One of our primary responsibilities as strategic advisors is helping our family clients manage the gradual transition of financial responsibility and accountability from one generation to the next. This has always been a complex process for any family, but it has grown more complex in recent years. The current rising generation in many families faces very different circumstances than their parents did; they learned very different lessons from the formative events of their lives, and thus they often make different decisions and have different priorities than their parents.
We need to understand these differences so we can effectively advise all members of a family, young(er) and old(er) alike. We often work with multiple generations within a family and can see firsthand the similarities and differences between parents and children, and the circumstances they respectively faced when starting out. In most cases, the families who successfully manage generational transitions are the ones who can effectively bridge differences between generation and unite around a common set of principles or beliefs that can tie the family’s various goals together.
Kids These Days
There are some obvious differences between generations that crop up fairly often—for example, younger clients are generally more comfortable with technology and with the concept of operating in the digital world—but it is the more nuanced differences that stand out to us, and that offer us a particular opportunity to help create value across generations:
- Comfort with nontraditional income streams. Clients that are relatively early in their careers are generally working to build wealth and save for the future. Today, many of them find themselves in sectors shifting toward non-traditional corporate structures or work settings. Their compensation may take the form of consulting income, business distributions or equity ownership. Some of these structures enhance long-term security for the client, while others increase uncertainty.
Nontraditional income influences the way we as advisors think about risk and liquidity for the client when we construct their portfolio. It also impacts matters outside of pure investment decisions; for example, it can pose challenges for those seeking loans or financing from traditional banks—some clients may find themselves frustrated by the challenge of demonstrating income from a collection of non-traditional sources. - Comfort with entrepreneurial ventures. Technology and other factors are making it easier and less costly to start new business ventures, or to build a career on a set of ideas and projects. Career trajectories now take many different forms than the traditional path of a long-term career commitment to an employer.
This approach offers many benefits—flexibility, opportunity, intellectual stimulation—but it also may carry individual and family risks. We work with all of our clients to help them manage these risks—such as health insurance or ensuring a safety net if income is interrupted—on both a short- and long-term basis. This kind of risk planning is critical for anyone on an entrepreneurial path that offers both risk and reward. - Comfort with newer investment ideas. Generally, younger clients are more comfortable with change than older ones—it is a natural part of life to desire change when younger, and stability when older. (This rule has plenty of exceptions, of course!) For example, sustainable investing has gained an immense amount of traction in the past decade, especially with younger investors. Many of our clients were raised in homes focused on charity, philanthropy and giving back to their communities. They also grew up in an era of global connection and have friends and contacts around the world. All of this has led many of them to want to invest sustainably. We have helped many of our clients as they gradually bring newer ideas like sustainable investing (or cryptocurrency, for example) into their strategic financial plans.
In working with clients that face these emerging circumstances, we find that family collaboration and unity can be a powerful tool to help older and younger generations accomplish their goals together. Here, we offer a number of case studies and examples of situations where we worked with our family clients to enact a planning strategy that offered specific tangible benefits to both the parents and children.
Risk Management for the Young Entrepreneur
Our client “Sharon” has both a young family and an entrepreneurial spirit. She wanted to start a new venture but did not want to expose her family to undue burden or risk in the process. With a well-vetted business plan, she came to us for guidance on how to proceed.
We started by reviewing Sharon’s cash flows and understanding her basic financial needs. As we do for many of our clients, we ran a capital sufficiency simulation to determine whether her current spending rate was in line with her long-term goals. This helped us assess the level of risk that she could afford to take when committing capital to a new venture.
Our next priority was to ensure Sharon’s estate plan was in place and up to date. In addition to reviewing basic trust, will, and power of attorney documents, we advised her on the best entity to use for setting up her business, and on how to keep her business cash flows separate from her personal accounts. Additionally, as part of the review, we implemented a thoughtful succession plan and updated her personal and liability insurance.
