Advisers focus on psychology to help next generation face the ‘burden’ of wealth

Wealthy families increasingly require holistic advisory services from their advisers, but relationship managers must have purposeful training and outside support to provide them.

While wealth can provide financial security, opportunity and freedom, it may also be perceived as a burden, especially when received unexpectedly, such as when inherited at an early age.

Inheritors may experience isolation, paranoia, guilt and shame, which may lead to depression and anxiety, a psychological condition known as ‘sudden wealth syndrome’.

Wealth advisers are increasingly aware of the importance of helping families develop their legacy through careful planning and education programmes, so that younger generations can achieve success. They strive to help them beat the ‘shirtsleeves to shirtsleeves in three generations’ curse, so that they can flourish across multiple generations and benefit wider society too.

With almost $85tn expected to change hands over the next two decades, shifting advisers’ mindsets from managing assets to nurturing relationships also makes business sense for banks.

But this is not an easy feat and requires purposeful training and support from both internal and outside professionals.

Bridging gaps

“The transfer of wealth to the next generation can often happen abruptly and under stressful conditions. For inheritors, the burden of wealth is a very real thing and, mishandled, can be a destructive one,” says Julius Baer International’s CEO David Durlacher.

With due planning, openness and time these transfers can happen smoothly, but it is crucial “to engage with different generations of families as early as possible, particularly where large transfers of wealth are concerned, to ensure that all parties are aware of what is at stake, and what conditions and considerations need to be understood”.

In wealth management, there is growing awareness of the importance of personal relationships, says Mr Durlacher. “We teach our staff adaptability and emotional intelligence and train them to broach sensitive personal topics with clients, should they see cause for concern.”

As the purpose of wealth can often differ across generations, advisers must “use dialogue to bridge those gaps, while letting the next generation stand on its own feet and be wise with their wealth”.

Wealth often comes with major transition, be it death, divorce or sale of a family business, explains Kathryn George, partner at US bank Brown Brothers Harriman, responsible for all non-investment related work with families and business owners.

“The impact of change on people can be overwhelming, especially if combined with grief,” she says. When it comes to sudden wealth, research shows that anxiety comes from “the fear of losing what we have, what we are accustomed to". The youngsters are particularly susceptible to anxiety, she adds. “Issues can be magnified because they do not have the life experiences to manage through change and they don’t have the financial literacy older people have.”

Particularly over the past 10 years, during the Covid-19 pandemic and during the Black Lives Matter movement, there has been “a significant increase in client conversation around next gens feeling guilty about their privilege and wanting to give it all away. They may also be ashamed of their wealth, often trying to hide it, which brings a feeling of isolation.”

Communicating the family’s values very early, before inheritors access the money or even become aware of it, and educating children so they can understand and take pride in the story behind the wealth, can avoid some of the challenges, she adds.

All relationship managers (RMs) at BBH have been trained about the importance of family dynamics by an expert trained in ‘family systems theory’.

When client issues become “beyond their ability to handle it, as untrained psychologists”, the expert is brought to client meetings. The professional may also make referrals, if needed, “be addiction counselling or mental health psychiatrist”.

“It's really important to understand the line of where it's appropriate for us to be engaged in these client conversations, and where you need to get a licensed professional who can help,” says Ms George, adding that all wealth management firms “should be able to refer to outside, trained, licensed resources”.

It is also important to recognise that not all RMs are comfortable holding these conversations, and they may not have “a strong EQ” (emotional quotient).

A team approach to client servicing is therefore vital. RMs can rely on internal resources, including a team of lawyers who can facilitate family meetings, assist clients with estate planning and offer strategic advice.

Giving philanthropy advice, organising initiatives such as “philanthropy days” where families are brought together, are also crucial. “Young children and adult who feel grateful for what they have, are more likely to thrive in their lives, while making the world a better space,” explains Ms George.

Psychologically minded

Helping wealthy families find and fulfil their purpose so that society around them can also flourish is at the core of the philosophy of Jay Hughes, a US-based retired attorney, a leading expert in family wealth consulting.

