Any wealthy family is likely to confess that wealth provides a unique opportunity for a child to receive the ‘best education that money can buy’. In fact, most families I speak to prioritise the education of their children above all else.
Whilst the value of a good education is appreciated, why is it so difficult to talk about wealth and to extend the education to the subject of family wealth itself?
Asian families are clearly wrestling with the issue
I was presenting at a family office conference in Hangzhou China last year with a friend and client who happens to be a third generation member of an ultra high net wealth family. During the Q&A session, my friend was ambushed with the following questions from the audience (largely comprising family wealth holders):
- When did you first learn you were rich?
- When did you first let your children know they are rich?
- What advice do you have?
The whole audience leaned forward with concentrated stares, listening and anticipating the responses with a sense of fascination. I sat in quiet amazement, realizing that the questions they were wrestling with were a form of taboo in all family conversations.
Let’s first start with some public research which evidences the challenges facing families when it comes to discussing wealth:
- Only a third of parents worth more than $20 million discussed wealth with their kids before they turned 21
- Very few believe children should know about family wealth before the age of 25
- Half believe children should be told between the age of 25 and 34
- One-fifth believe they should wait until they are at least 40
- 77% confess to being dishonest about money related matters
In summary, most families delay talking about wealth and the majority are dishonest when it comes to talking about wealth. But why?
Before tackling this question, I turned to some research amongst my own networks and conducted a series of multi-faceted interviews of some 20 ultra high net wealth families in the Australasian region (wealth ranged from tens of millions to billionaires). I interviewed patriarchs, matriarchs, their children, those who ran family offices, executives in family businesses and their trusted advisors. The families ranged from first generation entrepreneurs, to families preserving businesses now in their fifth generation of family ownership, to passive portfolio wealth holders.
And I concluded that there is no doubt that families have great difficulty in discussing family wealth.
I have compiled my top 5 reasons (in no particular order):
Reason No 1 – Families fear that their children will develop a sense of entitlement to the wealth and lose ambition in life. It’s what drives Warren Buffet’s philosophy that he wants to leave his children enough to do something with their lives, but not so much they choose to do nothing.
Reason No 2 – They fear their children will develop a sense of superiority that will harm relationships with their peers. Do you really want your children being viewed as ‘spoilt little rich kids by their peers?’
Reason No 3 – They fear their children will become spendthrifts and blow the family fortune. It’s the old proverb that wealth can’t survive the third generation.
Reason No 4 – They are trying to protect their children from the burden and responsibility that wealth brings. I think of the story of a lottery winner whose parents became kidnap and ransom victims.
Reason No 5 – Families avoid direct conversations to preserve family harmony. Yes, families will ignore the difficult conversations for the sake of peace!
My interviews were a treasure trove of priceless quotes, confessions, ideas, questions and even some pontificating. As I sorted through my research material I failed to identify any consistent patterns or rhythms. My conclusion is simple: each family is unique, each individual is even more unique and every circumstance requires a unique approach.
That being said, here are my top 10 tips, again in no order. I qualify the production of such a list with the advice that they serve as a guide to the education of your children and the development of your own strategy:
Tip 1: All Conversations Should Evolve
Conversations should evolve according to age, maturity and family dynamics. Mum and dad going through a divorce with children in their teens will be a very different discussion. The child who is a dancer will require a different conversation than the child studying accountancy.
I quote a wealth inheritor, “if you don’t talk about wealth, it can become a big shock. The discussion should evolve, so children can learn. That way, when the full extent of wealth is revealed, it’s not a big deal”.
I also quote a father dealing with children ranging from mid teens to their early twenties, “children are all about immediacy. “I want a new car, I want money for a holiday”. They just aren’t thinking long term yet”
And I quote a matriarch on her ultimate fear, “I observe rich friends whose children are waiting for them to die”.
Tip 2: Observe the Children’s ledgers
Children keep ledgers in their minds. Financial and non-financial.
Anyone with siblings will be able to recall, instantly, perceived favouritism by the parents towards a brother or sister. Even 50 years later!
I quote a middle child (one of seven children), “if you have favouritism, it breeds disunity. And if you cover it up, and it is later discovered without a process to even it up, it is a death wish”.
