Succession: a crucial wealth challenge

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After giving them life, directing their every step and investing so much in them, today’s wealthy may be nervous about handing over control and ownership of their personal and business assets to their children. The transfer of their material, income-generating creations to their human, cost-incurring ones, can be an extremely daunting proposition.

Making a success of successions 4 of 9 Executive summary 2 of 9

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Yet it is something that increasing numbers of wealthy individuals have to grapple with — not just in the ageing developed countries, but also in the emerging economies. Indeed, inheritance is a more important source of wealth for high net worth individuals in emerging markets than in developed ones, and as a result all aspects of inheritance planning in these areas are coming to the fore.

Values are also passed down by parents

Wealthy individuals’ views on whether and how to transfer wealth are partly influenced by their values, which, in turn, are often learnt from their own parents. On average, 59% of high net worth individuals globally said their values were very similar to those of their parents. In general, individuals in developed countries are less likely to have similar values to their parents’ generation than those in emerging countries.

Whilst they may share similar values to their parents, the wealthy do not follow them as ardently in all things. A meagre one in five, on average, said that it is important for them to follow in the footsteps of their parents in terms of their careers or businesses.

One country which firmly bucks this trend is India, where some 81% of wealthy Indians surveyed believe it is important to follow in their parents’ footsteps. Shaunaka Das, Director of the Oxford Centre for Hindu Studies, explains that in the Indian culture there is a deep respect for parents and tradition; and that individuals believe in a calling or dharma that is very influenced by the nature of one’s family and one’s obligations to them.

There are some other regional exceptions, such as in the Middle East and Latin America, where following in parents’ footsteps is a priority. In these regions, especially the Middle East, respect for the family is a very important cultural theme. The findings also reflect the importance of entrepreneurialism in these geographies, with our research showing a positive correlation between entrepreneurialism and willingness to follow in parents’ footsteps.

Money really can lead to happiness

 

A 10% rise in income has roughly the same affect (on happiness) no matter which country you are in. So a 10% rise in the income of someone in Burundi or Haiti buys about as much extra happiness as a 10% rise in the income of someone in the United States...There (once) was this view that once your basic needs were met, further rises in income don’t make you happier. That view is most assuredly false... As you keep increasing average income you keep increasing average happiness. -Justin Wolfers, NPR “Planet Money” program

The issue of inheritance and wealth transfer inevitably raises questions about the impact on the lives of the recipients, and how it will affect them both financially and emotionally. Research into happiness is a growing field and has resulted in the recognition of different types of happiness and the factors that drive them. Most people are sceptical of the idea that money leads to happiness, but recent studies clearly show that money and happiness are more closely and directly linked than previously thought. One of the most extensive analyses recently conducted was by Wharton School Economist Justin Wolfers. Studying data from 155 countries, he found a close and quantifiable link between happiness and income.

“A 10% rise in income has roughly the same affect (on happiness) no matter which country you are in. So a 10% rise in the income of someone in Burundi or Haiti buys about as much extra happiness as a 10% rise in the income of someone in the United States… There (once) was this view that once your basic needs were met, further rises in income don’t make you happier. That view is most assuredly false… As you keep increasing average income you keep increasing average happiness.” (Justin Wolfers, NPR “Planet Money” programme, March 8, 2011.)

Our research confirms this positive relationship between income and one measure of happiness: financial happiness. We find the same steady, increasing relationship that does not level off. However, source of wealth is important. Financial happiness is more closely linked to income than it is to net worth — actually earning wealth seems to boost financial happiness.

Reflecting on the implications of this, Emily Haisley, who is part of the Behavioural Finance Team at Barclays, comments: “Parents should be concerned about how passing on wealth impacts the motivation levels of their children. Whilst there is an obvious benefit of wealth on health, freedom, satisfaction, etc., there is the worry that it may diminish the ambition to work hard and realise the fulfilment that comes with it. Productive work is a good thing; it is associated with intense experiences of happiness according to the work of Psychologist Mihaly Csikszentmihalyi (conversation with non-profit organisation: TED; February 2004).”

