Many people dream of inheriting a large sum of money. We spend time imagining the cars we will buy, the homes we will live in and the holidays we will take once we hit “the good times”.
However, most wealth advisers will tell you that those who inherit money face many challenges – not least of which is maintaining this wealth and not squandering, in a short space of time, what may have taken generations to accrue.
Jacques Brown of Private Client Holdings, who specialise in a Family Office approach to wealth management, explains that unprepared or financially uneducated heirs are susceptible to all sorts of influences – not least of which is extravagant spending. It is really the benefactors’ responsibility to adequately prepare their heirs for their future wealth responsibility.
How much is actually a lot?
Brown says that younger inheritors, who lack the understanding of how far money truly goes, are especially susceptible to misinterpreting how much money is “a lot”, versus how much is enough to live modestly. “This can lead to expensive purchases – some with related ongoing maintenance expenses - that can erode an inheritance fast. It is not hard for it to get out of hand and for people to squander a significant amount of capital in a short period of time.”
Regardless of the size of an inheritance - the key to holding onto wealth long term is setting clear quantifiable goals and planning. Otherwise seemingly vast amounts of money can erode faster than people realize. The importance of understanding and planning the sustainability of the inherited capital is paramount.
“At Private Client Holdings we offer our clients a Family Office approach to wealth management – which is basically a comprehensive wealth management service which consolidates all financial aspects of a client’s life. As part of our Family Office approach we advise our clients to educate their heirs in advance about a future inheritance so that they are not unprepared for the pressures and responsibility associated with large capital inheritances. We then council beneficiaries to formulate a game plan which will satisfy their short term needs and preserve as much of the capital as possible so that this money can be put to work.”
Brown says that they always tell clients to pause and take time to figure out exactly what they want to get out of their money. “Not necessarily what you want to do with your wealth, but what you want the wealth to do for you.”
It takes planning to transfer wealth from one generation to another
A Family Office approach to wealth management services includes not only portfolio management and fiduciary services, but also cash management, risk management, tax and financial services - all coordinated by the wealth management division. “Planning how to invest money so that it exists for the long term is particularly important these days as low interest rates and lower returns reduce the ability to make a higher return. People who squander too much of their inherited wealth sometimes end up taking unnecessary investment risks with the capital, trying to earn higher returns to get it back,” says Brown, who concludes by saying that one size does not fit all when it comes to financial planning.
"Benefactors and there beneficiaries need to sit down with someone who does not have an agenda or a product to sell, who can help them identify their goals and develop a quantifiable and holistic financial plan.”