Guide to Generational Wealth | AWM Insights #128
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Episode Summary
It is estimated that 70% of wealth is lost by the second generation and 90% by the third. This is what defines the phrase “shirtsleeves to shirtsleeves” and it has been this way for centuries and across cultures.
What can be done about it?
You have to start by being intentional and focusing on solving the problem for your family. Begin by thinking big picture and spending time and resources to set your family up for success over the long term.
The number one issue we have seen is a lack of skillsets - not technical knowledge. Not knowing how to talk to your kids and failing to prepare them can be addressed early on. Setting the intent and fostering strong communication over decades can establish the foundation for them to then be successful into the next generation.
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Episode Highlights
(0:27) There is no greater impact than working on your family and helping them become the center of that impact. Not just for today but into the future.
(1:38) Why doesn’t wealth transfer? How you can have more impact on future generations?
(1:44) Family wealth includes more than just dollars and cents. It includes values, history, and the stories that create family legacy.
(2:05) Intentionality is difficult. The numbers are unfortunate. It’s estimated that 70% of wealth is lost by the 2nd generation and 90% by the third generation.
(2:30) The “shirtsleeves to shirtsleeves” epidemic has been around for centuries.
(3:02) To break this trend, you have to begin the process. Doing nothing or passing it off to someone else isn’t the best solution.
(3:30) You shouldn’t be afraid of your kids inheriting large sums of money. You should feel confident they are prepared and educated on how to handle it when that times comes.
(3:50) Passing off the wealth to someone else probably won’t result in the greatest impact for your family. Training your own family and heirs to steward the wealth well is an incredible opportunity that you have a lot of control over.
(4:32) The data shows that 60% of the reason wealth doesn’t transfer is communication, and 25% is due to heirs being inadequately prepared. Technical knowledge only makes up a small amount of the problem.
(5:45) Lack of skillsets. Not knowing how to talk to your kids and failing to prepare them can be addressed. Setting the intent and fostering strong communication over decades provides the foundation for them to be successful.
(6:20) Not talking about money is common in our society. Communication should be encouraged and framed in the right way.
(7:00) Talking about the work, study, and effort that went into earning that wealth is a great opportunity to frame wealth the right way.
(7:56) Stewarding the wealth generation after generation becomes the mindset rather than just focusing on what you can do with it only in your lifetime.
(8:34) Wealth can be financial capital, human capital, social capital, and charitable intent. Each of these types of wealth deserve their own conversation.
(9:11) Generational wealth is more than just a portfolio and how big it is.
(9:23) The families that successfully transfer wealth are ones that take a step back and establish intentionality and a big picture vision.
(9:55) If you’re a business owner, you have utilized your intellectual capital and intelligence to create a new opportunity. Teaching financial capital is important but arguably more important is social capital. Relationships and the people you are around is an incredible opportunity to model for your children.
(11:02) Put your kids in a lunch with you and someone important and teach them the importance of relationships to begin building their social capital.
(11:45) The technical side or financial science is just one part of the equation.
(12:29) Building the foundation for a flourishing family that will make an impact for generations is a fulfilling endeavor.
(12:46) It’s never too early to start. The younger years are actually the most influential when it comes to money. It’s also never too late. The worst strategy is to not communicate and leave it to chance.
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+ Read the Transcript
Brandon Averill (00:16): Well, welcome everybody. We're back for another episode here of AWM Insights. Justin, I'm excited to jump in today. We talked a lot about impact in the last episode, how to think about that, how to do it effectively. And there is absolutely, I'm convinced of this, I think we all are, no greater impact than really working on your family and helping your family to become the center of that impact. Not only for what's going on today in your current family, but hopefully for generations to come. And I think, yeah, certainly this is an area that most ultra wealthy families should be focused on. We're going to get into some of the stats that unfortunately this doesn't happen. But I'd argue all the way down the line, this is something that people should be focused on because, yes, transferring wealth is a big part of things. Wealth is in the eye of the beholder in large part, but it's also transferring values and transferring your stories and all those types of things. And I think you can have tremendous impact across the board over time.
(01:18): So we're going to jump in. We kind of want to frame a few the different things today. We want to frame why are we even talking about this today? What's the problem that exists? A little bit about also how to go about fixing this, or at least getting on a good path to hopefully have more of an impact down the line. So let's start there, Justin. Maybe jump in, Kind of frame this for us a little bit. What is the problem? Why doesn't well transfer? Why are we sitting here talking about this?
