Strategy Lessons for Life

Sharlene Goff 2 April 2008 Lessons for Life

Wealthy families are devoting more time to educating dependents on how to approach financial matters for fear that their legacies could be eroded by unwise decisions.

Wealthy families are devoting more time to educating dependents on how to approach financial matters for fear that their legacies could be eroded by unwise decisions. An explosion of wealth, particularly among entrepreneurs, means that there is a huge pool of money waiting to be passed on to the next generation. In the UK, for example, changes to the tax regime have made it harder to lock up funds in trusts, so more money is being released to dependants at a younger age. But unless the recipient understands the value of money, and how it can be put to good use, being confronted with a fortune potentially worth millions can be overwhelming. “One of the big problems for clients is deciding how much and when to pass funds on to the children,” says Heather Maizels at Barclays Wealth. Giving too much too soon can make it more difficult for the recipients to develop their own work ethic and personal ambition. But delaying the moment when money can be handed over can increase the risk of a high inheritance tax bill and can leave the next generation unprepared to deal with the windfall. Private banks say some families are beginning to educate their children about money before they even reach secondary school. Barclays Wealth has held discussions with children as young as eight to start identifying potential future leaders within a family. More generally, private banks and independent wealth managers are offering places on courses to those aged between 18 and 30. Participants are the offspring of the banks’ top clients – a place on Credit Suisse’s course, for example, typically requires minimum wealth of $100m. These next-generation courses evolved in the US. Groups such as Merrill Lynch and JPMorgan Private Bank have been offering them to their high-end clients for several years. More recently, UK banks have muscled in to meet demand from clients while more US and European banks are hosting courses in London. Courses take place over a number of days. They include practical sessions on how to construct investment portfolios, make sensible asset choices and understand family dynamics. They also tackle the psychological and emotional aspects of inheritance – how, for instance, the recipient can align their own interests with that of their family legacy and how to deal with the responsibilities that accompany significant wealth. Banks say demand for their courses is greater than ever. Many programmes running later this year are already oversubscribed and some banks have started offering additional courses that are more tailored to specific family situations. Coutts has attracted new clients as a result of the course it launched last year. One big theme this year will be how to protect an investment portfolio from weaker financial markets. Private banks say the recent turmoil in the markets has brought home to clients how important it is that they and their families understand where their money is invested and that they have a well-diversified spread of assets. “Clients are really interested in what is going on right now,” says Amy Braden, who heads the Family Wealth Centre at JPMorgan Private Bank. “The volatility in the markets reinforces the message that it is important to have diversification and understand the trade off between risk and return.” Because the types of investments available to private clients has expanded rapidly in recent years, banks say it is important that the next generation starts accumulating investment knowledge as soon as possible. Coutts, which is running its second next generation course this summer, is planning to incorporate more on asset allocation and investment. “A lot has changed in the markets this year,” says Fiona Fenn Smith, who manages the courses. “Young people are really aware of the credit crunch, so we are going to build it into the course and look at what it means and how it might affect clients in the long term.” She says it is important that clients understand the structures behind their investments and how they might affect them. Banks are looking for innovative ways to teach these financial aspects. “They realise that 50-year-old men in grey suits giving PowerPoint presentations are not really going to cut it,” says Zoë Couper, whose advisory firm, Carte Blanche Communications, works with a number of big banks to help structure their courses. Banks have made their classes more interactive and brought in a range of speakers. Citi, which is hosting its first course in London this year, is hoping to include a talk by a well-known business personality to bring to life the idea of wealth creation and management. “We want someone the children can identify with,” says Peter Charrington, head of Citi’s UK private banking. “And to balance this with teaching hedge funds, for example.” Banks also organise games, role-playing exercises and discussions. One popular ice breaker is a virtual asset allocation exercise. HSBC Private Bank, for example, divides the group into teams, gives each $100 million of “play money” as well as asset performance figures and they have to decide where to invest. The teams are given different years – each with its own political and economical events – and judged on how their portfolios would have performed. To view the whole article click here.

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