Mr Hughes has dedicated all his career and his philanthropic efforts to advancing the study of family governance and generational wellbeing. The etymology of wealth – “weol” in old English – means, in fact, “wellbeing”.

Wealth, when received from someone else, is always “a meteor from outer space”, believes Mr Hughes. People burdened with money may suffer from post-traumatic stress disorder, with many inheritors spending their fortune and trying to flee from it, he explains.

Like doctors, lawyers and academics, wealth advisers could play a critical role in society, if they were able to help families grow all their five capitals. These include the spiritual, social, intellectual, and human capital, supported by the financial capital, states Mr Hughes (see below).

Family wealth consulting is something families increasingly demand from their advisers, especially as gen X, inheritors of trillions of wealth, are "psychologically minded", and their children are brought up with psychological thinking, he says.

Advisers may decide to manage a client's financial capital only, which is important and needed, but they ought to be transparent with their client about the service they provide, he warns.

The issue, he says, is that wealth managers often get the best financial education at the best business schools around the world, but do not receive any training about the psychology of money.

In fact, even psychologists receive very little training on how to help clients face money issues, according to his anecdotal research. Yet, “money is the biggest interferer of happiness because no nice person would speak about it”, explains Mr Hughes, referencing Sigmund Freud, the father of psychology.

Today, he says, most wealth management firms are simply managing clients’ financial capital. Only a few firms treat their clients as “souls under management” but are unable to keep up with the increasing number of families requiring this service.

Very few institutions have integrated both systems, and this is where the greatest growth potential lies. Wealth management firms should look for a combination of both ‘quants’ and qualitative advisers keen to work with clients across generations.

The biggest hurdle is the compensation structure at private banks, mainly aimed at pushing advisers to gain new clients.

“Banks should pay advisers differently, and reward bankers who are morally correct and are interested in client retention,” says Mr Hughes, adding this is also what wealthy families desire.

Wealth management firms succeeding in servicing multiple generations are generally partnerships, he notes, as opposed to large, listed firms. “It is critical to have a stake in the business, and a corporate culture and mission focused on the wellbeing of clients,” he adds. These firms succeed because they believe they have a “higher order purpose to grow a flourishing society, and see their everyday actions as aimed at growing the community of which they are part”.

Training advisers

In the US, family wealth consulting has grown significantly over the past two decades, explains Stephen Goldbart, clinical psychologist and co-founder of the Money, Meaning, and Choices Institute (MMCI) in California. He coined the term 'sudden wealth syndrome' in the 1990s.

“It’s now an accepted practice in the US for private banks and family offices to work regularly, collaboratively with family wealth consultants,” he says. Their aim is “to address all questions and issues families have, articulate a set of operating values and come up with an action or strategic plan, which will then drive their financial decision making”.

The institute offers two levels of training. The basic one aims at training advisers sufficiently to understand what it means to include family wealth consulting or coaching within their compendium of services, so it is an offering they can suggest to a client, says Mr Goldbart.

While many firms in the US have reached this level, in much of Europe it is like the US 20 years ago, he states. “My sense is there's a dawning awareness, a lot of anxiety among financial advisers, when it comes to talking about money, family and guilt inside the walls of traditional banking in Europe.”

The more advanced level of training is to help advisers elevate their skills, and learn new ones, “so they can liaise with clients within the confines of what is possible for them and then refer out the most difficult clients”.

While it is “too risky” for advisers to face clients’ very complex psychological issues, they should realise they can help their clients "80 per cent" of the time, because these skills can be learned, adds Joan DiFuria, licensed psychotherapist and co-founder of the MMCI.

They can learn how to assess the individual, their self-esteem, whether they have inherited “a positive money history” from the family or not, their stage of wealth identity and their emotional reaction to it. Also, they need to consider the different impact wealth has on women and male inheritors, and the role of age and culture.

