Making HNW Families Master Finance - What's The Best Way?

Robbie Lawther Reporter London 24 April 2018

Making HNW Families Master Finance - What's The Best Way?

This publication interviewed a partner at Stonehage Fleming about the financial education of wealthy families.

Since WealthBriefing started to look into the financial education of wealth management clients, the big question that has come up time and again is: what's the best way to educate the wealthy about their money?

According to RBC Wealth Management’s 2017 Global Wealth Transfer report, general family conversations are the most typical method of learning. There may be benefits to this, but how deep do such discussions go? Can they fully explore topics and areas that challenge the wider public? It appears there are differences of view, because in the aforementioned RBC WM report, it found that 60 per cent of wealth individuals believed family conversations are effective, whereas 79 per cent said that structured financial literacy programmes are effective.

Financial education needs to go beyond formal classrooms or structured learning, despite the figures showing formal education is more beneficial to high net worth individuals, Matthew Fleming, partner at multi-family office Stonehage Fleming told this publication recently.

“Education is really important but it shouldn’t all come from us,” said Fleming. “There are certain elements that will impact a younger person’s relationship with wealth. A lot of that comes from the family itself, it comes from the values that the family have grown up with. We start with the family and understanding what their purpose of wealth is for them. It is much easier to understand the money if you have a more measured approach to it. Where we really come into play is helping all members of the family understand the roots of the wealth. The hard work that has gone into the creation of wealth. It is only once you have figured out the purpose, then that provides a framework for the rest of the family’s interaction and education.”

“The fact is that our primary role is to help families stay rich not get rich. We educate the family a great deal about risk. And as part of that risk we often act as 'bad cop' for the younger family members who may get approached a lot. We educate them to gently say `no' to opportunities that would skew their risk. Beyond that if they don’t have the knowledge already, we will help educate the youngsters on what money is, how to make the wealth for you, and how what the elements of their wealth means,” he said. 

Easier clients
It seems high net worth clients around the world are not always the most financially educated. In 2014, US-based McGraw Hill Financial joined forces with the World Bank Development Research Group to interview over 150,000 high net worth individuals in more than 140 countries. And they found that only 33 per cent of those adults are financially literate.

But despite a lack of knowledge, Fleming said less financially savvy clients can be easier to deal with. This appears to be a counter-intuitive argument but Fleming explained how it works. “Sometimes if we are being entirely honest a client that doesn’t want to be informed is often an easier client, as you can agree very clear parameters for the investment and what they expect from it.”

“And we are left to get on with it and report back to the client to ensure that they understand what we have achieved for them. But that is becoming less and less relevant in today’s world where most family members want to have more involvement, and therefore want to have greater understanding. It is both a challenge and an opportunity for us to have those sophisticated and engaged clients. It enables us to build a deeper relationship with them, understand their wants and needs, and therefore provide a better service to them. The engagement is pretty critical and more important than the knowledge and understanding from a client’s perspective," he said. 

Family affairs
Educating families financially about their affairs can be fairly difficult as each family is not the same; discussions fluctuate from one to another. However these discussions are very important as the wealth management sector comes to pinnacle of the $30 trillion wealth transfer, which will see large amounts of wealth move into the hands of the next-generation.

The sector is coming to an important point, and the transfer is more complex than it should be. Recently, UBS found that business owners who plan on passing their business to family are worried about their legacy. Most (57 per cent) feared their heirs will take a business in a different direction, and an equal number were worried that heirs might sell the business outside the family.

Therefore discussion and education among wealthy families is increasingly necessary. Fleming said that if a change of leadership in a family isn't handled well, it can impact future generations.

“Every family is different,” said Fleming. “And as everyone is living longer you could end up with four generations of a family living at the same time, so this may lead to great leadership challenges. One of the great challenges will be the change of leadership, and the transfer of knowledge through the generations. And doing that poorly will negatively impact the next generations’ understanding and therefore their financial understanding too. Some families will have four meetings a year with all family attending, a written agenda, we or they may chair the meetings which will lead to a great discussion on family wealth. We don’t have to educate those children nearly as much some others.” 

“We offer a next generation and experiential programme," Fleming continued. "We generally start getting them into the office at the age of 18 to 21, particularly when they have started living away from home because it gives them life experiences that you can reference in the financial education. Until they start paying bills or experiencing life, it is quite hard to have a serious conversation about the transfer of wealth. We get about 30 youngsters in the office for a week, and we talk about financial education, accounts, understanding trusts and trustees, pre-nups, taxes, philanthropy, impact investing, leadership and business start-ups. It is a pretty full agenda, and we work them quite hard and we challenge them in all these areas, and all of them come away with a bit more knowledge. But also by doing [this] in groups of around 30, they understand that there are a lot of men and women out there that have the same uncertainty and opportunities that they do. And often sharing conversations with peers in a more educational environment enables them to learn just as much as if we told them it.”

Wealthy individuals and families regularly spend millions a year through philanthropy. In 2017, Coutts found found that foundations donated £1 billion ($1.4 billion) to various causes, and about half of foundations are family foundations, where more than one member of the family is involved in the giving.

At a time when the public continue to look negatively towards the rising wealth of families and gaps in wealth, Fleming said his firm helps educate its clients on using wealth positively. 

“The most important thing we can do for the families is to help them recognise that one of their greatest duties is to be responsibly wealthy and define a purpose for their wealth,” said Fleming. “We have seen a lot of headlines about irresponsible bankers, but not much about the contribution to society that rich people make –  whether its employing responsibly in the family businesses or playing an active role in the community. All the things that responsible wealthy families do, that is the starting point and the thing that financial institutions should most be talking to families about. De-risking wealth by ensuring wealth is making a positive contribution to society."


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