Facing the wealth transfer challenge

Almost three-quarters of Australian family offices expect to see a generational shift in the coming decade. But 78% of private banking clients are concerned about successfully negotiating a wealth transfer.^disclaimerWith many worried about maintaining unity within their family, how can they prepare themselves to distribute their wealth appropriately?

In the next three decades, the cumulative value of wealth transfers made each year in Australia is expected to grow four-fold, according to the Productivity Commission. That growth comes off a base that already exceeded $120 billion in 2018.^disclaimer

Wealth transfer pain points

Although every family’s circumstances are unique, many share the same concerns about intergenerational wealth transfers.

Chief among these worries is that the process could sow the seeds of disunity within the family. Research by wealth consultancy The Williams Group found that 70% of wealth transfers in the US fail, and that 60% of these failures follow a loss of trust and communication between family members.^disclaimer

Failure in this context refers to any deviation from someone’s transfer plan, including the loss of all or part of a family’s wealth, disharmony within the family, or even the erosion of previously held values.

Another pain point is preparing the next generation for the responsibilities they’ll inherit along with the family wealth. The same study found 25% of the wealth transfers that failed did so because the family heirs were ill-equipped.

Collectively, these numbers seem to suggest wealth transfers are fraught with danger. However, there’s still good reason to be hopeful.

ANZ’s own research found that families that are actively planning their succession are more worried about the preparedness of the next generation than those who don’t plan. Meanwhile, separate research by RFI Global in October 2021 found that 74% of those actively planning their succession were very optimistic about the next generation, while only 35% of those not planning felt the same.^disclaimer

It could be that families just starting the planning process are introduced to challenges they were previously unaware of. And perhaps this knowledge enables them to plan accordingly, so that later on they can enjoy the peace of mind that comes with being prepared.

The findings also suggest that those who haven’t started planning are less concerned because they are in the dark about the complexity of the process – but as a result are less confident about their heirs’ futures.

Ultimately, how families feel about future wealth transfers often comes down to how early they begin planning.

The next generation: attitudes towards transfers

Younger Australians feel differently about intergenerational wealth transfers than their parents.^disclaimerIt’s startling, then, that only 17% of family offices have policies specifically focused on engaging these young people with their family’s wealth and educating them on its proper management.

So how well equipped are the next generation for the responsibilities that come with wealth?

A study of family offices by the Private Wealth Network, published in March 2022, found that young people aged 18 to 35 universally believed that mentorship from the previous generation would better prepare them to manage money.^disclaimer

Others wanted more direct experience and training. The study found 39% of this age bracket wanted to observe how their families actually manage wealth, 35% wanted on-the-job experience through board roles, while 32% wanted board director training to prepare themselves.

In light of this, it’s promising to see that more than 50% of 18- to 35-year-olds are already deeply involved with their family’s wealth strategy.

Even so, there is still some trepidation within the next generation. The Private Wealth Network study found that 29% of 18- to 35-year-olds want to forge their own paths with respect to their family wealth. And 14% of the cohort said they felt “burdened” by their families’ wealth.

This suggests there’s still scope to better engage with the next generation to both educate them and address their fears.

Addressing the challenge

Anticipating this challenge, many families are turning to trusted advisers for guidance and support. As many as nine in every 10 families say they rely on the input from an external adviser.^disclaimer

These advisers vary in expertise and skill set, ranging from trained professionals with deep experience managing money to long-term family friends.

Of these trusted advisers, private bankers are the most popular, followed closely by financial advisers.

Who do Australians rely on?

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Source: RFI Global Survey

But it’s not only the patriarchs and matriarchs taking the advice of those around them. Many families are introducing the next generation to their own professional advisers in the active planning stages.

These introductions can help build lasting relationships and give the next generation an insight into the services and support each adviser can provide, and an indication of their responsibilities as custodians of family wealth.

Although building these networks early can better prepare the next generation to inherit wealth, some families may require additional, more tailored guidance.

Many families will compile a series of documents designed to serve as a single source of truth regarding their wishes for the future. These documents may be physical or digital but are designed to answer any questions or settle any disputes the heirs may have regarding the distribution of the estate. It is vital that the relevant parties know precisely where these documents are being kept.

These often include, but are not limited to:

• your will
• account details
• trust deeds
• passwords and PINs.

Finally, most will be sure to appoint an appropriate executor(s). This decision needs to be treated with the utmost care. The people appointed to this role have significant responsibility and control over your fortunes and should be people you trust to understand and act on your vision.