Finally, we had a unique opportunity to assist Sharon, because we advised both her and her parents. We were able to strategize with the entire family about the most effective way for Sharon’s parents to help with her venture. By engaging in upfront asset transfers to Sharon, rather than waiting to transfer wealth as an inheritance at the time of her parents’ deaths, we helped her parents reduce transfer taxes while also enabling Sharon to utilize those funds at the time when she needed them most.
It was a highly rewarding outcome for all parties. Sharon gained a better appreciation of her parents’ careful planning and went into her venture with peace of mind that her family was protected. Her parents were impressed with her conservative approach to entrepreneurship and were confident that she would be an effective steward of their hard-earned capital.
Sustainable Investing in a Family Foundation
“Helen” is another younger client of ours whose family has a long history of charitable giving. In the 1980s her parents set up a family foundation, and about five years ago, they asked Helen to assume leadership. We had worked with Helen’s parents to educate her on the functions of the foundation and the values on which it was based. Because of this, Helen felt empowered to take on this role when the time came and immediately wanted to bring her own perspective to the foundation. Helen broadened the mission of the foundation to address a wider range of sustainability topics, such as the environment, education and health care in developing countries.
She also wanted to develop a stronger link between the foundation’s portfolio decisions and its mission, with specific ideas about investing more of the foundation’s assets with companies, managers and ventures that provided both a financial return and positive global impact.
In helping her implement her ideas, we advised a patient approach, in which we worked with her to gradually adjust the portfolio overtime. We find that in most cases, when a client is transitioning assets toward sustainable investments—especially when a portfolio is already fully invested—it is important to move deliberately. When taxes are a factor, it is essential to consider the consequences of exiting holdings that may be held at a lower cost basis, and in non-taxable situations (such as Helen’s family foundation), it is still important to carefully evaluate potential new managers on both a financial basis and on the basis of potential impact of their investments on society.
The family greatly appreciated this approach. Helen was pleased to have a team focused on the full range of investment factors she considered important, and Helen’s parents were also confident in the portfolio changes, as each manager that we recommended was approved through our firm’s strict manager due diligence process. The parents had put a great deal of time into their foundation, and they were thrilled to see their daughter leading it to strong financial results and an expanded mission.
The cases of Sharon, Helen, and many others give us new opportunities to learn about the needs of our clients. These cases also highlight the fact that there are more similarities than differences between generations. Like her parents, Sharon is risk averse. Before heading down the entrepreneurial path, she wanted to have a safety net in place and make sure her family was protected. Helen shares her parents’ love of charitable work and is focused on reinvesting her family’s wealth into her community through high-quality investments. Despite the differing experiences of younger and older family members, we find that a unified approach to planning that spans generations is often the best way to achieve everyone’s individual goals.
These examples also highlight for us the fact that a relationship with both the older and younger generations of a family puts us in a position to be most effective during transitional moments. Bridging that gap and finding common ground is perhaps the most rewarding outcome we can help families and younger investors achieve.
Steps Toward SustainabilityMany investors have deeply held beliefs and values that shape their life choices, yet three out of four investors are still hesitant about discussing sustainable investing with their advisors, according to a 2013 study by Calvert Investments. We have found that an incremental approach, with an emphasis on comfortable starting points, is an excellent way for families to begin building a sustainable investment plan that addresses their full range of goals. |
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 Identify the values you prioritize. Families often have a wide range of beliefs; you and your family may struggle with how to tackle all of your values within your portfolio. It can be helpful to target one or two priority issues to begin making concrete progress. |
 Consider and learn about all your options. There are many tools at your disposal, from simple screening to innovative impact strategies. After learning about your options, you can select the ones that best match your specific goals. |
 Stay true to your plan; be comfortable with gradual change. Sustainable investing is a worthy endeavor, but changes to your portfolio should progress at a deliberate pace. By proceeding gradually, you can avoid disruption and leave time to adopt new ideas you learn from experience. |
1. http://www.fa-mag.com/news/millennial-interest-in-values-investing-rising-with-performance-27349.html
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