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Making and then managing your money call for very different skills. Entrepreneurs who are unfazed by the cut and thrust of business can find themselves out of their depth in the more analytical world of money management.
Yet investing your money effectively is the key to establishing and maintaining a family fortune. Dynasties such as the Rockefellers and the Carnegies would not have achieved their long-term charitable goals unless they had been as shrewd in managing their cash as they were in drilling for oil or operating iron and steel plants.
“Acquiring wealth can often come as a shock,” says Phillip Wood, director of personal financial planning at PwC, the accountancy firm. “An entrepreneur may have experienced false dawns in his efforts to sell his business and he doesn’t want to believe it will happen. He wants to be careful and doesn’t want to think about how he might spend the money.”
With no shortage of sources of advice – from investment banks, financial advisers (IFAs), accountants, stockbrokers and lawyers – the newly wealthy can often be given a welter of conflicting opinions.
Many of the big investment banks have made great efforts to build up their wealth management divisions – traditionally rather sleepy parts of their business – to cater for this fast-growing market. They believe they can provide a more comprehensive overview of the individual’s finances than could be given by stockbrokers, lawyers and accountants each working in their own specialist areas. Not all of the banks, however, have been successful in this field .
“You need to sit down and have a long hard think,” advises Jeremy Arnold, head of wealth advisory at Barclays. “You need to work out your priorities. Do you want to spend the money on yourself, pass it on to the next generation or roll it over into the next deal?”
Devising a strategy will require the individual to assess their willingness to take risks and to decide the time horizon over which they will be investing. Money intended for future generations may safely be locked up in long-term assets but funds required for more immediate use will need to be put into more liquid investments.
“The best thing may be to sit down and write a family constitution,” says Mr Arnold. “That requires a disciplined approach and might take six to nine months to do.”
Taking time to think has become even more important in response to the speed with which fortunes can now be amassed. A long period of steady economic growth and a frenzy of corporate takeovers have led to an unprecedented rate of wealth generation .
“People are achieving in a few years what would in the past have taken two generations,” comments Nick Tucker, head of global private clients in the UK at Merrill Lynch.
The number of people with $1m or more to invest grew by 8 per cent to 9.5m last year while their wealth rose to $37,200bn, according to a survey by Merrill Lynch and Capgemini. About 35 per cent of this wealth is in the hands of 95,000 “ultra high net worth” individuals each with assets of more than $30m.
The growing efficiency of the world’s financial markets means that it is easier than ever for entrepreneurs to obtain a public listing for their company or sell it to a trade buyer. On the one hand, it is easier to obtain riches by selling out. But on the other it is less likely that a business will remain in the hands of the founding family for very long.
According to one survey, only 8 per cent of UK business owners expect to pass their business on to the next generation. Globally, a bigger proportion – 28 per cent – expect the business to remain in the family, possibly reflecting more conservative attitudes to family ownership in parts of continental Europe and Asia.
The creation of secondary stock markets such as London-based Aim and the growth of the private equity sector may have made it easier to “exit” an investment. But finding a home for your cash has become more complicated with the closing down of some of the traditional investment methods.
A Europe-wide crackdown on undeclared sources of income has meant “offshore” jurisdictions have lost some of their appeal. A tightening up last year of the UK inheritance tax rules as applied to trusts reduced the appeal of holding funds in these traditional investment vehicles. Although these trusts did offer a tax advantage, they were used by many people primarily to retain some control over their money before it passed to their children.
“The IHT [inheritance tax] changes made trusts less attractive,” says Mr Arnold. “There was much consternation because there was a feeling that they were not primarily tax-motivated structures.”
Tax planning is an important and complex area. The vendor of a private business enjoys certain tax reliefs including 100 per cent business property relief on IHT. Once you are living off the proceeds of the sale you will find yourself to paying tax at your highest marginal rate and bearing the liability for full IHT.
The first generation to enjoy sudden wealth may blink at these challenges, but many are determined to ensure their children will know how manage their money. Parents are preparing their children from an early age to deal with the intricacies of investing.
“Fathers invite their sons or daughters along to financial reviews so they have some understanding of what they are inheriting,” says Mr Wood. “They want to protect them from receiving a large amount of money and not knowing what to do with it.”
Merrill Lynch organises regular “boot camps” for the children of the wealthy where they are given a grounding in handling money and where they meet fund managers and other financial experts. Fleming Family & Partners, which manages £4.3bn of its own and other families’ money, runs a summer programme for undergraduate and graduate level youngsters to introduce them to the ways of financial markets.
How best to leave your money to the children is traditionally regarded as the main preoccupation of the wealthy. But financial advisers are noticing a trend among the newly wealthy to devote more of their money to philanthropic causes.
“If they make it themselves they don’t necessarily see it as their job to pass it on,” says one banker. “However, if they inherit it they do see it as their role to preserve it for the next generation.”
“Typically, businesspeople will provide their children with half a million pounds, a flat in London and a good education,” says Merrill Lynch’s Mr Tucker. The children are left to sort themselves out while their parents focus on philanthropy. Increasingly, advice is available from organisations such as New Philanthropy Capital and the Institute for Philanthropy that provide advice on how to increase the effectiveness of people’s charitable giving.
“Eighteen months ago, were starting to talk about his happening but now it is the new reality,” Mr Tucker notes.
Total charitable giving by wealthy individuals amounted to more than $285bn last year, according to the Merrill/Capgemini study. The ordinarily wealthy donated 7 per cent of their wealth while the ultra-rich donated more than 10 per cent. Charitable giving has a far higher profile in the US than in the UK and continental Europe partly because it enjoys tax breaks. But it is a growing phenomenon around the world.
“Thirty years ago, it was seen as natural to hold on to the money for the next generation but that is not a given nowadays,” says Mr Arnold.