Some of the business world’s greatest brains have wrestled with this question of how to let their children share in their wealth, whilst encouraging them to make their own mark in life. Legendary investor, Warren Buffett, is quoted as describing the right amount to leave children as enough that “they would feel they could do anything, but not so much that they could do nothing.” To help accomplish this, he has strictly limited the amount of his own fortune that his children will inherit. UK businessman and TV personality, Peter Jones, similarly eschews the idea of simply transferring large-scale wealth to his children, and instead has reportedly put in place a scheme that matches what they earn every year for the rest of their lives (The Times of London).

Catherine Grum, Director, Wealth Advisory at Barclays specialising in succession planning, notes that such concerns are common amongst clients, and that there are many things which parents can do to foster ambition within their children.

 

 

 

 

 

Family wealth begets family conflict

An unfortunate drawback of wealth is its ability to cause conflict, and in the context of succession, family conflict. This is a real issue identified by our research, with 40% of high net worth individuals on average having personal experience of family wealth leading to conflicts.

 

Conflicts around succession reveal a multitude of human proclivities. Commonly, these conflicts are triggered by individuals who feel that they haven’t received their fair share of the wealth. Amongst children, there may be those who feel they weren’t adequately rewarded for the caring responsibilities they took on preceding the death of a parent. Where there are multiple spouses, there may be those who feel entitled to more from the estate, based on their contribution in creating it. But disputes may also arise or be aggravated by less logical arguments and more emotional ones — particularly, negative feelings to other members of the family. These emotions may be kept in check whilst the patriarch or indeed the matriarch are still alive, but emerge after their deaths.

Sue Medder, Partner in the Contentious Trusts and Succession Group at international law firm Withers LLP, notes that the multi-faceted family structure has certainly contributed to the rise in disputes. “You’ve got a rise in second marriages, third marriages; you’ve got children from different marriages competing, not just against each other, but against second or third wives.” She points out that this is exacerbated by the fact that in some regions families do not live in close-knit units and care is provided externally, fuelling claims made by non-family members.

Parents can delay the transfer of wealth until they have done something under their own steam, or filter the transfer through a third party such as a trustee who can act like a tap to control the flow; or even educate them on the true value of money through charitable

Psychologist Peter Collett suggests that there may be something more general about the nature of the wealthy that causes conflict: “People who work hard to acquire wealth are naturally ambitious and they’re often competitive too. The tendency of wealthy people to become embroiled in family conflicts may therefore have a basis in personality, and conflicts may arise from the confidence and certainty in one’s own opinions so often found in people who’ve become rich through their own efforts.”

Patterns of spending and saving also play a role in these conflicts. In England, Sue Medder notes that there is an entire baby-boomer generation who are often over-borrowed, under-capitalised, and certainly “under-saved.” These individuals are looking to their own parents for support in their old age: “It’s reflected in the fact that children are prepared to fight when an inheritance doesn’t go their way.”

The transfer of family businesses from one generation to the next can also be a source of real family friction, as seen by respondents in India who say it is important to follow in their parents’ footsteps, but also report experiencing family conflict. Niall Glynn, Partner at Deloitte, Ireland and author of “Planning for Family Business Succession,” highlights the dangers of decisions about the business being driven by family issues rather than business needs. He specifically highlights the risk of leaving management under the control of less capable relatives and dividing ownership so that there is joint control or even fractured control amongst multiple families.

Amongst our respondents, we found that those who have inherited their wealth (47% for inherited vs. 40% not inherited) and those with more wealth (see Chart 4) are more likely to have experienced such family conflict. Interestingly, the reverse is true for income: those with higher income are less likely to find that wealth causes conflict. Emily Haisley explains the reason behind this: “When someone accumulates wealth through their personal income it is hard to make claims on it — it is accepted as fair that people should reap the rewards of their own labour. Norms of entitlement for wealth that is inherited are more ambiguous and can trigger disputes. Conflict over inherited wealth can also help to explain why we see a stronger relationship between income and happiness than we observe between net worth and happiness.”

