The greatest misconceptions of generational wealth

Generational wealth. Photo: Forbes

The term “generational wealth” refers to any assets passed down by one generation of a family to another. These assets can include stocks, bonds, real estate, family businesses, trust funds and any other investments as it pertains to that family.

These assets are often built through investments, as well as inheritance, however, it is important to note that wealth is not guaranteed from generation to generation without proper knowledge, exposure and planning. We would be discussing three major misconceptions regarding generational wealth.

The first misconception is that generational wealth lasts forever. When we hear of the likes of the Rockefeller family whose family wealth has lasted and outlived generations, many people think that it is very common for wealth to last for multi generations and even forever. However, it would interest us to know that according to research, it is estimated that about 90 per cent of high-networth families lose their wealth by the third generation, which is illustrated by the proverbial saying; “shirtsleeves to shirtsleeves in three generations” meaning that wealth gained in one generation will be lost by the third generation.

Sadly, the truth is that smart investments and money management skills are not always passed down with wealth. Sustaining substantial wealth takes financial education or exposure which is something that not all wealthy patriarchs and matriarchs are passing down to the next generation. Without proper financial education, and especially if money is spread across multiple children, any inheritance may be spent quickly without any means of recovery. Therefore, it is pertinent to note that when building generational wealth, creating a structure for proper preservation, management and transfer of such wealth is important.

Families need to ensure that there is an extensive education plan for the next generation to develop both their hard and soft skills in order to prepare them for wealth transfer thereby preventing loss of family wealth upon transfer. This plan can be structured and effective particularly when handled by a professional family wealth advisor.

Also, another profound misconception is that financial education is all a family needs to create generational wealth. Many believe that all that is needed to preserve and effectively grow generational wealth is to teach the children and next generation about financial literacy and money management skills. However, financial education alone is not enough or sufficient to preserve generational wealth.

While it is very important to expose the next generation to financial education, it is important to build family values, trust, and unity within the family. There must be clear communication between the generations and mutual respect. A family business with strife and disputes will definitely struggle to maintain wealth no matter how financially exposed and literate they are. Therefore, while teaching financial education and money management, it is important for the family to build and maintain a shared family vision, build trust and close relationships with one another, be unified as a family and communicate to ultimately preserve wealth across generations.

Lastly, there is a great misconception that generational wealth has to be large or massive therefore, many patriarchs and matriarchs have no wealth plan because they believe that they do not fall under the wealthy umbrella. This misconception is most likely as a result of how “wealth” is generally defined however, it is important to understand that wealth is defined differently in families and varies from one family to the other.

Wealth to one family can mean enough money to retire on or pay for future children or grandchildren’s tuition fees and it may also mean simply having a safety net in case of emergencies, or even assets to pass on as gifts.

It is important to know that you do not have to be a Rockefeller to make a generational wealth plan. If you have significant amount of assets you wish to preserve for generations to come, then you are in need of a generational wealth plan. It becomes important to consider working with a trusted family wealth advisor who can help you make a wealth and succession plan, educate the next generation and see to the proper execution of the plan.

Whether deliberately or not, at times what is understood about generational wealth gets overshadowed by the myths and misconceptions we attribute to the idea of generational wealth. In believing you understand the dynamics of generational wealth without fully accounting for its complexity, you are at risk for financial loss on the long run.

Family Patriarch’s and Matriarch’s must open dialogues, implement estate plans, teach financial literacy, provide oversight and maintain relationships within the family to effectively transfer wealth from one generation to the next generation.

Generational wealth is very possible and achievable with the help of professional family wealth advisors who understand your unique wealth portfolio needs and can provide the education and oversight that leads to successful management and transfer of your wealth.

Adejumo is a Wealth Advisor at the Meristem Family Office.