What is the most important factor driving the long-term success of wealthy families? It is not prudent investment advice or good estate planning, or even risk management. In a word, it is communication.
Seventy percent of wealthy families lose control of their wealth by the second generation, and 90% do so by the third generation, primarily due to lack of communication and trust in the family.1 Both engaging and preparing younger family members to manage family wealth are critical.
Barriers to Communication
While the evidence in favor of thoughtfully articulated wealth values is clear, families of substantial wealth often shy away from talking about money. Many parents feel they are not prepared to answer their children’s questions. They are unsure how to respond to questions like: “How much do you have?” or “How much do I get?” One possible response is: “That is a great question. Why do you ask?” By uncovering the motivation for the question, you can embark on a productive conversation. With older children, you may ask more sophisticated questions, such as: “I understand why you are interested, but how do you think the answer will change your perspective?” You will certainly learn something valuable about your child and perhaps what prompted them to ask in the first place. Having a few prepared responses in your back pocket can make these conversations less scary.
Many families feel that they do not need to communicate their values because their children see how they live. While your children see how you act, they have limited context – first, because they have less lived experience, and second, because as parents we tend to protect them from difficult information. Without context for our actions, they often do not understand the significance. Living in consistency with values is incredibly important, but not enough.
Often adults make financial literacy the cornerstone of family communication about wealth because there are clear, accessible answers. While understanding the “how” (what a 401(k) is and the role it plays in saving for the future, for example) is important, it is no substitute for an education on the “why” (why you save and plan for the future). The “how” and the “why” must go hand in hand.
Understandably, talking about wealth and values can seem daunting. How do you even begin to explain your reasoning around complex decisions about wealth? It starts with understanding your own values and then creating a plan for communication. At BBH, we help clients with this process by following three steps:
- Discover Your Story: Understand what in your family history has influenced your values.
- Live (and Plan for) Your Values: Consider how your values affect your decisions today and the plan that you put in place for the future.
- Share Your Story: Create a plan for communication, either now or in the future.
Discover Your Story
How we think about money is often deeply rooted in our past experiences – frequently in stories from childhood or early adulthood. Therefore, understanding our own perspectives should start by looking back. As Warren Buffett famously said, “Someone is sitting in the shade today because someone planted a tree a long time ago.” Values often have deep roots that trace back to ancestors we may have known in childhood or vivid memories from our early years and “first” experiences.
Luckily, many of these stories float to the surface with little prompting. To start, sit down with a blank sheet of paper, and draw a timeline on one side of the page. Go as far back as you have actual or inherited memories. Along the timeline, plot events and people who influenced your view of wealth. After you are finished, consider some of the following questions:
- What messages about money did you take away from each of those moments or people?
- What key choices did your ancestors make about money? Do you agree or disagree with those choices, and why?
- What lesson did you learn from this family story?
- How has this story informed your life choices? Your wealth choices?
- What part of this history is important to pass on?
Your family wealth story can elucidate why you make the choices you do about spending, saving, investing and giving. Attitudes about wealth are framed by the messages delivered to us – whether intentional or unintentional – by those who came before us.
Live (and Plan for) Your Values
We all have values, but most of us cannot articulate them readily. Not being able to describe your values does not mean that you do not act and plan in accordance with them. Your values influence your everyday decisions on an unconscious level.
Consider where you are spending your most valuable resource – your time – and your financial capital. What boards do you sit on? In which community, political or charitable organizations do you invest your time and money? Which qualities, characteristics and behaviors do you spend time emphasizing with your children – kindness, education, perseverance, achievement? From thinking about what you do, you will begin to understand your operational values – those values that influence how you make decisions (vs. those values you merely aspire to).
The next steps after completing this thought experiment are:
- Write down and prioritize the values that come from this exercise, and note a few that you want to be sure your children hear. Attach a story to each that explains the meaning and significance to you. Storytelling can be our most compelling form of communication – have them ready when the opportunity presents itself.
- Link your everyday actions back to your values for your children. For example, a message I heard a lot growing up was the importance of reliability: “You do what you say you are going to do.” I saw my own father do this when he would put on a suit in the middle of the night and go to the emergency room to see a patient who needed him. Now when my children ask me about why I attend an evening meeting instead of being home with them, I explain that I made a commitment to be there and had to follow through. The message: We follow through on our commitments, even when it is not fun or convenient, and we show up for the people who depend on us.
Some clients have a clear beacon that shapes how they use their personal and financial capital – a sibling or parent dying at a young age, being the first in their family to attend college, an influential mentor or parent. These vivid experiences and memories can drive their planning and how they want others to think about their legacies. One client had a son die at a young age. Now with her daughters, she has created a foundation to support families as they cope with similar childhood illnesses. However, more often than not, many experiences (rather than a single one) shape our values and influence how we plan to give away assets.
After identifying formative experiences with money and operational values, you may be intentional about how you integrate them into your estate planning, lifetime giving and philanthropic decisions. For example, the decision we see clients struggle with routinely is what purposes the assets in long-term trusts should and should not be distributed for. Often it is worthwhile for the donor of the trust to write a letter of wishes to the trustee explaining his or her intent. A letter of wishes that retells an important family story and cogently outlines the donor’s most important values can be useful and compelling for both the trustee and the beneficiaries in understanding why the trust was established and how it should be used going forward. Without this understanding, these letters can lack focus and sound somewhat homogeneous.
With money, we must also pass down love. No one wants to leave behind merely a list of assets and a stack of legal documents. Being open with what you value most, why and how those beliefs have influenced your planning for your children and the future is how you incorporate love into your legacy.
We acknowledge and thank Danielle Oristian York of 21/64 and Ellen Perry, author of "Wealth of Possibilities: Navigating Family, Money, and Legacy", for their insights and contributions.
1 Williams, Roy O., and Vic Preisser. Preparing Heirs: Five Steps to a Successful Transition of Family Wealth and Values.
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