In order to try to minimise this conflict, it is absolutely essential to undertake proper succession planning. Catherine Grum notes: “When it comes to selling your business, the planning process starts months or years in advance so that, when the sale takes place, the former and new owners and all associates know where they stand and what is required of them. You wouldn’t think of turning up on the day of the sale, handing the books over to the new management team and shouting ‘surprise.’ Yet when passing wealth within families, this is effectively what often happens. What are perceived to be difficult conversations are put off until it becomes too late, and when the patriarch or matriarch is no longer around and no plans are in place, the dynamics change and the conflicts begin.”

Given the likelihood of conflict, we went on to probe whether or not the wealthy thought that inheritance placed an “unnecessary burden” on the next generation, and found that 29% of all wealthy individuals believed that it did, with higher levels of agreement in Asia and Latin America, as well as the UK and Ireland. This high response rate illustrates the belief amongst parents that wealth is a double-edged sword that brings problems as well as benefits. When it comes to gender, women (44%) were more likely than men (39%) to feel that wealth placed a heavy burden on the next generation, and women were also more likely to feel that wealth led to family conflict.

 

Still, the inheritance cycle continues

 

The research has revealed that succession and wealth can be fraught with potential conflicts and burdens. In addition, attitudes toward the subject vary by age, gender, region and background. Despite all this, the world’s high net worth individuals still remain committed to passing on their assets to the next generation. Globally, just 4% of individuals said they did not believe that any assets should be passed on to the next generation. In the next chapter, we will look at how important succession planning is deemed to be in this transfer process.

 

Money with personality

 

Is an inherited dollar any different than an earned dollar? Sure, they look the same, but are they really viewed as being identical by the people holding them?

Academics Professor Orit Tykocinski from the Interdisciplinary Center (IDC) Herzliya and Professor Thane Pittman from Colby College looked into this question, and found that the inherited dollar was definitely seen as being different, as being “money with personality,” and this had profound implications on spending and investing behaviour.

“People tend to preserve inheritance money. They don’t want to waste it. It’s like they’re trying to prolong the presence, although symbolically, of the person who gave it to them by not using it,” explains Professor Orit Tykocinski, a panellist for this report. This means that they are reluctant to spend it, or invest it in risky financial instruments, and even want to isolate it from their other wealth.

Intriguingly, this preservation instinct is moderated by the personality and lifestyle of the deceased, and the nature of their relationship. “The idea is that this money becomes highly associated with the person who gave it to you, and with their value system. We find that people are trying to spend the money in a way which is consistent with the value system of the departed,” notes Professor Orit Tykocinski.

The professors’ research involved experiments with university student participants, which tested their attitudes in a number of scenarios. “We asked them to imagine that they’d inherited money from an aunt who caused untold difficulties in the family. (In this case), they take the money and they go partying with it! It’s like banishing the person. If it’s a beloved person, they act in a much more restrained way,” says Professor Orit Tykocinski.

The researchers speculate that these effects probably have an “expiry date” and that in time, inherited money becomes more like “regular” money, but they have yet to properly research this.

Of course, such emotionally-driven responses run counter to good investment management. Emily Haisley comments: “This underscores the importance of using a structured framework to assess individuals’ risk profiles to minimise subconscious influences that could unduly influence how an inheritance is invested, such as how close they were to the person who left them an inheritance. Since these effects diminish over time, it is important to make financial decisions after the mourning period has ended and to revisit these decisions over time.”

From a parental point of view, the findings also reinforce the importance of instilling values and building good relationships between generations in order to positively influence children’s behaviour. “If you have a loving relationship and a shared value system that includes responsible financial attitudes, it can make a real difference,” concludes Professor Orit Tykocinski.