Why your ‘bread-winner’ led wealth plan could cost your family

The great wealth transfer is well underway and gaining momentum.

According to research done by Cerulli Associates in 2022, a staggering $86 trillion will change hands through intergenerational wealth transfers by 2045, an increase of 25% from their same research in 2019.  This is indicative of the growing need for financial planning that gives consideration to intergenerational wealth succession. For such financial plans to be holistic, they need to be coordinated both at the individual level as well as at the family level.

Traditional family financial plans are outdated

Even the best laid plans will cease to work as intended if they are not co-created, co-owned, or executed as planned.

Traditionally, the main breadwinner or head of a family has been responsible for their family’s financial plan, resulting in many unintended consequences for future beneficiaries and contributors to family wealth. The  reasons for poor outcomes include that:

• beneficiaries may have their own financial plans that differ from or contradict the intentions of the head of the family’s plan for inter-generational wealth,
• a lack of alignment exists between the head of the family and the beneficiaries in relation to the vision and purposes of the intergeneration wealth and how it should be managed, and
• the head of the family’s values and behavioural relationships with money are not shared with their beneficiaries.

While there are substantial benefits to being able to achieve incredible inflation-beating wealth from generation to generation the benefits of the intergenerational compounding effects on growth assets are often not felt due to misaligned understanding of goals and the strategies or portfolios designed to achieve them.

Competing intergenerational wealth strategies can erode an inheritance

A sizeable inheritance has been built up through equity exposure and the head of the family has only been taking dividends as income. But now the beneficiaries draw down income at much higher annual rates and/or at less growth-biased portfolio exposures.

Using the ‘rule of 72’ on listed equities of CPI+6% excluding dividends (that is, that 72 divided by the return achieved indicates that a lump sum will double in value), we can calculate that the head of the family would have doubled their assets every 12 years.  On the other hand, the beneficiaries who decided to ‘protect’ their assets in cash would achieve CPI+1% over time at an annual drawdown of 7%, thus halving the value of the inheritance every 12 years.”

Delaying family financial planning can happen easily

Family members often tend to place different levels of priority on this matter at different points in time, so it can be challenging to co-ordinate individual needs and family financial planning needs.

This includes not considering the estate planning implications on the family should a particular family member pass away, not having co-ordinated wills, impacts of more complex entities such as trusts, and financial products and other assets owned by individuals that have unintended consequences for family wealth and financial planning.

Top tips to help you reach your investment goals

• Ensure that your plan is robust yet flexible. It is natural that circumstances change and that individuals within a family may require changes to goals and objectives within the family financial plan – whether in the present or at a point in the future. Plans should be flexible enough to account for changes in entities, financial products, and ownership, and be able to cater to future needs that may differ from those of the present.
• Have an agreed process on how decisions will be taken. A robust process for decision-making will ensure that it is easier for family to understand and agree on why decisions are made and by whom, and how they can have their voices heard.
• Enlisting the services of experts is crucial. Ensure that the complexities of financial planning for families are met by utilising a qualified financial adviser, who should be centre point to helping your family unpack the journey to a multi-generation financial plan. In a similar vein, ensure that you enlist any additional support specialists that may be needed to ensure that estate, tax, behavioural approach to money matters, and other such areas are addressed.

A family financial plan is not the preserve of the wealthy

Intergenerational planning is also well within the reach of those that have a vision of family wealth in the future.

As Warren Buffet famously said, ‘someone’s sitting in the shade today because someone planted a tree a long time ago’. While the best time to have started your journey to family financial planning was yesterday, the second-best time is today – Carpe diem!

Nirdev Desai is head of sales at PSG Wealth.