Managing Wealth for the Next Generation (i.e. How to Not Spoil Your Kids)
By: Brian Seay, CFA
Desiring to build a financial foundation for your children, in other words, “multi-generational wealth”, is more common than you may think. Generational wealth is about building assets that provide opportunities and flexibility for future generations of your family. That does not mean you need to become a Rockefeller, a Vanderbilt, or have your name on a library. It also doesn’t mean your children will be automatically spoiled or that they will never work. In fact, this is probably the opposite of a compelling, sexy guide to acquiring more stuff. In this series of articles and podcast episodes, we explore how to build, maintain, and transfer generational wealth in a way that empowers your family with opportunities, flexibility and generosity.
Managing Wealth for the Next Generation
(i.e. How to Not Spoil Your Kids)
Key Takeaways:
Engage Next-Gen in Business, Investment and Family Planning Early and Often. Training Stewards Takes Time.
Focus on What Matters
Diversify
1) Engaging the Next Generation (and the one after that)
Concerned about spoiling your kids? You are not alone. Most successful families share your concerns. You may have read about “family meetings” or annual reviews where family members from multiple generations help dole out funds to charities or listen to updates from leaders in the family business. Meetings are a good start, but they are not sufficient to teach your children and grandchildren how to steward wealth. What have you learned by going to a few meetings? Probably not much. When you hire a team member, it takes days, weeks even years to train them to fulfill a role. Stewarding wealth is no different. It takes active training over long periods of time to build the next generation of stewards. Managing wealth is about the training period.
If you are concerned about your family’s ability to successfully steward generational wealth, you are not alone, your kids are likely concerned about it too. Research from RBC in the UK shows that more than 80% of 25–34-year-olds feel the responsibility of preserving wealth. Perhaps the old adage about the 3rd generation spending the family assets is less true today than we think. New levels of engagement among millennials and gen-z did not occur by happenstance. The desire for preservation is likely because families are more actively engaged in training their families to steward wealth. So how do you engage with your family?
The first step in the process is to begin engaging WITH them in the process. If business and money are not discussed in your household, then how can anyone build the skills required to succeed when it’s their turn? Here are a few ways to engage your family on financial planning and business issues:
Involve them in business decisions. Even high-school aged children can get involved in making small decisions around your business and investments. They should participate in meetings, analysis, and discussion. You can even ask them to recommend a course of action. Here are a few timely and engaging topics:
Should you move offices?
What about buying a new property?
Is your marketing effective at reaching gen-z?
How should you convince more workers to join your company?
What does our community not have that it should?
Ask about charitable causes they are passionate about. Then engage in those causes with both time and money. Younger family members can participate in discussions around annual giving, but getting hands-on drives passion and commitment long-term. You probably saw the impact of a charity firsthand in the past, they need to see that too. Charitable work is even more impactful when you are engaged together to support a cause and create change in your community. Your children and grandchildren will learn, be engaged, and have stronger bonds by working together. Not to mention your community will be better off!
Involve them in investment planning and decision making as they age. The best way to ensure “they pick up where you left off” is if they have been making decisions that impact family wealth for years before you’re gone. Once children are in their 30’s, they probably have a good sense of your family’s level of wealth, so seeing the details is unlikely to cause them to make different life choices. Have them meet with your investment, legal and tax advisors at least once a year and provide input on decisions.
2) Focus on What Matters:
Going beyond the P&L and building their understanding of your real goals is critical. You probably don’t manage your business solely to increase returns to equity holders and cash flow.
Why are you in this business?
Do your customers receive value and a better life because of your business?
Does your firm help the community thrive?
Does your business provide an asset and flexibility to the family?
As you engage your children and grandchildren in decision making, help them connect to the real purpose behind your family assets. If they understand and share the “why,” they are way more likely to carry that mission on long-term.
3) Diversify:
Individuals can build life-time wealth through saving and diversified investing. It is difficult to build generational wealth this way because the returns just simply aren’t high enough. Generational wealth is usually built by taking concentrated risks in a family business, real estate or other types of assets. Those types of bets are unlikely to succeed, thus the returns are very high. Congratulations, you may have beaten the odds. But, it is even more unlikely that your family will continue to make the right concentrated bets repeatedly with your business and investment interests. Thus diversification becomes more important over time. As your business grows and produces significant cash flow, it’s time to buy equity and debt in other industries. Acquire real estate if you aren’t heavily invested in real estate. Think about other long-term assets, and there are many asset classes, that both protect and grow wealth long-term.
