The road to multi-generational financial planning

If you speak to HNI (high net worth individual) or ultra HNI (UHNI) families, they will tell you that their biggest concern is sustaining the wealth that they have worked so hard to create. Creating multi-generational wealth is difficult, but there is an increasing consensus in the financial world that sustaining this wealth might just be the harder task. These concerns are backed by statistics. According to Forbes India, only 30 per cent of family businesses make it to the second generation and 12 per cent to the third, while only 3 per cent go beyond the third generation.

Hence, it becomes extremely important for families to discover concrete routes to multi-generational financial planning. The role of a multi-family office (MFO) can come into play here; apart from handling investment planning, real-estate management, and providing CFO services, MFOs act as trusted advisors for HNI and UHNI families.

As trusted custodians of wealth for UHNI families and business houses, MFOs play a crucial role in safeguarding wealth in good and bad times. They can also provide guidance to HNI and UHNI families regarding the importance of mentoring the next generation in order to safeguard and grow multi-generational wealth.

Trust deficit

Several studies and researchers point to the fact that family wealth is often lost due to lack of trust and communication between the older and younger generations. Leaders of wealthy families are often wary of their heirs’ ability to take responsibility and not squander away family wealth. Such sentiments hinder the younger generation from gaining knowledge and exposure to business and family financial matters.

This should not be the case, welcoming young leaders and enabling them to carry the family legacy forward are the best ways to secure multi-generational financial wealth. The old adage you give a man a fish and you feed him for a day, but if you teach him to fish and you give him an occupation that will feed him for a lifetime, should be a cornerstone principle here.

In this context, involving the younger generation in asset management decisions at an early age is an important element for families to consider. Key aspects for the younger generation to imbibe include dos and don’ts in investing, how to assess the values and processes of advisors, taking a long-term outlook on investing. The most significant attribute that we believe needs to worked on is avoiding the fear of missing out.

Right mentorship

Some of these matters are related to the analytical aspect of investing and the more important aspects are related to the behavioural aspects of investing. These aspects can take anywhere between 3-5 years to imbibe but is something the right mentorship can impart. Having a good family office advisor who has a framework for such a mentoring programme can help aid this process.

The younger generation today is focussed on making an impact in the world, hence, HNI and UHNI business leaders should focus on creating a purpose-driven environment that will motivate their heirs to be more involved in the family business. Children should also be given the right amount of freedom to explore their interests outside the realm of business in order to strengthen their holistic knowledge.

Developing the next generation is one of the most important elements of creating and sustaining multi-generational financial wealth, hence, HNI and UNHI families must work towards embracing the younger generation.

Apart from mentoring the younger generation, HNI and UHNI families should also work towards creating wise wealth. The first step in this direction is to segregate family wealth into “core” and “excess” capital. The “core capital” should be used to create a well-balanced and mixed portfolio of traditional and liquid assets that can support the family’s basic lifestyle needs. Once the core portfolio is built to generate the yield required to meet the required expenses, the rest can be invested in really long-term avenues.

Long-term investing

The power of long-term investing, that does not look at benchmarked returns every quarter has to be experienced to be believed. Meanwhile, the “excess capital” should be set aside for future generations i.e., children and grandchildren. In addition to this, “excess capital” funds should also be earmarked for charities and set aside in a way that matches future risk profiles so as to optimise profits for intended beneficiaries.

An airtight succession plan is another key component in multi-generational financial planning. An often underestimated tool, a thorough succession plan ensures the smooth transfer of wealth, power, and control of business from one generation to the next. In the Indian context, succession planning can be particularly helpful because of the tightly-knit nature of family businesses.

In 2018, India was home to the third-largest number of family-owned businesses in the world; most family businesses prefer to pass on the business to the next generation or next of kin. However, this can often lead to succession battles and long-drawn court litigations, hence, a well thought out succession plan is often the best route for HNI and UHNI families to avoid erosion of wealth.

Sustaining and growing wealth over multiple generations can be an arduous task. However, providing the right mentorship to the next generation combined with the right succession plan can ensure that the family’s financial legacy is passed forward to the chosen heirs in the most efficient manner possible.

The writer is Principal Founder and MD, Entrust Family Office