How to help ultra-high-net-worth families avoid committing ultra-high-priced mistakes that blow their wealth — "shirtsleeves-to-shirtsleeves" — in just three generations? Guide them to raise children who will be productive, financially self-sufficient and independent. So says Coventry Edwards-Pitt, partner and chief wealth advisory officer at Ballentine Partners, in an interview with ThinkAdvisor.
The CFP and CFA specializes in helping super-wealthy families deal with the impact of wealth — especially on offspring.
"Yes, there's wealth here, but we hope you never need it. We encourage you to be productive in your own life" is the values-themed message such parents should drive home to children, according to Edwards-Pitt, author the popular "Raised Healthy, Wealthy & Wise" (Amazon Digital Services, 2014) and the new "Aged Healthy, Wealthy & Wise" (BP Books, Oct. 2017).
There's a host of ways FAs can help well-to-do clients transfer assets to the next generation — but some of the usual ones can do more harm than good, says Edwards-Pitt, 41, who began her career at Goldman Sachs evaluating money managers.
Raised middle class by her divorced single-breadwinner mom, a lawyer, she joined Ballentine in 2004. The firm's assets under advisement total $11 billion, of which $6.9 billion is under management. With 189 clients, Ballentine maintains two high-net-worth practices, one for clients with $3 million to $20 million in investable assets and a family office for those with $20 million or more. Average account size of the latter: $50 million to $100 million.
One big blunder moneyed parents make, Edwards-Pitt says, is telling children how much the family is worth without encouraging them to be productive and earn on their own. Annual gifting, especially at kids' formative 20-something stage, is another "don't" since that can easily lead a child to slip into financial dependence.
To be sure, instilling a work ethic and setting spending limits to hold kids accountable are universal issues, but they are more pronounced in families with great wealth, partly because these parents have big hang-ups about discussing money with their children in the first place.
ThinkAdvisor recently chatted with Edwards-Pitt, on the phone from her office in Waltham, Massachusetts. For "Aged Healthy, Wealthy and Wise," she interviewed well-heeled elders engaged in life and inspiring. Her previous book was the product of interviews with 24 inheritors who developed successful lives on their own – despite having tidy family wealth. Here are highlights of our conversation:
In working with clients, is passing down family wealth through many generations one main objective?
That's talking exclusively about whether the wealth will survive. I see this as a much larger issue: Whether every generation will have the chance to be productive, self-actualized human beings because the presence of wealth can impair the next generation's ability to lead a grounded life filled with pride in their own achievements.
You write that children are better off when they're uncertain about when they'll inherit and how much they'll receive. Why?
As advisors, we may unintentionally be doing harm if we recommend sharing wealth information if that isn't going to help a child be productive. However, that information can be shared effectively if the right narrative is put around it: "Yes, there is money here. But it's not for you to use now. You are encouraged to be productive." But typically that's not the full narrative that's used.
Why is that harmful?
Because then the kids are confused as to whether they're expected to develop financial self-sufficiency. Parents add to that confusion by providing annual gifts or other financial transfers that don't meet the need for kids to develop that self-sufficiency.
You write that the typical industry attitude is that there should be family discussions about wealth transfer. But you stress: Don't have them when the kids are in their 20s. Why not?
That's a really critical period for development — the time when kids develop their own identity, form their own careers and life partnerships, and separate to a certain degree from the family unit.
So where does any conflict arise?
By that time, parents in their 50s and 60s want to see their wealth used in their children's lives: How can I make my child's life easier? So they start to [initiate] wealth transfer to them. That typically doesn't help the child as they're embarking on that critical identify formation because it can loop them into what can be a very dependent cycle.
What about parents who, around that time, try to interest the children in philanthropy, such as involving them with a family foundation?
If the kids haven't developed critical life skills, like earning their own money or having a career, that often doesn't work in the way parents hope. I see kids becoming philanthropic on their own once they have families and are trying to pass values down to their own children.
Wealthy parents siphoning off money on a long-term basis to a child, who perhaps isn't making it on their own, can lead to codependency: the child feels entitled and the parents are more than willing to give them money. That doesn't seem constructive.
It's rare that the child will ask for the first transfer of money. But the parent thinks: "I have all this wealth. How can I make my child's life easier?" and offers to pay for something. At first, it's appreciated, and then it becomes baked into their life.
What's the repercussion?
Over the years, it's harder for the parent to back off. And you throw in the emotional relationship between the parents and child, especially if the parents are going through a version of empty-nest feelings. If the kid phones, it's sad but understandable that many parents are happy for that call even if it's just asking for money. They know that if they say, "No," and stick with it, they won't get a call anymore; or if they do, it will be a call of anger.
Can this occur even if the kids aren't exactly "kids"?
Yes. For example, parents in their 80s can have still-dependent children who are in their 30s or 40s. At that stage of life, the parents just want family harmony. So the larger goal of trying to change the child's behavior to enable them to be more productive and independent is subsumed by the more immediate goal of simply wanting to maintain harmony.
You write that children of great wealth can be "dependent, childlike, bitter and frustrated" but that parents have no idea what they're doing wrong regarding money. They think, "How can I better express my love than by sharing my wealth with my children?"
Most people who are parenting with wealth haven't come from wealth. Some have even come from deprivation. Those parents, especially, are at risk for giving too much to their children because they want them never to feel like they did. So to them, there's no higher use for their wealth than to remove the chance that their children will feel deprived.
What has to happen to make wealth transfer work well?