I absolutely recommend transparency when it comes to major gifts and loans to children, preferably via formal accounting ledger records. Children will have an awareness of “who got what and when” and if your estate plan does not include a process to equalise the financial ledgers, you are unduly exposing your estate to a legal challenge.
Tip 3: If you have a well-known name in your community, the conversation MUST start sooner
A young father, with a famous name, said to me “my seven year old arrived home from primary school frustrated that he couldn’t explain to his friends why his family was famous”. The fact is the family is famous because they are so rich.
A third generation family member (part of a very successful business family) confessed he found it much harder growing up. His friends would always say “it’s easy for you, you have nothing to worry about because you are rich”. He grew up thinking he would have to find a cure for cancer to be treated seriously by his peers.
The point I make here is it is much harder for “rich” children to build meaningful and trusted relationships in life and this starts from a very young age. Sure, everyone will want to be their friend, but for the wrong reasons.
Tip 4: Start conversations around family history
Any education should encompass passing on your values to your children.
So, start the conversation around important elements of family history which help to give value to the wealth and the pride you have in the family name and reputation in the community. If there is a business, take them for a visit to the factory, introduce them to staff as Mr Jones and Mrs Smith, to show you have respect for everyone. Point out real estate that you own, how you came to acquire it and the struggles when interest rates were high that almost forced you to sell.
My message here is simple: Talk about family values before you talk about family wealth.
But not all agreed as I quote a patriarch who grew up with wealth:
“Communicating your vision/philosophy is a double edged sword… yes, it helps children to value the wealth, but it can also be too much pressure. They might drop out feeling they can never live up to your expectations”.
My personal view is that, just like a good business leader will articulate a vision for the future, the family patriarch or matriarch should articulate their vision for the future of the family. This vision is often encapsulated, formally, in a family charter document.
Tip 5: Keep it low key
Children learn from your behaviour.
I quote Albert Schweitzer:
“Example is not the main thing in influencing others. It is the only thing”
Most of my families referred to the negative impact that an “over the top, ostentatious lifestyle” may have on the next generation (sometimes referring to themselves).
One person said:
I under indulge the children so they don’t get a sense of entitlement
One of the very wealthiest family members said:
My parents were paranoid about spoiling us. They wanted to stamp out any sense of entitlement or superiority.
This last quotation is significant. Think about the negative impact on your child’s ability to build meaningful relationships with their peers, if those same peers perceive them to be arrogant by way of the attitude of superiority.
Tip 6: Self esteem is more important than money
One of my very favourite quotes from a very wise patriarch was:
“Wealth is secondary to self esteem. You will do more damage destroying a person’s self esteem than by destroying their wealth”.
I couldn’t agree more with these sentiments. Wealthy families are at an advantage when it comes to applying wealth strategically, not only for education, but as a foundation for helping children to achieve something meaningful in life. So, a conversation about family wealth could be strategically directed into conversations about it can help children to “climb their own mountains” and develop self-esteem along the way.
Tip 7: Wealth predominantly tied up in the business makes a big difference to the conversation
I was often referred to stories along these lines (this story quotes a matriarch who inherited significant wealth): “When I was growing up, there was never any discussion about wealth. Rather, I recall stress at the dinner table when mum and dad were talking about troubles in the business. The whole of the wealth was the business and we never saw any money. If there ever was a trace of money, it was reinvested back into the business”.
Wealth in a business is illiquid and subject to volatility. There is no comparing a business worth $100 Million to an equivalent investment portfolio of stocks and bonds.
Wealth in a business can also be much harder to hide. Children can Google information about businesses and form their own conclusions about family wealth (which might be grossly incorrect).
When a business is central to the wealth, issues of succession in the business and grooming the next entrepreneur in the family to take over, come to the forefront of conversations.
Consider complex estate planning goals as well. Take the example of a son being groomed to take over and steward the business for future generations. Is it fair to equalise this value with other children?
Maybe. Maybe not.
What would you prefer?
