The ABCs of wealth and responsibility

By Maureen Milford

How family offices can help with NextGen education.

Nearly 100 years ago, Pierre S. du Pont was concerned about the difficulties future du Ponts would face as a result of the fortune being generated by the young chemical giant of the same name.

Du Pont, one of the three cousins who transformed the family’s 100-year-old gunpowder business into the modern DuPont Co. in 1902, wrote to his nephew in 1922 about his concern that “du Ponts born to a position of wealth” would not have to “work for a living” as had previous generations dating back to the 1802 patriarchal founder, according to Pierre S. du Pont and the Making of the Modern Corporation, by Alfred D. Chandler and Stephen Salsbury.

The coming generations could need “greater moral stamina to combat the temptations of wealth and luxury and to carry forward, in a manner becoming the family traditions,” du Pont wrote in the letter. He warned: “If you fail in your example those immediately following you may do likewise.…”

Generations later, these types of concerns continue to trouble owners of successful family businesses and other high-net-worth individuals. At the start of the economic downtown in the last decade, 53% of high-net-worth parents reported that they worried about the possible negative impact wealth with have on their children, according to a U.S. Trust Survey of Affluent Americans in 2007. Those who work with wealthy families say that figure still seems valid today and is likely an age-old fear among those who amass wealth. 

Nearly three-quarters of the affluent parents who responded to the U.S. Trust survey reported that they themselves taught their children to manage wealth. Today, there are professionals who can help provide wealth education for heirs. The most tailored, hands-on education can come through the family office. These entities that serve high-net-worth families can offer a wide range of customized schooling and counseling services, starting with children as young as 2 years old.

With the number of family offices exploding in recent years, these entities have often evolved to include family education.

“There is a growing awareness among sophisticated families about the real danger in doing nothing,” says Donna Trammell, director of family wealth stewardship at Bessemer Trust, a multifamily office.

The demand for such services is likely to grow as an estimated $15.4 trillion in wealth is expected to be transferred by individuals with a net worth of $5 million or more by 2030, according to “A Generational Shift: Family Wealth Transfer Report 2019,” by Wealth-X, a company that provides data analysis of wealthy individuals for-prestige brands in industries such as financial services and higher education.

The education offered by many family offices today usually involves much more than just teaching young people how to read a balance sheet, create a budget, understand a buy-sell stock agreement or perform other basic financial tasks. More important, many family offices work to provide social and emotional support to imbue heirs with the qualities they need for a meaningful life.

Ryan Agre, director of Vermeer Family Office, an entity embedded in the Vermeer Corporation, a family-owned manufacturer of construction, industrial and agricultural equipment based in Pella, Iowa, says his role includes anything that could help prepare future generations, whether it’s financial fluency, college planning or character development. He describes himself as “part coach, part teacher, part cop, part firefighter, part disciplinarian,” to name a few roles he performs.

“It is an investment and it’s a long-term payoff,” says Agre about the work a family office does to educate heirs.

The need
Often a family turns to a family office for generational education after a precipitating event, says Jill Shipley, senior managing director of family culture, impact and governance at Cresset Family Office.

Perhaps a young family member hears in school that his family is wealthy. A college-age heir might be approached by a friend with some investment or business opportunity. Marriage plans might necessitate a discussion around prenuptial agreements.

In addition, more and more information about a family’s financial situation is floating around the internet. Some information can be misleading to the next generation, Trammell says.

“If a number is revealed, the family office can provide important context for it,” she explains. “For example, many NextGen clients need some help understanding the different considerations for a $10 million and $100 million pool of assets.”

But while there are instances where the next generation might request more transparency, in most cases “it’s a top-down issue,” initiated by their elders, says Rhona Vogel, founder and CEO of Vogel Consulting Group, a multifamily office.

“Parents are worried about how this inheritance will impact their children,” Shipley points out. “I see parents initiating out of worry.”

Robert (Bobby) A. Stover Jr., Americas family office leader at EY, agrees. He often hears: “I don’t want money to spoil my children.”

Certainly, there are enough cautionary tales of profligate children and squandered fortunes through the ages to keep any parent up at night.

Thayer Willis, whose family founded Georgia-Pacific Corp., knows the pitfalls firsthand. She recalls she had an “attitude of entitlement” and “taking things for granted.”

“My father was a very kind person, but he couldn’t say ‘no’ to me,” Willis recalls. “My father felt like there was plenty, and why wouldn’t he give it?”

But Willis explains that her father was brought up in modest circumstances and had no experience with raising affluent children.

“The people that make the money don’t know anything about bringing up wealthy kids,” says Willis, the author of Navigating the Dark Side of Wealth: A Life Guide for Inheritors. “Parents raised in much more modest circumstances want to give kids things they didn’t have.”

