Boutique wealth manager warns of threats to family wealth as next generation inheritors face uncertain future.
Nearly a third (30 per cent) of young heirs to family fortunes speak of “apprehension” regarding their lack of practical experience in organisational leadership. Even more strikingly, 25 per cent actively fear the financial burden attached to their future position, according to a new study by Nedbank Private Wealth.
While the study from the private bank and wealth manager based in the Isle of Man revealed that 69 per cent of young heirs aged 18 to 40 express enthusiasm about assuming leadership roles within the family business, it is the “fear factor” that particularly concerns private bankers.
“The fact of the matter is that the people that are going to be transferring that wealth to you are keeping the business very close to their chest, and they're not letting you have hands-on practical experience,” says Rebecca Cretney, senior investment specialist at Nedbank Private Wealth.
“But what we found is that the more time passes, the more these older generations realise their own mortality and actually think: ‘I'm going to have to involve this person at some point.’ But by that stage, it might be a little bit too late,” she warns.
Indeed, the concerns at the world’s largest wealth managers mirror those at boutiques such as Nedbank. While the vast majority — 98 per cent — of young investors interviewed by UBS say they feel prepared to manage their family’s wealth, the stark reality is that by the third generation, only 10 per cent of this wealth remains intact. This presents a major problem for both banks and their family clients, admits Ms Cretney.
“Studies have been repeatedly made for generations on what decimates wealth and why wealth transfers are unsuccessful,” she points out. “But regardless of which country we're looking at and which generation we're looking at, repeatedly, time after time, we are looking at the wrong monsters in the coverage.”
The real “monsters” she believes, are not external factors such as government policies or economic conditions, but internal issues of poor communication, lack of trust and inadequate preparation within family businesses.
Families that “work together and stick together” can grow far more than those that do not, she says, adding that it’s essential to create an “environment of communication” where young heirs can participate in managing their family wealth.
Philanthropic lens
Today’s private banks typically see philanthropy as a major device to help involve the next generation. Yet according to the Nedbank survey, 57 per cent of millennials with wealth exceeding £25m ($31m) say their family has no philanthropic lens.
“People don’t tend to realise philanthropy can benefit them,” says Miss Cretney, adding that “it creates a more level playing field” for families seeking to manage their wealth transition more effectively.
She illustrates this with a compelling analogy. “Imagine you're a lion providing for your cubs. An esteemed economist, once noted that while a lion can easily pass down prey to its young, it's far harder to pass down its hunting skills or claws,” she recalls. “The lion may regularly bring gazelles for the cubs to feast on, but what happens when the lion is gone? Eventually, the gazelle is eaten, the older lion dies, and the cubs are left with nothing.” Similarly, she believes, wealth alone is not enough. Philanthropy, like teaching the cubs to hunt, ensures a more sustainable, equitable foundation for future generations.
Philanthropy, she says, helps educate younger generations, enhances financial literacy, provides board or trustee experience, and instils values and responsibilities. It also helps insulate families against the type of inertia common to many younger family members.
“Protecting against ‘affluenza’ and teaching younger generations about the real world is something that millennials and below are already really quite interested in,” she says.
Private banking advisers are often not playing a significant enough role in preparing for wealth transfers, says Miss Cretney. “It's our fault. It's the adviser's fault,” she says.
“If I have a client that comes to me and asks me what the effect of my wealth is going to be if Trump or Harris wins the next general election, I'm going to answer that question, but I'm not going to tell them that they’re looking in the wrong place,” she explains.
The risk of a rogue candidate winning a presidential election, she suggests, can be dwarfed by the vast amount a family stands to lose if they fail to bring their children into the conversation or, prevent them from participating in the family’s broader wealth generation and management responsibilities.
