The new inheritance generation

  • Author : Drew McNeil
  • Date : May 2011
ABOUT THE AUTHOR: Drew McNeil is Director of Lord North Street Private Investment Office

T he owners of large fortunes go to a private investment office to seek out the best possible returns for their hard-earned money, while at the same time ensuring that future generations will benefit from their efforts. What they find is that the next generation can be the biggest hurdle to deal with – and not just the first, but in some cases the second and third generations too.

Before beginning to address this challenge, the central and most enduring task is to establish a complete understanding of a client’s circumstances and the underlying purpose envisaged for their capital. What is the money for? What expectations and aspirations do they really hold for it? How does it relate to the rest of their assets? Could this change in the future? In many cases it is the next generation that turns out to be a key consideration.

So what are the challenges that different families face?

Getting the tax right – or, at the very least, not getting it wrong – should be the first consideration. Tax is the most important factor in growing and preserving wealth through the generations. The challenge here is the issue of diverging tax domiciles of family members, particularly as the younger generations marry foreign nationals and residents. This can be dealt with by encouraging families to use a global custodian that is able to cope with multiple tax jurisdictions. Using a consolidated reporting platform it is then possible to provide families with a summary of their overarching position and to design bespoke reports for each individual family member and advisor. The key is in identifying, selecting, negotiating pricing and monitoring the most appropriate global custodian for the family in question.

Long-term investment plan

The next most important decision is strategic asset allocation, or the long-term investment plan. The impact of a well-thought-through and appropriate asset allocation will far outweigh the manager or stock specific decisions taken along the way. That is why it is essential to spend a lot of time at the outset of the relationship getting to know each and every family member, trustee, director and advisor and in taking great care to gain an understanding of what the clients need and want, and also to paint a realistic picture of whether those requirements can be met. It is during this initial period that familiarisation with the next generation is key to discovering what their aspirations are for their current wealth and how they fit in to the succession plans.

It is often the case that the next generation has diverging needs from the senior generation and their siblings. The best way to deal with this issue is to create building blocks, either via private unit trusts or alternative structures, which allow the family to have, for example, a family equity fund and a family bond fund. Each family member will then have a bespoke asset allocation by investing in these family funds in different proportions. The other advantage of this approach is that younger members can invest small amounts in their ISAs and learn about financial markets by being invested themselves as well and, of course, by attending meetings in which the strategy is explained to them.

Governance and education

There are really three broad situations that have to be faced. The most common is one in which a family has set up a governance structure – whereby the representation of the family on the investment committee is the patriarch or the husband and wife – and to begin to educate their children from the start. The idea is that they can gradually introduce the next generation of the family onto that committee. Often, they are encouraged to join this first in an educational capacity and then over time by bringing them forward as an active decision maker. This can happen from as young as 18-25 when an individual heir is beginning to take interest in financial matters and starting to think responsibly about their own future and the continuity obligations of a responsible successor.

In some cases the eldest child goes on to chair the investment committee, taking over from the original client. Here it is important to make time to meet with the junior members of the committee, to answer their questions, to fill in knowledge gaps, and to give them a sense first hand of how the whole family can benefit. This early involvement encourages them to take an interest, not just for themselves, but eventually for their own families and their successors too.

Where a big family is not always easy to manage…

A second scenario is where families are extended with many branches and, in some cases, where there is a wide range of differing characters with different circumstances and objectives. In this case the role of an advisor is about finding common ground and this can be achieved by inviting various generations to ‘surgeries’ that help them to reach consensus and understanding of how best to construct a suitable allocation across different asset classes and reach an understanding between all parties on other important decisions regarding income requirements and capital preservation/growth wishes. By getting families together in this way it is possible to help them to agree common goals, at the same time setting up a proper financial plan that should work for each of them.

Again, it is in the early 20s that family members are encouraged to become involved in this way – when they have, perhaps, finished their education and moved into their first job. This seems to be the moment at which their own independence kicks in and they want to know more about their inheritance and to become involved in the process.

The younger the better

The third scenario is where an older and more experienced generation of ‘children’ of the original client has strong views that are at odds with their parents, or even each other. In many cases the solution can be as simple as getting them all into a room together and going back to the original principles and objectives agreed at the beginning of the relationship. A scenario such as this emphasises the importance of the lengthy start-out process where the expectations and aspirations of the client are agreed upon: when later elements of discord arise between family members, the original investment rationale agreed can be revisited by everyone and more often than not can create the unity required to move forward again.

Disputes can come in many shapes and sizes. They may be about selling the remaining holding in a family company; about selling or retaining a family home; or in many cases about finding a balance between liquid and illiquid assets. Whatever the issue may be, finding common ground between generations is the answer, which can only be done by having an in-depth knowledge of the whole picture. So, when being brought in to advise and manage large fortunes, it is ideal if the brief is to advise on all the client’s assets, enabling unbiased advice to be given.

The value of independent advice

Every family is different and has varying ambitions – an off-the-shelf solution to planning to preserve and grow wealth simply does not work for this very reason. The more independent the advice the more dimensions it has to it. Having no asset bias is a key ingredient, as well as having a diversified asset allocation approach and the ability to pick and choose managers. Independence can also mean that advisors are sufficiently confident to be able to say to a family that they have the wrong approach or that they may not be acting in the best interests of the whole family. This independence comes into its own particularly when dealing with the inheritance generation – I like to call it ‘sitting on the same side of the table as the client’.


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