1. To gain control of the family business which was last valued at $100 million and which employs 500 people, carries debt, is highly illiquid and needs you to work an 80 hour week (and has an expectation of surviving for another three generations); or
2. Take a cheque for $50 million?
At a conference last month, 90% of an audience of 80 voted for option 2.
My advice is simple, engage in conversations that will have the outcome of keeping differences off the children’s ledger cards. A transparent conversation about succession of business assets, explaining why an equal financial split might not achieve equity, an understanding of what you consider to be fair ‘rules’, will help alleviate a family dispute that will, in turn, destroy wealth, and maybe the family itself.
Interestingly, all families I interviewed recommended that children pursue outside education and training before coming into the family business “to develop their own abilities and discover their own talents which they can then bring back into the business”.
As a very successful entrepreneur quoted (who runs a global business):
“I stuffed up by bringing my son into the business too early. He resisted me all along and I ended up having to fire him or else I would have lost the respect of my management team”.
That same client confesses his son rejoined the business a decade later and has earned the respect of everyone in the business (bringing in new skills that he acquired in outside roles).
There is a common lesson here: Children resist being taught by their parents!
So, my view is to let your children learn from cuts and bruises inflected by non-family bosses. Just like they do when they are coached to play on the soccer field (it’s OK for the coach to yell at your child from the sidelines, but it’s not quite OK for you). Family harmony is far better preserved!
Tip 8: It is different for women
All wealthy women I interviewed talked about difficulties in their marriages because their husbands felt some-how inferior.
A Chinese-Australian lady told me she was continually told by her parents she would get nothing because “she must live off her husband”. She confessed to me that she grew up worrying about finding a husband capable of supporting her, otherwise she would be penniless.
Many Asian families still believe that wealth should not flow to girls because when they marry, they become part of another family and money should “stay with the family name”.
These Asian themes are synonymous with past Western culture (recall the primogenitor system where the eldest son inherited all). Sadly, it is more and more likely that these issues will be played out under the rules of Family Law Courts, not in accordance with the rules or wishes of the parents.
My personal view is that it is harder for wealthy women to find love and enjoy happy relationships. I therefore encourage open conversation with daughters so they know they need special safeguards and protection, but most importantly, that it is normal and that they will talk about it openly and seek help.
Tip 9: Philanthropy is a great aid to education
Most people confess a desire for their children to be grounded and to recognise that they are fortunate, not superior, to have wealth.
An introduction to philanthropy, whether it be via a family foundation, or otherwise, can be a great way for children to recognise how privileged they are and how wealth can be used to better humanity and society. Volunteering by parents can also set a great example for children to follow.
A family foundation, in particular, has great benefits in teaching children about managing portfolio wealth. They learn, with the aid of investment professionals, about maintaining a diverse portfolio, due diligence, liquidity, risk, volatility and process. They learn to become a member of a Board. Being continually “hit up for money” they also learn how to say “no” through processes of due diligence, strategy and formality in bequest programs. All of these skills can be transferred to other aspects in life. Think of friends wanting financial support, being approached to invest in the latest business at a cocktail party. Children will develop tools and understanding to say “no” through process, rather than “yes” through pressure and guilt.
I quote more than one person:
The family foundation continues to be one of my greatest sources of pride.
Tip 10: Give children some responsibilities that promote learning.
I actually learnt about my family wealth when I completed my training as a Chartered Accountant. My father thought he could save money and said “here, you can do the family tax returns”. I certainly learnt about the family wealth and it was in a structured and process driven way. A positive experience in my view.
Several clients encouraged giving children a small portfolio to manage themselves, but only after they have demonstrated suitable maturity, and as one matriarch stated, “only after they have graduated and completed their first full year of work”.
Offering board positions (after requisite training) is a great way to educate your children about structure and process. They learn to listen to other people’s views and when they see the respect that outsiders have for their parents, that can enhance the child’s respect for you.
My personal and strong view is in favour of transparency (evolving and tailored to the circumstances of each child). For without transparency, you cannot build the structures and process to protect wealth. And it will ultimately be the structures that protect the family from the wealth!
I can’t sum it up any better than this third generation patriarch:
For a well balanced child, the revelation of wealth should have no impact.