3 Measures To Help Protect Your Family Fortune Through Generations

By Chirag Nanavati  
Tuesday, July 19, 2016

Chirag Nanavati, Executive Director, Asset Vantage
In a perfect world, high net worth families would focus on building their wealth consistently across generations. In reality however, reports across the globe suggest that 70% of wealthy families lose their wealth by the second generation and a stunning 90% by the third.

The root cause for this problem lies in the lack of trust between the generation that worked hard to amass the wealth and the generations to follow for whom this money comes easy. The older generation fears disclosing financial information to their children thinking, that would make them lapse into laziness and develop a poor work ethic. The common belief among principals of high net worth families is that the next generation is financially irresponsible and will frivolously spend away their inheritance.

Clouded by these delusions, families falter at succession planning and hence prepare the next generations to fail. Here are three measures that a family can take to protect this colossal proportion of heritage from getting squandered away.

1) Start early andeducate the next generation It is important to create an open environment where family members can comfortably have discussions about wealth. By proactively instilling financial literacy from an early age, the fears outlined above become irrelevant. It is highly unlikely that if your children understand concepts like the power of compounding and the time value of money, they would recklessly spend money away. The lack of financial knowledge naturally increases the risk of investment mistakes. Especially, with high inflation rates in emerging markets like India, the family patriarch must fully understand and communicate the need to beat inflation and demarcate the real margin available for spending.

2) Set clear goals & milestones Just like your business, setting a vision as a collective unit for the long term preservation of your family wealth is of paramount importance. A shared sense of core values towards creating wealth, saving, spending and giving can act as a foundation on which generations can continue to build a dependable financial eco-system. Additionally, the older generation can also set wealth creation milestones for the next in kin that will serve as a roadmap to track financial progress and handling increasing responsibility over time.

3) Leverage technology to build a transparent &consolidated view Ease of access to consolidated wealth information is a family's Achilles heel when it comes to its financial well being. Moreover, data aggregation becomes increasingly complex as the family and its portfolio size continues to grow. This data is traditionally managed and passed on in the form of spreadsheets, physical documents, investment fund statements, bank statements and more paperwork. For the next generation of principals, having a complete picture and tracking performance of each investment in such a scenario is extremely burdensome.

Today, as a new era of tech-savvy inheritors are taking control of their finances, they demand greater efficiency in terms of transparency, data management and accessibility of information.  Also, families need to secure their data and documents by recording them in a single secure system to deal with any future emergencies.A recent report by PWC affirms that the global wealth management sector is lagging in the adoption of technology and a large number of high net worth individuals prefer to rely on powerful digital solutions in addition to human contact. Technology, an important enabler in this scenario, not only facilitates greater transparency and control over one's finances, but also ensures a smooth transfer of information to the next generation.

Some of the most prosperous multigenerational families are steadily adopting a few practices to ensure that the family legacy survives future generations. According to the recently released World Wealth Report 2016 by Capgemini, the wealth of high networth individuals in APAC (Asia Pacific) witnessed a growth of 11% as opposed to the global growth of 4%. This growth has the potential to change the general attitude towards sustaining wealth across generations. Since succession planning has always been an area of distress, high net worth families must flag preparing the next generation for their financial future with these few measures as high priority.

Column by Chirag Nanavati, Executive Director, Asset Vantage

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