Justin Dyer (01:47): And I think it's important to underscore, at least I want to underscore what you were saying. We're going to use the term family wealth here. And it's a lot more than just the financial side of things or the dollar and cents. That's a big component of it but you can apply this to every single aspect of life. Values, history, personality. I mean, there's an argument of nature versus nurture in there somewhere. But just being intentional. At the end of the day, that's what we're talking about. And intentionality is difficult and the numbers behind it are unfortunate really, at the end of the day. 70% of wealth is lost by the second generation. I mean, that's staggering.
(02:26): So the first generation builds it, earns it, whatever you want to say. And then 70% of it is gone by the second generation. 90% by the third. We've used the term, but this is the shirt sleeves to shirt sleeves epidemic as it's called. It's not new. It's been around for generations and centuries and long, long periods of time. But it's something that's worthwhile to solve and something we're really, really passionate about. It gives us a whole nother motivator really to do what we do on a daily basis, to put the hard work in there to help people be more intentional, to be more high performing if you want to think about that with our client base, to really try and break this trend, which it's not easy, it's not necessarily difficult, it's a process. It just takes that intentionality really.
Brandon Averill (03:22): And I think one other thing about this is we often hear, many times, I think we've mentioned this on a podcast before. But so many people think about it like, here are these stats, and I think it gets paralyzed. Or it's like, yeah, this is exactly why I don't want little Johnny or Sally to inherit this. I'd rather kind of give it away and give it to organizations that can utilize it. But I think that's kind of a myopic, very small viewpoint. At the end of the day, you're going to be gifting that to somebody. And unfortunately as a society, we aren't trained very well in financial aspects or wealth. And so we would argue what better place to actually have an impact than to train your own family, your own heirs to actually deal with this wealth. And deal with it is kind of a strong word, but steward it well and actually make that impact, jump on top of each other rather than falling victims to these stats.
Justin Dyer (04:23): And training. Just to piggyback on that word, I mean it really kind of boils down to that. So there's some studies that try and look at why doesn't this actually work? So we went over the statistics of how poor wealth actually transfers. 60% of it according to one study by the Williams Group. Basically they say they found 60% of it boiled down to communication. And I mean we all know that. Communication is difficult. We humans are terrible at it for whatever reason. And it also applies here. 25% is due to errors being inadequately prepared. Chances are that's probably due to bad communication. So this isn't because of some lack of technical knowledge, or in some cases, it can be, but very few and far between, is it some big glaring thing that you would commonly probably guess off the top of your head.
(05:25): It really boils down to this aspect of communication, instilling your values, your history, and like you're saying, to give the gift, if you will, to your family and future generations, to become a steward, and have a much greater lasting impact on your wealth, even if it is charitable. That's okay.
Brandon Averill (05:44): Absolutely. Yeah.
Justin Dyer (05:45): But you get to magnify it, you get to educate your family for years and years or generations to come, many, many years to come to really make that impact.
Brandon Averill (05:54): And I think what you're talking about here is exactly why the problem exists. It's that communication, it's the lack of intent, maybe the lack of skillsets, not knowing how to deal with some of these topics, not knowing how to talk to your kids. I mean, it's totally natural. I totally understand the argument. I was talking with a colleague the other day and they were talking about it. They have a friend that's a surgeon, he makes several million dollars a year and they were having a conversation about his children, and they're in their teens and buying cars, et cetera. And the colleague of ours had asked, "Well, how have you talked to them about money?" He's like, "Whoa, I'm not going to talk to them about that. Are you crazy? I'm not going to let them know that I make a couple of million dollars a year."
Justin Dyer (06:40): [inaudible 00:06:42]. Brandon Averill (06:42):
But it makes sense. I don't want my kids to hear, oh, I make a few million dollars a year and then all of a sudden there's this entitlement factor. But I would argue or we would argue that the times that we've walked through this with clients is that's not what your kids hear. Your kids hear what you value, how you value money, how you emphasis on money. And it's such an opportunity to talk about how you've actually earned that wealth, the amount of time that person spent in medical school, and how much work, and how many surgeries and all these types of things that had to go into building that wealth. What fantastic lessons for those children to learn as opposed to them not knowing the high level details, they're still getting all the toys and the cars and all that kind of stuff. So why not take the opportunity to educate them?
(07:28): And so as we shift a little bit towards at least what we believe some of the answers are here, I think, starting to think about how are some ways to fix it. You've brought it up in this conversation, by passing those values, we just talked about it, passing those stories on. I mean, it's no secret there. There's a significant, I don't know the stats off top of my head, but a significant amount of the wealth in the world is still controlled or owned by the Jewish communities. We would argue that there's a big reason for that. And often, I'm going to speak in generalities, but in often cases there's a long sense of history. Families look at themselves multi-generationally and I think it's that type of viewpoint that you have to start to look at. It's stewarding the wealth from generation to generation to generation as opposed to the traditional problem of, "Oh, I earned a bunch of money. What can I do with it in my lifetime?" And so we've got to start to work on that.
