Is 70% Failure Rate OK?

According to a recent Forbes article, 70% of intergenerational wealth transfers fail, according to research conducted on over 3,250 families who transferred wealth. That is, inherited wealth is dissipated by the heirs at this stunningly high rate.  It’s an international phenomenon.

So what is going on?

Surely families with the skills, work ethic and foresight to accumulate wealth also anticipate what it takes to successfully pass on their knowledge and vision to the next generation along with the assets? Not so much, as it turns out.

The researchers identified the root causes of the failures and found that the main reason was that no  planning or preparation was going on for the post-transition period. The  transferring families were not preparing their heirs for the multiple kinds of responsibilities they would face when having to take over the reins.

None of the failed transitions could be blamed on poor legal preparation, inadequate financial advice nor improper tax preparation. Rather, these professions usually did well for their clients.

"By contrast, the 30% of families who succeeded did so with broad and well thought out planning, preparing both children and grandchildren for their futures. A key component was to identify a family mission as well as a strategy to attain it.  The heirs understood what the family’s identified mission was about the family wealth.  With that known they were given the opportunity to practice their roles for the future, in philanthropy, the family business and other ventures at a more minor level than they would have upon the passing of the patriarch or matriarch who headed the family at the time."

My own experience of over 40 years as a business lawyer confirms what these research results say. But why? Why is it not the 70% who succeed in their goal? The reasons are many but mainly fall into two broad categories, I would say - Assumptions and Fears.

Assuming that one or more heirs has the desire and ability to take over and manage the business, farming enterprise, real estate assets, or investment portfolio is dangerous. Even the fact that a child is already active in the family business does not guarantee they have the abilities to sustain it or share the mission of the parents as a reason to sustain it.

Then there are the fears which block communication and preparation. Some common fears which become obstacles to success are: "if the kids knew what we are really worth, they'd pressure us with guilt for money now, take advantage, stop working hard." Or fear of loss of control: "They don't know how to run it like I do. If I give them the decision making, it will go downhill." Maybe, but if they don't start to take over before you die, you pretty much guarantee your fears will come true.

Of critical importance in researcher Roy Williams’ work is the building or improvement of trust and open communication in families, to permit them to be among the successful ones in transferring wealth.  He does this through professional coaching programs, offering layers of learning for both those passing on wealth and those who will receive it.

If you have family wealth, congratulations. If you'd like to explore how I could help by coaching your family in this type of transition, email me at waverockcoaching@gmail.com

Lorne