Understanding generational investment goals as a family

Even the best laid plans will cease to work as intended if they are not co-created, co-owned, or executed as planned. Traditionally, the main breadwinner or head of a family has been responsible for their family’s financial plan, resulting in many unintended consequences for future beneficiaries and contributors to family wealth. The reasons for poor outcomes include that:

• beneficiaries may have their own financial plans that differ from or contradict the intentions of the head of the family’s plan for inter-generational wealth,
• a lack of alignment exists between the head of the family and the beneficiaries in relation to the vision and purposes of the intergeneration wealth and how it should be managed, and
• the head of the family’s values and behavioural relationships with money are not shared with their beneficiaries.

While there are substantial benefits to being able to achieve incredible inflation-beating wealth from generation to generation, the benefits of the intergenerational compounding effects on growth assets are often not felt due to misaligned understanding of goals and the strategies or portfolios designed to achieve them.

A practical example of this would be a sizeable inheritance built up through equity exposure, and with the head of the family only taking dividends as income, but from which the beneficiaries now draw down income from at much higher annual rates and/or at less growth-biased portfolio exposures. Using the ‘rule of 72’ on listed equities of CPI+6% excluding dividends (i.e. that 72 divided by the return achieved indicates that a lump sum will double in value), we can calculate that where the head of the family would have doubled their assets every 12 years, the beneficiaries that decided to ‘protect’ their assets in cash would achieve CPI+1% over time at an annual drawdown of 7%, thus halving the value of the inheritance every 12 years.

The ‘rule of 72’ explained

The number of years before for a lump-sum investment will double in value can be estimated by dividing 72 by the real rate of return. For example, if the real rate of return is 6%, the lump-sum investment will take approximately 12 years to double in value (72 ÷ 6% = 12 years).

Temptations and pitfalls that all investors in the family should be wary of

Delaying planning as a family is something that is easy to let happen, and which consequently happens far too frequently. Unfortunately, family members tend to place different levels of priority on this matter at different points in time, so it can be challenging to co-ordinate individual needs and family financial planning needs. This includes individuals not considering the estate planning implications on the family of individual members passing away, not having co-ordinated wills, entities such as trusts which can complicate the family financial plan, and financial products and other assets owned by individuals that have unintended consequences for family wealth and financial planning.

Ensure that your plan is robust yet flexible. It is natural that circumstances change and that individuals within a family may require changes to goals and objectives within the family financial plan – whether in the present or at a point in the future. Plans should be flexible enough to account for changes in entities, financial products, and ownership, and be able to cater to future needs that may differ from those of the present.

It is crucial that you have an agreed process on how decisions will be taken. A robust process for decision-making will ensure that it is easier for family to understand and agree on why decisions are made and by whom, and how they can have their voices heard.

A final thought
A family financial plan is not the preserve of the wealthy of today. It is also well within the reach of those that have a vision of family wealth in the future. As Warren Buffet famously said, “Someone's sitting in the shade today because someone planted a tree a long time ago”. Whilst the best time to have started your journey to family financial planning was yesterday, the second-best time is today – Carpe diem!