This is where a partner, such as a family office, can provide sound, dispassionate guidance. Indeed, many family offices now have chief learning officers.

“A family office can be a catalyst to preparing the family on three fronts: act as a sounding board for parents in developing messages to share with future generations, reinforce those messages when interacting with younger generations, and act as a capable teacher/coach who is, sometimes importantly, not a parent,” Trammell explains.
This takes the parent “off the hook that they should know better or they should know how,” explains Amy Hart Clyne, chief knowledge and learning officer at Pitcairn, a multifamily office.

The nuts and bolts
Family office professionals agree that helping heirs achieve financial fluency should begin as early as possible and be continuous. Some say toddlers can pick up valuable lessons.

“They know the wealth is around. The sooner you start educating, the better kids are at absorbing it,” says Stover.
Smaller children can play games that require decision making. Shipley suggests fun activities like a bank tour or a visit to a nonprofit organization. Another method is to coach parents to take advantage of everyday teaching moments, such as explaining what happens when you swipe a credit card, adds Lauren Blatz, director of family education at GenSpring Family Offices. These are opportunities to educate children in navigating the real world, not through abstract concepts or theories.

“We try to take advantage of what’s going on in their lives,” such as getting a first paycheck or first credit card, Blatz explains. “We’re trying to coach our clients into more responsibility.”

The Vermeer family office takes advantage of “pop-up learning opportunities” by presenting lessons in person or by video conference, Agre says. For example, Vermeer held a session on the proper use of social media and the potential fallout from a hasty tweet or post.

Pitcairn has developed an “individualized learning map” for heirs that has many different components, including financial aspects, Clyne says. It’s a dynamic approach that allows for flexibility.

While Bessemer Trust offers strategies and exercises families can practice at home with young children, it typically starts working with the next generation in their teens or early 20s.

This enables the NextGens to “get comfortable with their team of advisers before they reach important financial and personal milestones,” Trammell says.

The responsibilities of ownership
Business families may overlook the necessity to educate the next generation to be responsible owners, particularly if a child is not expected to be employed in the business. But early education by a family office in this area can help circumvent future difficulties.

Shipley, who taught responsible ownership to college students whose families owned a business, says even those not working in the family enterprise needed an understanding of business finance, accounting, family systems and family dynamics.

Shipley’s approach is to understand an individual’s goals, hopes and fears, as well as their current and future roles and responsibilities.

“I help families develop governance systems to ensure owners — especially those not working in the business — are informed, have an appropriate voice and understand the implications of being a stakeholder and shareholder,” Shipley says. “Many heirs benefit from technical education on the financials, budgeting, understanding shareholder agreements, gaining clarity around distribution and implications on one’s financial life, estate planning and passing on shares to future generations, etc.”

At Vermeer, all age groups learn about the “implications, opportunities and challenges of family business ownership,” Agre says. “Our NextGen program is geared toward education on Vermeer ownership, in age-appropriate ways, while also helping them understand themselves better, which creates a more stable ownership group.”

This year, for example, children 16 and younger created a lemonade stand. “They had to pick the spot in Pella for the stand, build the stand from a kit, choose the type of lemonade to serve, choose the sales price based on the input costs, sell the product and then (as a team) deliberate and choose a charity that would receive all of the profit,” Agre says.

“These hands-on activities cement how business works, but also the family’s goals of teamwork and philanthropy.”

Family wealth education do’s and don’ts

Amy Hart Clyne, chief knowledge and learning officer at Pitcairn, offers these recommendations for educating NextGens about business stewardship and family wealth:

Do:
Tap your resources. Give the NextGens space to learn outside the family structure and to benefit from experienced professionals who have demonstrated this unique competency.

Set family and individual learning goals. Develop personalized SMART (Specific, Measurable, Attainable, Relevant and Timely) goals. Don’t be afraid to include some stretch goals. For example, a reasonable goal for a 21-year-old family member might be to build a personal budget for 2020. A stretch goal might be to create a personal economic mission statement.

Make it engaging and fun. Provide a variety of flexible formats.  Meet NextGens where they are (which means taking time to understand where they are and what they want to know). If they are old enough and mature enough, enlist them in building their own learning experiences. These experiences should be relevant and current. Don’t just tell them how the world works, show them.

Be intentional about communication and inclusion. Find ways to share experiences in order to build relationships and family cohesion. Parents need to tell their heirs their plans. Find ways to support the individual and ways to support the family. Intentionally bring in-laws into the conversation. Let the younger generations in.

Budget for these experiences. Set aside money to cover the cost of the learning programs — it’s an expense often overlooked. Establish a policy that spells out how the budget will be administered and what qualifies as a family learning expense: grad school tuition, conference fees, one-on-one learning sessions, coaches, etc.