Justin Dyer (08:25): Yeah, I think the way to tie that into a nice bow is you redefine how you think about wealth. And these successful families do that. They think about much more broadly than just the pure dollars and cents. It's not just a number or it's not just something you've earned and then you get to deplete it during your life cycle. It takes on a different definition and meaning around stewardship or thinking through wealth, both in terms of financial capital, which we talk a lot about. We talk also a lot about human capital, social capital, charitable intent, things like that where it becomes really multi-dimensional and adds a lot more meaning to it. And each one of these different areas, or refined definitions of it has a different conversation and there's different values that the family might have around that to then instill into the next generation. And then that generation gets to instill in the subsequent generation.
(09:22): That's a big component to this. It's not just pure financial wealth, dollars and cents. How big is the portfolio? Or how big is my portfolio? How much can we actually spend before the end of our lifetime? And maybe that's your goal, that's another conversation. But just being intentional about thinking about that. The successful individuals, the successful families, those that live more of a fulfilled life, if you will. I mean, not to get too touchy feely around it. They take this step back and have this intentionality and these deeper conversations around it, and then really think through it over the long term.
Brandon Averill (10:00): I think that's a great point. And if you started to think about it, and oftentimes we talk about human capital on this podcast, but I think that's how families more broadly think about it. They're thinking about their human capital, which encompasses your intellectual capital. So if you're a business owner, you created something. You used your intelligence to create a new opportunity. That's one source of capital. But then you've also got your social capital and your financial capital. So we need to teach them about our financial capital so they know how to steward that, make good decisions. But I think I would argue as well, what you're saying is social capital. If you're pulling on a story from our childhood, Eric and I benefited tremendously from our dad working with AT&T and with a lot of professional people. And he brought us around and we learned how to navigate those conversations, have conversations with business people, introduce ourselves properly, look them in the eye.
(11:00): I think people listening to this, especially the athletes for instance. I mean the people that you're around, if you can expose your children and teach them. I mean, what greater opportunity that not only we talk about this with a lot of our clients. At this point in time, when you're still in the celebrity status, you could pretty much get to anybody. Well guess what? So can your kids. Put them in a lunch with you and somebody important, teach them how to have that social capital. It's just going to benefit overall. And you start to stack these things up. And we're talking about a lot of different kind of ideas here, but having a process and a team to help you work through this is really important as well.
(11:39): So don't feel like you have to go at this alone. There are a lot of people out there that should be able to help you through this process. It's something that, this is really the nuts and bolts and what we do in our expertise, we take a lot of pride in. But I would say this is really where we have a lot of fun and are able to see the impact that we have with clients pretty quickly.
Justin Dyer (11:59): Oh yeah. It's rounding out the technical aspects of what we do with a lot more meaning. The technical side of it is the financial science, if you will, those dollars and cents. And we take pride in that and there's a lot of emotional stimulation there. But then being able to take that and apply it to individuals and families, and even our own families, it really comes true to heart for all of us that are trying to implement the same things, being more intentional with life, to leave an impact, leave a legacy, whatever that may be. Again, we always say it's different and unique for each and every family, but us being involved in that conversation and bringing in a specialist where a specialist is needed, or serving in that role ourselves, it's a really, really, really fulfilling endeavor. Because it's never done. It's not a single singular project. It is this overall process that really brings a lot of joy and fulfillment to all of us and to our clients at the end of the day.
Brandon Averill (13:05): Absolutely. And I'll leave with this is it's never too early to start. I think a lot of people get paralyzed by that, "Oh, my kids are too young. They don't understand." That's just not true. From a psychology perspective, we actually know that specifically to money, some of the more forming and shaping that is actually done is in those elementary years, believe it or not, when they're first learning how to count, how do they start to use money? Like adding $5 and $10 and that type of thing. How do you steward it well? It's never too early. And conversely, it's never too late. As long as you have intentionality behind it, you want to pass these things on, you can start at the very end if you have to and start to work backwards. So might make it a little more difficult, but that process is still absolutely there.
(13:56): So before we close out today, I just want to remind everybody, shoot us a text. We'd love to start distributing these things out to you guys via text. Make it easy on you for when a new episode gets launched. That telephone number is (602) 704-5574. You can also shoot us questions around this topic specifically, or if you have questions that you'd love us to hit on in the future, we'd love to cover those as well. But until next time, own your wealth, make an impact, and always be a pro.