roles are assigned based on merit, contributing to their ability to earn the respect of the workforce. Assigning significant titles without corresponding achievements can foster a sense of entitlement and is generally considered poor business practice. To cultivate a culture of meritocracy and competency, many families adopt a policy requiring their children to gain external experience before joining the family enterprise.

For instance, I am aware of two independent department stores that implemented a unique strategy to achieve this objective. They established a mutual arrangement where their respective offspring would undergo training at the other’s store. Such experiences are invaluable as they equip the young members with diverse skills, perspectives, and a deeper understanding of the industry, independent of their family’s influence. The primary goal of these initiatives is to prepare the children not just to join the company, but to become constructive, skilled, and active contributors to its growth and success.

7. Don’t be too generous

In the context of managing a family trust fund, it’s prudent to consider providing the younger generation with a modest allowance while imposing restrictions on their access to the principal capital, particularly during their teenage years. This approach is aimed at allowing them to develop a mature and responsible attitude towards financial management. It is crucial to set realistic expectations for them regarding the family’s wealth and its future distribution.

Regardless of the family’s current wealth status, the reality of inheritance must be clearly communicated. When considering factors such as inheritance tax and the division of assets among multiple children, it becomes evident that each child is likely to inherit only a portion of the total estate. Consequently, while they may lead comfortable lives, they might not attain the same level of wealth as their parents without their own financial endeavours.

To maintain or surpass the lifestyle they are accustomed to, it is vital to encourage these young individuals to actively pursue their own professional and financial goals. By doing so, they can contribute to their own financial success and not solely rely on the family’s wealth. This strategy not only fosters financial independence but also instils a sense of personal achievement and responsibility in managing their financial futures.

8. Instil a sense of responsibility

Educating children about money management is essential, but it is equally important to ensure they develop into healthy, happy individuals with a robust sense of personal values. Emphasise to them that possessing wealth is a privilege that comes with significant responsibility. Instilling this understanding helps them appreciate the broader impact of financial resources.

Encouraging children to contribute back to society is a crucial aspect of their development. This can be achieved through their active participation in philanthropic activities or through personal volunteering efforts. Such experiences not only enhance their awareness of the world around them but also foster a sense of empathy and social responsibility.

This approach aims to cultivate a well-rounded perspective in children, where they recognise the value of money not just as a means for personal gain, but as a tool for positive societal impact. In doing so, they are more likely to grow into grounded and balanced individuals who understand the importance of using their privileges for the greater good.