While the industry “has come a long way” over the past 20-25 years, and family wealth consulting will continue to rise because of client demand, there is still a lot to do, says Ms DiFuria. Wealthy parents too often feel helpless, worrying that wealth may impact children's self-esteem, sense of agency and motivation. Successful advisers have great social and people skills, but often tend to overlook the psychological and social impacts of wealth, she says. When offering training to financial advisory firms, “only 10 per cent of advisers get it”.

One reason for optimism is the increasing number of female advisers entering the sector. “When we do the training, women take to it right away. Social communication, asking questions, listening, it may be our genetics, it's kind of in our bones, but women get this, and they love it,” says Ms DiFuria.

Also, learning how to service clients holistically gives advisers a greater sense of purpose, making their work more meaningful.

Unconsciously incompetent

Matt Slavin, London-based clinical psychologist, highlights how his private bankers’ clients are not able to switch off, because of workload and having to look after people's worries and stresses when they are stressed themselves. “That’s hard because they have not had the technical training needed to be able to distance themselves,” he says.

They may struggle with downtime, worrying that if they take time off, which is necessary to recharge their energy levels, they may miss something important about markets or clients.

But trying to help clients not having had the appropriate training can be damaging clients too, says Mr Slavin. “The danger point is when bankers are ‘unconsciously incompetent’ and try to be good mentors. They may be unhelpful or make things worse with clients who need specialist advice,” he explains.

“The best thing is to train advisers, so they have a little bit of training to be ‘consciously incompetent’ to understand when the issue is beyond them,” he states, referencing the first two stages of the 'competence model', with the third and fourth stages being respectively ‘unconscious competence’ and ‘conscious competence’.

Sharing best practices

While considering the psychological impact of money, bankers also focus on the role of technical skills, the importance of building relationships and gaining a broad experience of family issues.

At BNY Wealth, wealthy families and their bankers are supported by a group of in-house wealth strategists, typically lawyers, who facilitate family meetings, share best practices, and help clients with asset structuring and estate planning.

“While there is a psychological element to wealth strategy, the legal side of it plays such an important role that it’s helpful for the adviser to have,” says Belinda Herzig, senior wealth strategist at BNY Wealth. Although they are not always the driver, there are always significant tax and legal implications in legacy planning, she adds.

Wealth advisers typically collaborate with the family lawyer, prepare governing documents, help families draft an agenda for their family meetings, exploring the topics to cover, be it premarital agreements, next gen education, or guiding principles for the family philanthropic foundation.

Discussions may also focus on creating a family constitution, or mission statement, and governance. A typical example is establishing principles to govern a joint asset, such as a legacy cottage or a ranch, across generations.

“Families that have sustained wealth have implemented a strategy to keep connections between generations," she says. Extended families become a sort of an educational group of their own, she explains, whereas a senior generation will act as a resource for the next generation of heritage.

“Working with families in creating governance and doing next gen education is a full-time job. The fun part of our business is the relationships, guiding the next generation and helping them achieve their own level of success.”

Looking at the landscape in Asia, Kotak Mahindra Bank’s president Gautami Gavankar says that over the past several years, the private banking industry has evolved significantly and “the focus has moved from just managing assets to building relationships”.

Only if the private banker and the family work together, the next generation will be prepared and “ready to take on the baton at the right time”, she says. The bank has had an estate planning proposition for two decades, and private bankers engage with multiple generations and help them create structures such as trusts. These are “effective tools” for protecting financial interests and legacy over time.

Wealth managers need to be flexible in their approach, offer tailored service and listen attentively to client’s concerns and objectives, as there is no “one size fits all” solution, believes Jennifer Springett, head of wealth planning UK, Lombard Odier Group.

“The best private bankers are those that take the emotional and psychological impact of money when serving the client, providing both financial and emotional support to a certain degree, even if this is just by acting as a sounding board,” she maintains.

“Sharing anonymised examples of how other clients have tackled a particular challenge or dealt with a situation is often helpful for clients; they feel less alone, and it can also help them identify potential solutions.”