November 19, 2012 9:14 pm

Experts offer guidance on how to keep it in the family

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Dudley Moore as 'Arthur' (1981)©Warner Bros

Family fortunes: Dudley Moore as 'Arthur' (1981), whose behaviour puts his legacy at risk

Private banks are thinking of innovative ways to get youngsters interested in the language of finance. Some hold tutorials to teach children about wealth while others run competitions or set up interactive virtual portfolios to give them a taste for finance.

“One of the challenges we run,” says Charlie Hoffman, managing director of HSBC Private Bank, “involves giving children £1,000 each and asking them to use it to make as much difference to the world as they can with it.”

He says the idea of the competition is to teach the value of money. “For example, we might tell them how much it costs in Africa to save someone’s sight or to supply a family with water for the year,” he says.

“The idea is that at the end of the project the child will understand what £1,000 can do so that when that child grows up and goes into a nightclub and considers buying a bottle of Cristal, he or she might think twice.”

Others, such as Fleming Family & Partners, run Dragon’s Den-style courses, in which attendees, in teams, come up with entrepreneurial ideas to present at the end of the week to the “Dragons” – industry experts and their parents.

But what is the point of these courses? Private banks say that failure to carry out cross-generational succession planning can have a more dramatic effect on a family’s finances than a banking crisis or a collapse in market confidence.

This is because most family fortunes fail to survive three generations and the absence of clear leadership, effective communication and well-documented governance structures can cause uncertainty and division, which is particularly damaging if there are directly held business assets.

Andrew Nolan, head of the family office division at Stonehage, the wealth manager, says: “At its mildest, this disagreement can result in a loss of direction and leadership and, at its worst, can result in a full-scale family war as different family members fight each other for the assets, the legacy or the family leadership.

“By the third or fourth generation, the chances are very high that those who inherit were brought up in luxury with little concept of the work ethic on which the family fortune was founded. The increasing independence of younger generations today, who are less likely to take the helm of a family business, is also an emerging issue.”

The problem, says Catherine Grum, head of wealth advisory at Barclays Wealth, is that many families do not like talking about their wealth. “But if people don’t have the discussions then the family won’t know what to do once the matriarch or patriarch dies,” she adds. “Most of the conflict I see is based on a lack of communication between the generations.”

She says one of the biggest concerns for many families is divorce. “Wealthy families worry that their children will be seen as a target,” she says. “One of our clients was so concerned about it they had a family rule that for the first three years of marriage each child’s wealth was limited so they gave the marriage a chance of success.”

Société Générale Private Banking says it runs a number of technical workshops for clients’ children, which focus heavily on succession and transgenerational planning. It also runs investment games where students manage virtual portfolios.

Then there is the Coutts Academy, run by Coutts private bank. One of its courses, Finance “101” – which derives its name from basic university courses in the US and elsewhere – is designed to help 18- to 30-year-olds have an understanding of personal finance. It has an online classroom for people around the world to help younger clients establish a network of contacts.

Experts say many families have not seen the levels of growth they had before the financial crisis and need to adapt. “The crisis has continued for such a long time – and looks likely to continue – that families are increasingly being forced to look at next generation planning through necessity as much as by desire,” says Paul James, chief executive of Citi Private Bank’s trust business.

Richard Brass, director at Berenberg Bank, agrees. “The crisis has brought about a great awareness of volatility, the risk of negative performance and the vulnerability of family estates. Families are looking to be more involved in preserving their wealth.

“Mapping the overall wealth of a family and its ability to support future philanthropic projects is therefore important alongside determining an investment strategy,” he says.

“This creates a two-way dialogue. The current generation can reassess existing strategies, while the future generation learns about the family’s vision and approach to wealth.”

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