Transcript:
Hey everybody. Welcome to another episode of the Capital Stewards podcast. Today we're excited to talk about how to spoil your kids. I. Oh wait, it's not that. It's supposed to be the opposite of that.
In our last episode, we started talking about multi-generational wealth and how to build that for your family. And so today we're coming in with a secondary episode about how to do that and not spoil your kids.
When I was thinking about this episode. So often the way that sort of existing wealth management and investment firms. Teach kids and try to pass things down from generation to generation is by having a family meeting once a year. We should have this meeting, share all this stuff with your kids about your assets and, tax issues and other things that are going on. But what do you really learn in a two hour meeting? Nothing right
Annual reviews, this sounds like a corporate headquarters. Yeah. Doesn't that sound exciting? Like something you really wanna participate in?
I know my six-year-old wants to go through an annual review. Yeah. You are underperforming child. , you do not meet expectations in regards to keeping your room clean.
Yeah it's like, Hey, let's have some meetings, different generations, kids, grandkids participate. They do a lot funds to charities or listen to updates from leaders and a family business. And meetings are a good starting point. They're not bad. But they're definitely not sufficient to teach your kids or your grandkids, how to steward wealth. What do you actually learn in life by going to a couple of meetings? Probably not much. When you hire a team member, it takes times. It takes weeks. Day's years to train them on the skills that they need to fulfill a particular business role. You learn whatever business you're in over a long period of time. So stewarding wealth is no different. It takes active training over long periods of time. To build the next generation of stewards. And so managing wealth multi-generationally is really all about the training period. So that's what we're going to talk about in this episodes
well, it sounds like a great irony, like we create multi-generational wealth to give our family freedom and flexibility and instead we treat the training like they're an employee of a, a company.
Yeah, exactly. And so we wanna do something different and we wanna approach it differently. And so that's what we're going to talk about here. So let's dive it.
This morning, my day started with my child walking up to my bed and her first sentence out of her mouth being an expectation of something that felt very spoiled to me. So in that context, Brian, let's talk a little bit about, if we're concerned about our family's ability to steward generational wealth.
How do we set that up well, and how do we engage the next generation?
So, yeah. So I think the first part of this process is to reprogram maybe some of our expectations that we may have coming into this. I think a lot of folks have heard that. This anecdote that the first generation makes the money. Maybe the second generation protects it and the third generation blows it or something to that effect. And that's actually less true today than it has been historically that there's research from the UK. That about 80% of 20 to 25 year olds across wealth and income groups are actually concerned about preserving the wealth of their family. They want to be engaged. They want to be involved. They're not interested in, just sort of blowing everything so to speak. So they do want to be engaged and involved., But they need to be taught how to do that. And so it's up to us to figure out how we engage them, how we bring them in the process, how we teach them and train them so that when their sort of time comes down the road, they're ready to do that.
And for me, the best way to do this is to engage them in the process of stewarding our wealth while we're still here to do it. So if business and money aren't discussed in your household, , how can anybody build the skills that are required to succeed when it's their turn to be the steward of those assets? Particularly when we're talking about multi-generational wealth, because they're not going to find those skills. In the common media and, and things that they're taught in school and stuff like that. So i want to talk about a few different ways that you can engage your family on money
okay, give us some ideas. How can we gauge our family on money?
So the first thing is to involve them in business decisions even high school age children can get involved in making small decisions around your business they can participate in meetings they can do simple analysis they can be part of discussions they can even make recommendations
I don't know what you're talking about. They can go on chat G p t and tell you how to run your company.
Yeah. Although I don't know that the answers. Our very good, the advice may be suspect, but apparently., next generation's very good at using chat GTP for school. So maybe they can apply to your business to use your own judgment. There. And you may or may not want to take their recommended course of action, but you can give them in the habit of understanding what's happening, how you evaluate. , information to make decisions and how you're making decisions as a family. , so if you're going to maybe move offices, should you buy a new property? Are your marketing techniques. Effective at reaching a gen Z region. The next generation, if you're running a business that is selling to those folks, they could probably give you a really good idea about that. , How should you convince a younger or entry-level workers to join your company? , there are things that younger folks. , uniquely have some perspective on, they may be able to actually add some value to your decision-making. , In ways that a adults wouldn't think about. So, , I think there are times when we're, , maybe afraid to hear some of those things. And so we don't engage our kids. And I think that's true across the business landscape in general, but I do think you can get your kids involved in some of those business decisions. , So that they can start to understand the business and how it works at a more fundamental level
I look forward to having some of these discussions at our dinner table.
