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Is Canada on Track for a Transition Crisis?

Badger Investment Group - Nov 02, 2021
It is estimated that 70% of wealthy families will lose their wealth by the second generation, and 90% will lose it by the third.
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Generational wealth is an aspect of legacy planning geared toward passing down stable, significant financial resources to future generations. If all it took were knowledge to become wealthy, then plenty of people would be extremely wealthy. The reason they are not is that the process of becoming wealthy requires a lot more than knowledge. In many cases, parents work hard to provide a solid foundation for their children's future, hoping that their hard work ethic, understanding, and respect for earned wealth will rub off. Unfortunately, hope is not enough.

 

The generation that earns the wealth is the generation that experienced adversities to make sure they attain something better for their families. The next generation typically sees their parent's struggles and understands the value of sacrifice and hard work – but is understanding enough? While they often are more financially stable as adults than the previous generation, they can still remember the frugal aspects of their youth. The third generation never understands what the older generations went through to accumulate their wealth.

 

It is estimated that 70% of wealthy families will lose their wealth by the second generation, and 90% will lose it by the third. There are a variety of reasons why this happens[1]:

 

  • Younger generations are taught not to talk about money.
  • The prior generations worry that the next generation will become lazy and entitled, and the younger generations don't truly learn what it takes to generate that wealth.
  • Many of the younger generations have no clue about the value of money or how to handle it.

 

The families that preserve and build their multi-generational wealth do so by collaborating with the next generation. The guidelines they live by to do this are very simple but not always easy.

 

David Kleinhandler has these tips can be used by anyone who wants to have a successful conversation about wealth with their children:

 

Having Lines of Communication: Open communication builds the trust that is the basis for sustaining your family's wealth. Preparing the next generation for what they can expect is critical, and you should take advantage of any teachable moments that arise. The next generation can learn, understand and eventually participate in decisions that can affect the family's wealth. It could also be a good idea to introduce a wealth expert/advisor to help facilitate a productive discussion. This could lead to a better understanding among the family members and help them discover shared values and passions. These values and desires could result in the members working together and sharing in decision-making regarding the family wealth. They are also critical in helping them stay together during times of adversity.

 

Share Decision Making: More often than not, beneficiaries of family wealth cannot correctly manage what they've inherited. Usually, this results from decisions made by the earlier generations regarding the members' involvement with decisions made managing the wealth. Keeping the next generation out of the decision-making process can lead to severe dysfunction and a severe lack of understanding about how wealth is managed. They will lack the skills needed to ensure they lead a happy and productive life. Without the necessary core values or knowledge of their family's goals, the ability to maintain and grow the wealth is lacking.

 

Consider an Impartial Trustee: Even with a solid line of communication open and a proper decision-making process in place, there will still be some challenges that a family will not be able to handle on their own. Having a third-party objective point of view could be helpful, freeing any discussions from emotions that family members may bring to the table. Having a Trustee can ensure that your wealth is managed correctly and will be appropriately distributed. If there are intangible assets involved, a trustee, as a neutral party, can protect the beneficiaries over a more extended period. They can also mediate over emotional attachments that some family members may have over certain items, which could eventually lead to litigation.

 

Make a Plan: Here is where you develop a clear goal that plans the direction of the wealth, so it is sustained for future generations. Lacking a proper plan could result in the wealth being lost for future generations to taxes, poor investments, and unprepared wealth recipients. His plan should be a roadmap providing in-site on how the wealth should be managed and invested for future generations. Bringing in a Financial Planning Professional, one who has the experience dealing with the areas you want to focus on and handling your level of wealth, should be considered here. This can help ensure that there will be something there for future generations.[2]

 

Statistically, the road to passing on wealth beyond your grandchildren does not have a good track record. However, there are steps that can be taken to ensure your wealth is transferred beyond the third generation. Along with investing wisely and developing a legacy plan, educating younger generations is critical in making your wealth last.

What’s next?

