LAYVE RABINOWITZ: How to keep the young rich wealthy after the old rich die

Managing wealth is not easy at the best of times, but the next quarter of a century is set to be an unusually challenging one as Baby Boomers pass on an estimated $100-trillion to next-generation family members, in the greatest wealth transfer in history.

Among the challenges is that the heirs to these fortunes, the so-called Zennials (Millennials and Gen Z), will have to make financial decisions in a far more challenging wealth creation environment than their parents had to because the macroeconomic and political environment has completely changed.

They also have vastly different financial aspirations from the older generation, which further complicates the smooth handover of this considerable wealth from generation to generation.

The most recent US Federal Reserve data shows that Baby Boomers hold 50% of the wealth in the US vs the silent generation that came before them, comprising a far smaller 11.9% of the wealth in the fourth quarter of 2022.

The extent of the wealth accumulated by the Baby Boomers can be attributed to what economists call the Goldilocks era, when economic and financial market conditions are described as not being too cold or too hot. That meant a $100 investment in an S&P 500 Index Fund in 1980 multiplied 120 times to $12,000 today, and US home values increased about 300% over the same period.

While decades of low inflation, low interest rates, soaring house prices and rising stock markets enabled Baby Boomers to generate more wealth than any previous generation, the next generation faces a new routine, likely to be characterised by greater risks, volatility and uncertainty, and potentially higher inflation and interest rates. 

It’s not only this unpredictable and trickier wealth landscape that will pose challenges for successfully transferring wealth from one generation to another. The vastly different financial aspirations of Zennials compared to the older generation further complicate the smooth handover of this considerable wealth from generation to generation.

Younger generations tend to prioritise living life to the fullest, whereas older generations have generally prioritised working to build wealth. Younger investors prioritise green investment considerations, while older investors have focused predominantly on investment performance. Younger investors tend to prefer passive investment products, while most investors in the previous generation have preferred to invest in actively managed investment products. Younger investors are also more tech-orientated than the older generations, making them open to investing in disruptive but less predictable investments such as cryptocurrencies.

Against this backdrop, there is little wonder that the results of the Stonehage Fleming Four Pillars of Capital survey saw sustaining family wealth and failing to engage the next generation as one of the top three risks for ultra-high-net-worth families.

Poor investment outcomes and political risk entered the top three for the first time in a decade, highlighting the financial concerns weighing on the minds of the 300 ultra-high-net-worth family members participating in the survey (20% of whom were South African). 

This seismic shift in what ultra-high-net-worth families perceive to be the greatest challenges they face signals how acutely aware they are of the elevated financial risks that lie ahead. However, the lion’s share of the respondents in the survey (80%) indicated that they had not yet established a formal process for identifying and mitigating those risks.   

On a positive note, the 2023 survey reports that more than two thirds of the families are already taking proactive steps to give the next generation a more prominent role in family decision-making and financial responsibilities, with the trend more advanced in Africa and the Americas than in the UK and Europe.

Family offices are well positioned to help ultra-high-net-worth families in this respect. They have the resources to bring together family members with disparate views and the expertise to provide wise counsel on preparing the next generation for the financial responsibilities they will take over in the next 25 years.

In addition to the financial considerations, several nonfinancial challenges threaten to undermine a harmonious wealth transfer from the Baby Boomers to the Zennials. These include reputational risk arising from the next generation’s active digital footprints and the mental health tsunami fast spreading across the younger generations.

Though reputation is everything for most ultra-high-net-worth families, the survey highlights that 90% of respondents are not tracking the digital risks of the family, notwithstanding the damage a single post by a family member or staff member could do to a family’s reputation.

Most worrying is the steep increase in mental health issues being experienced by the younger generations. Almost one in five young people in the US reportedly experienced a major depressive episode in 2021 — double the proportion of young people suffering from depression a decade ago. The UK’s NHS reports similarly worrying mental health problems among the young, with a quarter of young people aged between 17 years and 19 years having experienced major depressive episodes in 2023.

Considering these challenges, it’s clear that succession planning needs to extend beyond financial education and training to becoming digitally savvy and ensuring the next generation has access to mental healthcare and resources.

The adage “shirt sleeves to shirt sleeves in three generations” aptly sums up the historical challenges of transferring wealth to the next generation. As the Great Wealth Transfer unfolds, families’ best chance of breaking this cycle is to prepare, educate and empower the next generation to take on the responsibilities of building wealth for generations to come.

• Rabinowitz heads the Stonehage Fleming Middle East & Africa family office.