Sudden Wealth and the Next Gen

With great wealth comes great responsibility. When that wealth comes suddenly and quickly, often referred to as “sudden wealth”, there is a need to be thoughtful when making decisions about preservation and management.
 

While many people dream of winning the lottery, getting a large inheritance, selling a successful business, or otherwise having their “ship come in,” the reality is that sudden wealth often leads to guilt, stress, isolation, depression, and fear of the unfamiliar territory. Individuals often end up managing conflicting emotions as they face important questions about their future, their family and their legacy.

The “next gen”, in particular, appear to have different goals and aspirations than their forebearers. Alongside the stress associated with their new financial position, individuals are forced to make complex financial, tax and legal decisions that they may not feel equipped to handle.

Does the industry facilitate the need to be responsible or amplify the feeling of being disempowered? How should the next gen be included early in the discussions?

The challenge for the advisors is to come up with a strategy that embraces the values and priorities of the client, making them aware of signs of abuse/ exploitation, whilst also preparing them for their new “world of wealth”.

Sudden Wealth

Sudden wealth syndrome isn’t a new phenomenon. There is often a psychological fear about passing on inherited family wealth. There is often a reluctance by many families to pass on wealth down through the generations because they believe that younger people are more  vulnerable, or even ‘reckless’ when protecting wealth that a family has accumulated over decades. Being notified of a large inheritance can be a positive life-changing event or the beginning of an administrative and tax nightmare. While selling a business can open up insecurities an entrepreneur never knew they had, it can quickly become a stressful time when exiting with a large pay out.

Responsibility of Wealth

Wealth often comes with huge responsibility and a sense of purpose.

1. Assemble a team
The first step in handling sudden wealth, as well as preventing mismanagement of the funds is to simply admit that, more than likely, the individuals “don’t know what they don’t know.” A dream team of professionals with a lead advisor to provide critical guidance and support, helping individuals make informed decisions about their future with greater confidence and clarity is needed. This step is arguably the most important “to do”. The team should include, at minimum, a legal advisor, an accountant and a financial advisor. Often there will be a learning curve which will, over time, change the balance between client and advisor. Wealth can arrive at times of, or can cause heightened emotion and advisors need to be mindful of this when helping a client navigate the situation. 

2. Education is key – learn about the wealth
When individuals first acquire their wealth, they should be encouraged to learn all they can about the what they have acquired. It is not unusual to see clients starting from a low level of financial awareness and a considerable learning curve in financial sophistication is required.

Often individuals will misunderstand how much wealth there really is; financial forecasting can assist with showing how much or little money there actually is. Sometimes wealth is not necessarily life changing, but rather life enhancing. Not only do they need to educate themselves, but consider the importance of investments, capital preservation, and philanthropic responsibilities.

Crucially, it is becoming clear that for the intergenerational transfer of wealth (and with it, the transfer of control) to be successful, advisers need to spend as much time preparing the next generation to receive the family wealth.

The advisers must handle any transition carefully and sensitively to ensure continuity and satisfaction amongst a new generation of clients who will have different aspirations, priorities and expectations of their adviser than their parents.

The old saying “shirtsleeves to shirtsleeves in three generations”  frequently sees wealth created by one generation and lost by the third. One of the main causes for this is family members who are ill-prepared to take on the responsibility which comes with wealth. It is becoming apparent that millennials and generation Z’s have different expectations, aspirations, and priorities to their forebears. They are more technologically focused and often less risk averse than their parents and grandparents, with diverse priorities and interests which include cryptocurrency, AI, and digitalisation. The next generation are also increasingly concerned by the ESG agenda, motivated not just by huge returns and reward, but by climate change, philanthropy and sustainability. By allowing the next generation to become involved in not only the creation of wealth but protection and preservation will help those individuals grow into the wealth owner and protector.

3. Clarify goals and aspirations
The natural instinct is to react right away when an individual  suddenly inherits, however, the best course of action is to take some time to let it all sink in and do nothing. Thought needs to be given to short-term goals and long-term goals. This includes, what type of lifestyle do they want, how long do the funds need to last, what do they want their legacy to be.

4. Create a long-term plan
A solid plan needs to be put into place. One of the pieces of understanding the responsibility of wealth is responsibility to be organised. This needs to include ensuring wills are updated, lasting powers of attorney are in place and that any succession planning is being considered.

Conclusion

There’s no question that a sudden wealth event will change the lives
of individuals. However, if they are equipped with an experienced, objective team of professionals and prepare themselves for the financial, social, and emotional road ahead they will be well positioned to use their wealth to make a difference for future generations. When managed well, conversations about wealth can facilitate its passing from one generation to another while strengthening family ties. Finding the right advisory team and lead advisor for the client is key, but must be done sensitively; wealth can be deeply personal.

This article was first published in ThoughtLeaders4 Private Client Magazine Issue 12 - Next Gen Wealth Edition