Go to the Globe and Mail homepage

Jump to main navigationJump to main content

(Jupiterimages/(C) 2009 Jupiterimages)
(Jupiterimages/(C) 2009 Jupiterimages)

Expert`s podium

How to pass the financial torch to the next generation Add to ...

Earlier this month I had a strategy update and portfolio review with one of our high-net-worth (HNW) client families–“Ted” and his daughter “Sarah.” Ted is the patriarch of a wealthy family that has run a very successful real estate development business. Several family members are involved in the business, but Ted identified Sarah as his successor several years ago. He’s mostly out of the business now, and Sarah is largely running the show, and very well I might add.

More Related to this Story

Now that he’s in his late 70s, Ted has gone one step further, and asked Sarah to assume a leadership role with the family wealth. A fair chunk of that is in real estate, but there’s also a sizeable liquid market portfolio, managed for the benefit of almost two dozen family members (siblings, children, and grandchildren). There are several trusts that have been set up, and the family also has a private charitable foundation as well.

Long story short: there are a lot of moving parts, and a lot of divergent interests. Ted wants Sarah to know the “ins and outs,” so the transition can be smooth when he officially hands over the reins in a few years.

I’ve started to see this more and more in my practice: getting children involved in managing family wealth. And while the trend seems particularly pronounced within the HNW population, by no means is it dependent on the size of the family portfolio.

If your goal is to pass on wealth or leave a legacy to the next generation (and most families have this goal ), then sooner or later, it makes sense to get your children involved and equipped with an education in managing that wealth you hope to pass on. It doesn’t matter whether that wealth is a stock portfolio, real estate, a family business, or something else; by getting the kids involved, you make the wealth transition smoother, which increases the chances that the wealth with survive into subsequent generations.

There are many forms of that involvement, of course. Some families want the kids to take over specific family assets (the family cottage, for example), or get involved with the family charity. I would say even having a child as a joint owner on the family home or a parent’s chequing account is a form of co-management. Other times, managing family wealth isn’t voluntary. When a parent falls ill, or becomes mentally unwell, children often need to step in rapidly.

Whatever the reason for it, it’s infinitely better that the next generation be prepared to take over. A lack of preparation increases the chance of financial mis-steps and problems. Here are some suggestions to ensure that doesn’t happen.

Educate them about the purpose of family wealth
Before they take the reins, your children should be well versed in the purpose of the family’s wealth. What are the family’s financial goals? What is the family trying to accomplish? What responsibilities do we have to members of our family?

These are all weighty questions – not the kind that get answered in a single conversation. Yet, I would argue that teaching your kids the “why” of family wealth is one of the most important lessons of all. This knowledge will guide the financial decisions they make for years to come.

Get them familiar with strategy
At some point, the kids need to know what’s in the family portfolio. But more important is the strategy behind those assets: the method by which a family is pursuing investment goals and managing risk. What investment strategy is the family following? What’s the overall game plan? And is that game plan the right one?

In my experience, this can be an area where generations can butt heads. Different generations can (and will) have different ideas of how to work with wealth. These issues can’t always be solved right away, but I believe it’s better to get things out in the open early, rather than wait for a blowup down the road. It becomes a process.

Establish a timeline for shifting responsibilities
It’s not always easy passing the torch. Involving the kids in wealth management ultimately means giving up a degree of control over one’s money. And that’s not always easy – particularly for business owners, who tend to be comfortable making decisions for other people and much less comfortable following another’s lead.

That’s why I recommend putting some thought into how exactly to shift responsibilities from one generation to the next. When do you want the children to take over? What they will be responsible for, and what will you hang onto for now? Just keep in mind that age and health-related issues can sometimes force families to revisit your answers.

Introduce them to advisors
Whether it’s with a wealth advisor, financial planner, portfolio manager, accountant, or lawyer (or maybe all of the above), chances are you have established relationships with professionals. At some point, the kids will need to meet these professionals, and get to understand the role those professionals have in helping the family meet its objectives.

When you do, give them the opportunity to ask probing, difficult questions. How do your services benefit the family? How much do they cost? What do you propose we do differently? Asking such questions is the start of the long journey from being a family member to becoming a family leader.

Thane Stenner is founder of Stenner Investment Partners within Richardson GMP Ltd., as well as Portfolio Manager and Director, Wealth Management. Thane is also Managing Director for TIGER 21 Canada. He is the bestselling author of ´True Wealth: an expert guide for high-net-worth individuals (and their advisors)’. (www.stennerinvestmentpartners.com) The opinions expressed in this article are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Ltd. or its affiliates. Richardson GMP Limited, Member Canadian Investor Protection Fund.

In the know

Most popular videos »

Highlights

More from The Globe and Mail

Most popular