Don’t:
Impose. Don’t be dogmatic or prescriptive. Don’t impose a plan without seeking input from the intended participants.

Assume. Don’t presume your NextGens will learn what they need to know in school. Make sure the advisers you engage have the necessary competency and experience. Don’t presume family members will be able to learn the responsibilities of a role by osmosis. Don’t assume one size fits all.

Vermeer has also instituted family summer camps that focus on relationships. Participants learn about the history of the company as well as the family’s service to the community.

Bessemer Trust takes a holistic approach when working with future owners. The process begins as early as possible, Trammell says.

“If good governance is already in place among the adults, we often suggest forming a junior council when the youngest child is around 7 or 8 years old,” she says. “In that regular forum, often adjacent to or concurrent with the annual stakeholders’ meeting, we can help the junior council understand what it means to be a good steward.”

The content of the forums is age-appropriate and interactive, such as bringing the company’s values statement to life. Other times it might involve interviewing a family director.

“All of this is done in the spirit of preparing them to be the best business owners they can be,” Trammell says. “After each session, we typically encourage the junior council to present what they’ve learned to the broader group, so they start to become confident with their knowledge of the business.”

To help next-generation family members understand what it means to be a partner, Bessemer works with families on their shared vision and on communication and conflict management skills. Having a facilitator present allows everyone to be heard and keeps the discussion moving forward.

“Family members need to trust each other and want to work together, and often that trust is built through regular family meetings that don’t focus only on business decisions,” Trammell adds. “Consistently adding pleasurable shared experiences to the family bank is important so that they will have more to draw from in times of conflict.”
Shipley says she works on styles of communication, including helping young people understand their own way of communicating and the communication preferences of their partners. Also beneficial is training on generational differences in attitudes, values and behaviors.

“This helps increase understanding and reduce judgment,” Shipley explains.

When it comes to educating future company directors and/or trustees, family offices can help with the basics, like understanding a trust document and the duties a director or trustee owes to the organization or trust beneficiaries.

“A clear understanding of the role of a board member and how the board will interact with the ownership group and management is essential to the success of a family business over generations,” Trammell says.

The tricky part
Much harder to impart are the social and emotional qualities that wealthy children will need to lead a worthwhile life, experts say.

Indeed, some, including Willis, believe there can be too much emphasis on financial matters.

Children need opportunities to develop self-worth, confidence and resilience. This can be tough if “the world looks at you as if you don’t have the right to have problems,” Shipley points out. “Growing up in the shadow of success can be paralyzing.”

Willis remembers she was “irresponsible, fickle and spoiled,” into young adulthood.

By contrast, Jeanna French, whose father founded the J.L. French Corporation, an aluminum die casting company, grew up without expectation of great wealth. Indeed, she says, there were periods when it looked as if the business wouldn’t survive. French was in her late 30s when the business was sold and her family experienced a liquidity event.

“I think we were lucky because we were old enough,” says French, whose family is a client of Vogel Consulting’s family office services. “We already knew the value of money. We’d paid bills and been out in the world.”

The way French sees it, family offices can help family members realize each other’s strengths and remain a cohesive unit. A family office can serve as the outside, unbiased adviser and counselor.

“Future generations need to be armed with both a technical understanding of investments and with the softer skill sets: communication, conflict resolution, delayed gratification and gratitude,” Trammell says.

By helping to develop such life skills, family offices can guide the next generation to fulfill its potential.

“Wealth is not there to be on easy street. You want them to self-actualize,” Vogel explains.

Clyne puts it this way: “If Pitcairn could do one thing for every family as they navigate their family’s dynamics, it would be to help them facilitate a dialogue around their values and mission. It’s foundational work that will benefit the family long into the future.”

Agre believes that helping heirs develop a strong sense of themselves is the underpinning of any good educational effort. “Know thyself. That is foundational to everything else.”

One way to achieve that is by nurturing individual talents. For example, Agre coaches Vermeer family members in sports, and there he learns their strengths and weaknesses. “You can give all kinds of advice on technical matters, but you can’t buy intimacy and can’t buy trust,” Agre says.

When children get older, a trusted family office member can be the neutral third party serving in the role of a wise aunt or uncle. “Having an outside voice helps,” Shipley says. “Professionals can say same thing as parents, but it comes across differently.”

While a family office can help launch children into the real world, parents should remember there’s no standard model when it comes to wealth education. Programs can be as unique and varied as families are.

“There’s no ‘every-family-ought-to-do-this’ rule,” Vogel says.                                                                  

Maureen Milford is a frequent contributor to Family Business. She last wrote about the pros and cons of debt.

 

Copyright 2019 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.

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November/December 2019

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