How to Transfer Financial Values to the Next Gen

Some wealthy families remain wealthy for many generations because they’re able to sustain intergenerational financial values. Although it isn't easy, these values can be passed down through what you say and what you do to successive generations, or else they may not survive a generational transition. Financial values and guiding principles can become murky or even lost if they’re not articulated, discussed and nurtured.

Creating a Family Guide

In order to keep these values alive and well, it’s best to write them down for reference by current and future generations, thus guiding the values-based pursuit of financial goals in the family tradition. This can be accomplished through a dedicated document or as part of a more comprehensive statement of family values. The latter, a concept I developed for clients, is what I call the family guide. This is a living, breathing record of principles and beliefs of all sorts to follow in pursuing various types goals, financial and otherwise, consistent with the practices and positive examples of past generations. (For more, see: Tips for Family Wealth Transfers.)

As financial values are often a natural extension of broader values, a family guide is a natural context for outlining the thinking and practices that have long served as wellsprings of family wealth. Each generation can have a proven blueprint for success in making choices as stewards of family wealth today and for future generations. This ancestral record can include principles for investing, financial planning and wealth management - equipping future generations to carry on family traditions of financial success and keeping them from repeating costly mistakes made by forebears.

Key Topics to Include

These documents can serve as the collective family wisdom on what ancestors have learned about handling money. Key topics for these documents naturally include:

  • An emphasis on saving and spending discipline - living well with one’s means to build wealth.
  • The importance of understanding risk levels of different types of investments. Taking too much risk jeopardizes family wealth currently and for future generations. Taking too little risk can reduce potential returns because, over the long term, this can subject holdings to erosion from inflation.
  • Having a distinct predisposition toward building wealth rapidly, with high risk, versus slowly with reasonable risk. Part and parcel of this is an awareness of prevalent fraudulent investment scams seeking to part the well off from their money.
  • Understanding the importance of not just growing wealth through investing but also preserving it through such protections as appropriate insurance coverage.
  • Understanding the spectrum of risk inherent in different types of investments. It’s crucial for future generations to understand what types of assets are completely safe, which ones are largely safe and which carry high risk. The names and structures of some investing vehicles tend to change over time, and more and more vehicles for holding assets are being created. Though the names and structures of vehicles may change over the years, many of the underlying assets tend to be basically the same from one generation to the next. The risks of these underlying assets and the rules of vehicles involved should be carefully considered before investing. (For more, see: A Quick Guide to High-Net-Worth Estate Planning.)
  • Knowing your true tolerance for investment risk and assessing the risks of different investments against this tolerance.
  • Spotting bubbles and realizing the perils of getting caught up in the investing herd that create them. This means having a sense of when valuations become irrational and unsustainable because they are clearly outside historical norms.
  • Following a disciplined investing process, including consistent buy and sell disciplines. Those who buy high tend to be the last to buy and those who sell low tend to be the last to sell. Knowing when to buy stocks involves knowing that value and momentum indicate future performance - up to a point. Value stocks are no longer value stocks after their prices rise high enough and momentum eventually runs its course.
  • Respecting individualism in investing. This can lead to a sound investing discipline rather than investing with the crowd - marching to a different drummer, as Henry David Thoreau famously wrote.
  • The importance of listening to qualified financial professionals or doing your own solid research.
  • Knowing what to look for in an advisor, such as a certain number of years of experience, and the right educational credentials and appropriate certifications or designations. Such credentials can help consumers discern professionalism among advisors.

Sustaining Family Wealth

By codifying and recording financial priorities and values, families can take an important step toward assuring that the principles that led to the creation of family wealth can live on to sustain it. And in the process, each generation can assure that they leave their heirs something more important than money - family values. (For more, see: Leaving Inheritance to Children Easier Said than Done.)