How can we recruit more workers in this family free ice cream every day? Yeah. Right. Our house might start to look like a Google office there.
Yeah, I could get behind free ice cream.
The second thing that you can do is ask them about charitable causes that they're passionate about and then engage in those causes with them with both time and money with them. And with both time and money. No, I said that twice. I didn't that wasn't an editorial mistake. A lot of times, younger family members, they're participating in discussions about giving every year., but a lot of times the causes or things that you care about the mom and dad, or grandma and grandpa really care about, they're not necessarily things that they're engaged in. So I think it's important. To get them participating in the generosity of your family. In things that they're passionate about. And then secondarily, it's really important that you actually get involved in those causes or those charities or organizations, whatever it is that you're supporting.,
I can feel us right now, we're gonna be donors to the zoo. And let's see, what else? Like any pet related causes, Is getting in a donation for us very soon.
And it doesn't have to form the core of the thing that you're doing from a philanthropic standpoint. Right? You may have things that you're still really passionate about. It doesn't mean you have to change that., but you can get them evolve around the edges and do things that they're engaged in it.
They're passionate about. And if you are attending events with them, if you're volunteering with them, it's actually going to build your family. While you're being generous to your community, your family is going to be more engaged together. You're going to have a stronger family., and your kids are going to get to see the impact of what they're doing. , they're going to feel great about that. , and so, I think if you build this sort of philanthropic muscle in your kids over time,, it's going to, help you train them to be. Great stewards down the road
Amazing. Any other tips on how to involve kids in investment planning and decision making as they age?
Yeah. And maybe the last point I'll make on engagement is as your kids get older, the best way to ensure that they pick up where you left off is if they've been making decisions that impact your family's wealth for years and years before you were gone., this is how transition planning works in every other organization in the world. , we bring people in, we train them up, they start making those decisions under our guidance. Maybe the leader leaves and they stay on as the chairman or something like that and make sure that the transition works really well.
Um, And then in our families, we do the exact opposite., we don't talk about things. We don't engage people in stuff. And then when we're gone, we're like, Hey, here's a well, I hope you get it right. And that just doesn't work. So as your kids get older, we want to start engaging them in a more holistic wealth management planning discussions. The most common objection to engaging kids fully in a transparent., well, planning investment management tax conversation is,, is sort of thinking about, well, I don't really want to tell them about how much we have or where it's gonna go or, you know, uh, I'm afraid that if I tell them things, we talked about spoiling your kids earlier that it's going to change their behaviors. Once kids are in their thirties, they have a pretty good sense of your family's wealth, right? You probably actually have a pretty good sense of that in high school, certainly in college.
But certainly by the time they're in their thirties, if not before. they've been out of school for a decade that they've, they've been to college. , they've been in school for 20 or 25 years. Um, they probably understand where you sit vis-a-vis society. And so you're probably not going to shock them or surprise them with anything that you tell them.
And I also think that by the time they're in their thirties, they've already had to make decisions about their own life. So they've already had to decide what they're going to be passionate about, what they're going to engage in, what their career is going to look like. How they're going to start their own families, all those kinds of things. Maybe they're working in the business. Maybe they're not.,
So I don't think that opening the books. The family book, so to speak at this point, it's going to cause them to make significantly different life decisions.
So how do we engage them? Have them involved in meetings with your investment team, with your legal team, with your tax advisors, at least once a year. , so they can see how those conversations go. They can learn how you steer the ship, they can see, how your, , managing your assets, how you're working with those folks and how you're making decisions., on behalf of the family.
You know, it's interesting because we started this episode off talking about spoiling, spoiling your kids, and that phrase of family as the mission versus family on a mission comes to mind for me. And how you kind of engage your kids being on a mission together versus them being kind of the recipients of everything that you've done, which to me, I think is a real potential delineator between whether the kids are stewards or kind of recipients and the mindset that goes along with that.
