If there's one thing that keeps wealthy Canadians up at night, it's the thought of their children losing their family's wealth. According to The Williams Group, a California-based family office, 70 per cent of families lose their money by the second generation, with 90 per cent losing it all by the third. There's a reason why the adage "from shirtsleeves to shirtsleeves in three generations" is a favourite among advisors.
In North America, with about $30-trillion in financial and non-financial assets expected to pass down from baby boomers to their heirs according to Accenture, it's critical to ensure that your client and his or her children know how to grow and preserve their family's wealth for decades to come, says Peter Bowen, Vice-President, Tax and Retirement Research, at Fidelity Investments Canada.
One of the reasons why so many families have difficulty making their wealth last is that their planning isn't long-term enough.
"[People] need to treat estate and financial planning as more of a long-term process than a one-off event," says Mr. Bowen. "When we think about sustaining wealth over multiple generations, there are certainly critical aspects to estate planning, but there is also the need for consistent, strong financial advice and guidance."
A classic mistake people make is not having a wealth-management blueprint that looks at everything, from succession to retirement planning. That's especially important today, with estates become increasingly complicated.
"[High-net-worth] individuals need to ensure they are relying on the appropriate advisors to think through all of the various elements involved in such a plan, including tax strategies and risk management," says Mr. Bowen.
Create a succession plan
One group that is particularly sensitive to the pitfalls of wealth transfer is business owners, many of whom hope to pass down not just wealth created from the business, but the company itself as well. Plenty of companies rely on the talents of the founder – and in many cases, those talents don't get passed down to the next generation.
Entrepreneurs can prevent the next generation from squandering a business though proper succession planning, but some owners have a tendency to wait until it's too late to come up with a solid plan.
"They are simply too busy to plan the next phase in life and may not appreciate the value of starting early," says Mr. Bowen. "It is important to ask whether selecting a family member as a successor – and keeping the business in the family – will result in the best possible outcome for the family as a whole."
In some cases, a third-party sale may be more appropriate, especially if a potential family successor doesn't have the same skill set or passion as the parent. And, where multiple family members are involved, conflicts can arise. It may be better to take the money and invest it.
"With a third-party sale, lump-sum amounts can be invested in a diversified portfolio that can provide greater long-term preservation and growth of wealth," Mr. Bowen says.
As successful as high-net-worth individuals may be, many don't know much about wealth planning and preservation. That's why advisors are key to the wealth transfer process. But multi-generational planning can't be done with just one individual – it needs to be a family affair.
"[Getting together as a family] can help ensure communication and transparency, and mitigate the family conflicts that may arise," says Mr. Bowen.
Advisors need to cover everything that could impact wealth, including taxes, inflation, how assets can thin out when shared among heirs, and, of course, investments. But because advisors need to take a more holistic approach to wealth creation and preservation, they should consider enlisting other experts for help. This might include accountants, lawyers, tax and estate experts and valuators.
"The financial advisor would act as a quarterback, helping ensure a robust plan considers [everything]," says Mr. Bowen.
Instill family values
An important element of multi-generational wealth preservation is getting children to understand the family's values and mission, which will provide the groundwork for planning. Younger family members who may be ill-prepared to shoulder the responsibility of wealth stewardship must be suitably coached.
"Financial literacy is key to this, and it's an area where a financial advisor can be enlisted to help a family member learn about wealth management with a focus on the long term," says Mr. Bowen. "This education can help build engagement and willingness. Ultimately, the individual's preparedness can influence how wealth is transferred to the next generation."
Clearly, a lot goes into multi-generational planning, but before any dollars are passed down, advisors must make sure their client – who could live for a long time – is taken care of first.
"While some people may want to gift assets earlier rather than later in life, they need to first ensure they will be okay for the long run, especially considering that Canadians are living longer than ever," says Mr. Bowen.
This content was produced by The Globe and Mail's Globe Edge Content Studio, in consultation with Fidelity Investments. The Globe's editorial department was not involved in its creation.