As the landscape of wealth evolves, the next generation of affluent families/individuals faces unique challenges and opportunities in managing and preserving family wealth. In this article, we’ll discuss next-generation wealth and the strategies Constellation utilizes to help families manage and navigate the process of wealth transfer.

We’ve all heard the stories of family wealth transfers, whether it’s Gen-2, Gen-3, or beyond. Clients often seek our advice on how to involve their children in engaging with their advisory team.  As an initial step, we recommend introducing children to the family’s advisory team early on, allowing the education process to begin. The exact age will certainly vary, some may be ready/interested when they are 16, others prefer to hold off until they’ve finished college. Whatever the age might be, connecting with the next generation has become one of my favorite aspects of advising families. 

How does Constellation approach working with the next generation?

We aim to build trust with the next generation so they are comfortable reaching out directly to their advisor. Beginning with concepts such as budgeting and saving, then moving into investments, debt management, and retirement planning, we are helping to build the foundation that will prepare individuals for more complex wealth transfer discussions. Building the foundational aspects will allow us to:

1. Empower the next generation to take control of their financial future through ongoing education, setting them up to achieve their own long-term goals. 
2. Develop the next generation into becoming good stewards of the family wealth, providing the best opportunity for successful wealth transfer.

Education and building a fundamental understanding resonate with me personally. The world of wealth management, investments, retirement savings, etc. can be incredibly intimidating and unnecessarily complicated. Back in May 2011, as a fresh college graduate starting my first full-time job, I distinctly remember looking at my 401k options and thinking, “I have no clue what any of this means.” 

In our efforts to educate, we believe it’s incredibly important to explain the ‘why’ behind our recommendations. For example, a 22-year-old should likely have an aggressive allocation in their retirement accounts. Those comfortable with the world of asset allocation and investments could respond here with ‘Thank you for the incredibly obvious insight!’ But an individual without prior exposure to asset allocation, time horizon, and the power of compounding may be able to use their workplace retirement plan enrollment process as the foundation for their financial education. This discussion could then lead into the concept of Goals Based Investing (Needs, Wants, and Aspirations) – detailing how an emergency fund, (“a Needs” account), is meant to cover short-term cash needs. How should a short-term account be invested? Is this different from the previously mentioned retirement account that will not be touched for multiple decades? These are discussion topics that will improve financial literacy!

Investments are one piece of the financial picture. What should clients consider as they prepare to buy a home, get married, have kids? Mortgage discussions, joining finances with a spouse, and funding 529 accounts take place along the way. By working through these topics with an advisor, confidence and trust are built. What started as an introduction to the intimidating world of money/investments has formed into a relationship between client and advisor. Having a plan is a great first step, but we all know that plans are fluid and will inevitably evolve as we move through various stages of life. Our goal is to be the first call when clients work through the seemingly never-ending changes.

The second goal, developing stewards of family wealth, can be a more complex process. Because our client families typically have sizeable balance sheets with various entities, trust structures, and charitable vehicles, the topic of wealth transfer goes far beyond dollars and cents. As the esteemed lyricist, The Notorious B.I.G. eloquently stated, ‘Mo Money, Mo Problems.’

Why do wealth transfers go wrong? While the exact statistics are difficult to validate, it’s estimated that the success rate of wealth transfer is around 30% (based on research completed for Preparing Heirs: Five Steps to a Successful Transition of Family Wealth and Values written by Roy Williams and Vic Preisser). The main causes of this low success rate are believed to be: lack of preparation and education among heirs; lack of communication; no shared values/vision; and no true structure for the future. In our role as advisors to the family, we stress the importance of open communication. While not every family is at the stage where sharing balance sheet information and dollar amounts is appropriate, establishing open lines of communications as it relates to family wealth is an incredibly important step in preparing future generations. Below are 3 examples of topics that can be helpful in jump-starting communication between family members:

• Core Values – Providing family members with an opportunity to express the values important to them can serve as an invaluable tool. By hearing from others, families can collectively formulate their values and/or mission.
• Philanthropy – Many families use charitable giving to build cohesiveness and open dialogue on the missions/causes they would like to support together.
• Family Meetings – Formal Family Meetings can be a great tool to encourage routine open communication, share updates as it relates to Estate Plans, etc. Most importantly, all members of the family are provided a setting to demonstrate their own development, comfort of working with advisors, and desire to truly prepare their heirs for the future. 

At Constellation, our goal is to prepare all clients with the proper foundation, allowing them to make decisions that align with their financial goals and values. We believe strongly in educating next-generation clients, as this process is essential for successful wealth transfer.

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For informational and educational purposes only. Not intended as legal, tax or investment advice or a recommendation of any particular security or strategy. The views and opinions expressed herein, specifically expressions of “we” or “we feel”, are those of the author(s) and do not necessarily reflect the views of Constellation Wealth Advisors, Quadrant Capital Group LLC, or its affiliates, or its other employees. Past performance is not indicative of future results. Constellation Wealth Advisors, LLC is a registered investment adviser. Information prepared from third-party sources is believed to be reliable though its accuracy is not guaranteed. Opinions expressed in this commentary reflect subjective judgments based on conditions at the time of writing and are subject to change without notice. For more information about Constellation Wealth Advisors, including the firm’s Form ADV Part 2A Brochure, please visit https://adviserinfo.sec.gov or contact us at 513.871.5500.