Yes. And I think the more they see you actively stewarding your family business, actively stored in your assets, being involved, philanthropically in the community. And the more they're doing that over time, and the more they're exercising their own muscles, doing that over time, the more likely that they're going to become that person, that you're training them up to be, The other thing I would say is it's really important to focus on what actually matters to your family. , it's important to go beyond the P and L. , so to speak and to build their understanding of what your real family goals are. You probably don't manage the business solely to increase return on equity or return to the various equity holders and profits., engage them in conversations around why you're in the business that you're in your customers. Get a lot of value and have a better life because of your business. Why, why did you start it? Why are you still passionate about it? Maybe you have lots of tenants out there that have a place to live that, you know, maybe otherwise wouldn't have housing or it wouldn't be as good. Does your firm help the community around you thrive or are you involved in local youth sports in the high schools and middle schools and sponsoring stuff all over town? Does your business provide an asset and flexibility to your family that allows family members to do things. , that they wouldn't necessarily otherwise be able to do. So, you know what those things are that are sort of outside the formal P and L of your business., and when you're thinking about stewarding wealth, all of those things are important. So involving them in all of the decision-making around how you're running your business and how you're thinking about managing your wealth is really important so that they build that bigger perspective lens., sometimes it's about longer term thinking, right? Maybe we're not, we're doing something that's a little bit suboptimal for the business today because we want to have some sort of community impact or because we want to set our family up to do something. Longer-term down the road. , and those things don't just show up in a PNL. And so when they see you. Um, connecting the decisions., that you're making to the real purpose behind your family assets, the things that you're called to in life, the things that you're passionate about. Then. They'll have a better sense for how to do that when you're not there anymore., and so it's really important that you build that really higher, sort of order decision-making and building those decisions in that they're not going to read in a book, they're not going to find it at a great business school. They're not going to find it in college or anywhere else., you've got to train them into those things because, that's the only place where they're going to learn,, some of those,, some of those skills.
Okay. Okay. In episode. Okay, so in episode one, we talked about the importance of diversification over time. Obviously, if you're teaching your kids about the wealth and assets that you have built over time, that's gonna be a key principle of their stewardship. So maybe just circle back, Brian, on diversification as you're bringing your kids into the business.
And how we might think about that once we've moved from, you know, phase one of like, we're just trying to build enough wealth to acquire assets, to now we have a portfolio and we're really trying to teach our kids about how to sustain that over time.
Yeah. So as we mentioned, the first episode, , it's difficult to build true multi-generational wealth through more of a standard diversified retirement portfolio that you see, , kind of online and common media and things like that. You've got to invest differently. , but that doesn't mean that we ignore diversification principles. Generational wealth is usually built, taking concentrated risk inside of a family business or in real estate or other types of assets. , those types of bets are actually unlikely to be successful. That's why they, , generating the kinds of returns that they do. If they were super likely to succeed, everyone would do them and the returns would be lower. So you've beaten the odds, so to speak, and. If you're in the middle of that journey, it's unlikely that you're going to be able to continue to make exactly the right decisions over and over and over and over again, and continued to beat the odds otherwise., that wouldn't be, what the odds are. And certainly for your kids throughout the rest of their lifetime, you know, as much as you train them, it's going to be difficult for them to continue to make, those decisions. Right. And to continue to, to win in a concentrated way over and over and over and over again, across multiple generations. , so diversification becomes more important over time. , as your wealth grows, it produces more cashflow. And so that's when it's time to buy equity and debt in other industries. , acquire real estate. If you're not investing in real estate. Think about other types of long-term assets. So if you're, you know, if you started in real estate, maybe you start., investing in businesses if you started in businesses, which over to real estate,, and then within each of those categories, there's, you know, there's a hundred different kinds of real estate that you can buy, and there's a million different kinds of businesses that you can buy. Right., so there's lots of ways. To get more diversified, across your family's entire portfolio.
So let's recap and kind of wrap up for our listeners, this idea about engaging the next generation in multi-generational wealth holding.
So we talked about a few things. The first thing is to engage with your kids, involve them in business decision making. You don't have to wait until they're in their thirties or forties. , that can start in high school. Well, maybe even before., secondly, get involved in charitable causes, participate with them and that kind of stuff. Don't just give money places, but actually go work shoulder to shoulder with your kids. Get involved on what's going on., third thing is involve them in investment planning and decision-making as they age. , we talked about this in a little bit more detail, but you don't want to wait until the very end of your life to do that. Having them see you make those decisions along the journey is really important. Teach them, what really matters? Why are you in business? Why are you in the business that you're in, what's most important to your decisions? Have them see you make decisions that reflect those values over time. That's a great way to instill those things in your kids. In the lastly diversify. , as your family's wealth level grows, your asset level grows. That's really important to start investing in other types of businesses in other industries, so that you're protecting your wealth. For generations to come
awesome. Well, thanks so much for episode number two on building multi-generational wealth. Bringing the kids along for the journey is always so much fun. This is episode two in a three episode series, so we look forward to seeing you back when we talk about transferring wealth for generational impact kind of beyond estate planning and taxes.
So yeah, see you then