Strategy
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.”
Contribution
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."