As Canada’s family-owned businesses look to turn the page on the global health crisis, a new era of urgency is looming in which many thousands of enterprising families expect to relinquish ownership to younger family members or outsiders in the next decade. According to research done by the Family Enterprise Foundation[3]:

The clock is ticking. In the next decade, tens of thousands of family businesses will transfer to the next generation if more than half of owners stay true to their intentions. This will be a period of urgency in which family members clarify their preferences, and discussion intensifies around next gens’ aspirations, ideas, skills and interest levels. Where future family ownership may be in doubt, rekindling the entrepreneurial spirit in the next generation can bolster longevity.

Is blood thicker than water? Maybe not, as more than one in three owners expect to transition their business into the hands of outsiders. There is optimism among enterprise owners that their family businesses will remain family-owned. Members of future generations may not be directly involved in the industry, but ownership will somehow follow bloodlines. While optimism prevails, there is a lingering cloud of uncertainty. Progressive families know that this sentiment can be addressed successfully through conducting family visioning exercises, formal family learning, formalizing succession plans and developing ownership skills.

 

The senior generation thinks the next generation is not ready to take over. True or just typical parent-child dynamics? Concerns are vital in families who hope or are planning to transition ownership and management within the family. 

After reading this report, here are a few questions for you and your family to discuss and explore.”

Next Generation Questions

  • How often is it implied that you are expected to take ownership of the family business? If not interested, what is the primary reason(s) for feeling this way? Discuss the challenges and opportunities.
  • Looking to the future, how interested are you in becoming more involved in the family business?
  • Do you view the family business as a rewarding place to work and a legacy to leave future generations?

Senior Generation Questions

  • Have you confirmed with your next-generation their interest level in the family enterprise? This should be actively explored.
  • Aside from formal education (university, college, etc.), what programs and experiences have you put in place to encourage and develop the necessary skills in your next generation?
  • Have you provided guidance or advice to the next generation on the skills needed to lead your family enterprise?

If you would like to talk more about your legacy plan and the transition of your business, schedule a meeting today with a legacy planning expert.

Big Value Proposal
Have you worked with a financial advisor before and had a frustrating experience? Do you feel as if your current financial plan does not align with future objectives? Do you have any pressing financial concerns? Are you looking for a comprehensive performance and risk analysis of your investment portfolio? Do you simply want to get a second opinion on your current portfolio for peace of mind?

At BIG, we use one of the investment industry's most comprehensive performance tools called Zephyr. This program provides people with detailed performance and risk analysis, peer group analysis, style attribution, asset allocation and custom reporting. Using this comprehensive tool, we will create a customized report based on your current portfolio and provide you with a detailed risk and return assessment. Following our analysis and debrief of your portfolio, if we find red flags, we will provide you with a BIG tailormade alternative portfolio with a side-by-side analysis of why we believe our solution will better match your investment objectives.

We would be happy to offer this no-obligation portfolio review process to you today - and the best part is, the worst news you will receive is that your existing portfolio is thoughtfully constructed and seems to be a good fit with your current objectives!

If you have any questions about our process, feel free to contact us by replying to this email, giving us a call or connecting with us through our website.

 

[1] David Kleinhandler. (n.d.). Generational wealth: Why do 70% of families lose their wealth in the 2nd generation? Nasdaq. Retrieved October 25, 2021, from https://www.nasdaq.com/articles/generational-wealth%3A-why-do-70-of-families-lose-their-wealth-in-the-2nd-generation-2018-10.

[2] David Kleinhandler. (n.d.). Generational wealth: Why do 70% of families lose their wealth in the 2nd generation? Nasdaq. Retrieved October 25, 2021, from https://www.nasdaq.com/articles/generational-wealth%3A-why-do-70-of-families-lose-their-wealth-in-the-2nd-generation-2018-10.

[3] Ready, willing and interested – or not? (n.d.). Retrieved October 25, 2021, from https://familyenterprise.ca/wp-content/uploads/2021/10/Research-Report-Ready-Willing-and-Interested-or-Not.pdf.