March 26, 2016; Minneapolis Star-Tribune
The grandchildren of our most affluent families are not likely to experience their riches.
According to a recent article by Philanthropy Roundtable, the vast majority of America’s most affluent families deplete their inheritances within just three generations of their fortunes being accumulated. Only 20 percent of U.S. families will pass this mark with the hope of creating lasting impact for their families and society. This has led many families and experts to question what creates lasting financial success.
Charles Collier, author of Wealth in Families, and former senior philanthropic advisor at Harvard University, is nationally recognized for his work in this area. In an interview back in 2005, Collier said he believed wealth could be defined in four dimensions: human, intellectual, social and financial. His work pushed families to connect to all four of these areas while connecting to the human dynamics of the family and the role of philanthropy.
The first step toward implementation of this work is to simply allocate time. Philanthropy Roundtable suggests giving thought and effort to prepare children and grandchildren to become good stewards of the dollars they will be entrusted in the same way that time is spent overseeing the dollars with investment firms.
This perhaps is easier suggested then implemented. Collier shared in his interview that he believed the biggest hurdle for families to overcome is that most households across the U.S. do not naturally have conversations with their children about finances. One of the first challenges families will face is basic communication and secrecy. The firm, conducting a 20-year study tracking 3,200 high-net worth families, shared with Forbes that failures among the group were not due to complex legal and finance rules around estates. Family dynamics, lack of trust, and poor communication were the core reasons that intergenerational wealth transfer failed for 70 percent of the families studied.
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Research suggests that there are two key ways to begin to address these barriers. First, Collier suggests setting regular, scheduled family meetings—as often as weekly when they involve young children, or grandchildren. The overarching goal for this new time together is to set aside the questions of “how” and focus on the questions of “why.” Discussions should be kept brief, with possible topics including compliments tied to the family’s core values, allowances, giving, and chores. Collier recommends ending each meeting with a fun activity to keep the children looking forward to the next one.
As the family ages, the meetings can transition into annual gatherings. Agendas would more likely include conversations centered on the family’s vision and goals for the future, new estate planning information, financial education and family philanthropy.
The second tool that will help lower communication barriers and increase the likelihood of financial success is not likely surprising to our readers: installing a sense of philanthropic purpose through active family involvement in the community through charitable activity. Philanthropy as a vehicle can teach a variety of lessons, including how to become responsible citizens and to see that there is something “important to do beyond ourselves.”
By adding simple charitable activities to the meeting agenda, the family naturally adds the family’s values and beliefs to the discussion. It creates the feeling of value and self-worth among members and promotes communication that can lead to other conversations about investment and finance. Roy Williams, president and founder of The Williams Group, told Forbes that philanthropy can be a great way to promote values, teach responsibility, and involve children in family decisions, especially if children are allowed to be active in giving to others and following-up with charities. He said that philanthropic work “fosters family values and can lead to better financial stewardship over the long term.”
As the U.S. enters what is predicted to be a thirty-five-year period of trillions of dollars passing from the Eisenhower generation and baby-boomers to their heirs, this is a key time for a wide-range of U.S. families to begin to have this conversation. Experts predict that unless there is a dramatic shift, these dollars will end up depleted within just three generations. The Forbes report shared that “the most common reason financial stewardship fails is a breakdown of communication among family members (60 percent of cases). Other reasons include heirs being unprepared to manage money (25 percent) and the lack of an agreed-upon purpose or mission for the family (20 percent).” With education, engagement, time and effort, this can instead be an exciting shift. Let us change the conversation in our own homes and begin to instill value systems that ultimately empower our children and grandchildren to have a positive social impact on their communities and future generations.—Michelle Lemming