In many high-net-worth families, the great wealth transition isn’t happening quite as quickly as expected, as it’s common for founding members to enjoy a long working life in their own businesses. Despite there being two working-age generations in waiting, a shift in thinking is needed so that they are both accommodated.
What you need to know
- The great wealth transition is actually happening at two speeds
- At the HNW end, incumbents are taking much longer than expected to move on, which affects the middle generation who are eager and ready to move into a senior role.
- We, therefore, need to be thinking in terms of three generations rather than two to accommodate these groups who want to work and contribute to the family business.
People have been talking about the “great family wealth transition” for a while now. It revolves around the Baby Boomer generation which created significant wealth and whose cohort is now well into retirement age. Trillions of dollars were expected to flow from them to their children. But things haven’t happened as quickly as we’ve all expected. Why?
First, let’s do some maths. The Boomer generation was born between 1945 and 1965, so they hit (or will hit) the retirement age of 65 between 2010 and 2030. That would put us right in the middle of the transitionary period. But are we even halfway there yet. Let’s do some more maths because very broad statistics about a group don’t always reveal the underlying themes. Let’s split the Boomer generation: group one is those in regular employment or with small, “ma and pa” businesses. Group two are the business owners.
Group one might be 80%, but their average net wealth might be $2-5M. They are a very large group, and they are the ones more likely to think about retiring at 65. Group two are smaller in numbers, but as business owners, they have accumulated far larger net wealth. While group one may be a much larger number of prospective retirees, group two is much larger by dollar value. It is the impact of the second group that is therefore much larger on their families as well as their family wealth transition, so let’s focus on them.
Most have large operating assets – family businesses – and may employ family members. For their owners – many of them first-generation and therefore the founders – the age of 65 is just another birthday. The same self-belief and determination that made them successful entrepreneurs informs a view on their own fallibility. They are not going anywhere and may work until their 80s and beyond. That is the main reason they remain involved.
Does the business need these founders to be so involved? Is the next generation prepared to take over the reins? This is where things start to get tricky – families can easily slip into some vicious cycles when it comes to succession planning. Consider this: the founder thinks they can stay on forever, therefore doesn’t adequately trust and/or prepare their children to take over. This can cause the children to become frustrated and/or seek other options, which means the founder is actually still needed. When families get trapped in behaviour patterns like these, they can be very hard to remedy or reverse.
Consider this too, from the perspective of the children. They will look at a person like Prince Charles – born to be king and now 73 years old and still waiting his turn. When he does eventually become king, for how long will it be, and in what stage of his life? Family wealth succession does not always mean control passes from one person to just one person – more often it results in a number of rising gen owners needing to work together as a group. The common factor is: at what life stage do those rising gen step up, and what part of their adult life does that represent?
Given these realities around life expectancies, family wealth transition needs to look beyond going just from one generation to another. Bear in mind that the way the wealth transitioned the last generation is not necessarily the model for how it should happen this time around. The family will have evolved and the world has changed. Rather, families should consider the fact that three or four generations may want to have roles within the family enterprise at any given time.
How should families adjust?
Firstly, we need to reframe the discussion. Rather than speaking in terms of two generations – “incumbent” and “rising” – we should widen things and consider three generations, based roughly on their age range
Aged 50+
This is a very broad age band, and covers people who might consider themselves in their prime, to those in their 70s and beyond who might genuinely be thinking about slowing down and “the r-word”. No matter what the age range, it’s important to start working on what their future life looks like as those in groups 2 and 3 below make their way into the family enterprise. Within the family group, they can look to shift into more of a governance role or as a mentor (not manager) for some of the younger family members. This is potentially a big change, but it doesn’t have to happen all at once. They could slowly reduce active involvement by delegating some authority to others, and at the same time begin a new role in mentorship and/or governance.
For the incumbents, transition doesn’t have to mean retirement and instead they can offer guidance and mentorship to the incoming generation.
Ages 30s-50s
Or, where there is an older-gen. This is the ‘sandwich generation’ who may fear they will end up like Prince Charles, and bear the biggest impact of longer life expectancies and an eager younger cohort. The last thing they want is a “skip a generation” succession or estate plan. They should be given the opportunity to move into more senior roles with the appropriate authority and autonomy. There is potential for conflict as this group want to step up, and older family members push back. This is where external board members have a role in championing this as a form of ongoing development of human capital within the family, as well as mitigating key person risk.
The under 30s
They are often in a hurry, looking to make their mark on the world and shaking things up. If they are told to “just slow down”, they may choose to run – in the opposite direction. HR professionals might say they are not the type to want to work in the same job for 20+ years, which is common in family operating businesses. They need a more tailored approach, and it may help them to seek their passion either in spaces adjacent to the family enterprise or externally. In general, it’s good practice for younger family members to have at least five years working ‘outside’ before joining the family business.
What if there are too many cooks?
This is a function of how many eligible adults within the family there are, and the size and complexity of the family enterprise. However, no matter what the size, two people do not fit into one role. Well before a contest for a limited number of roles emerges, leadership should look at how to diversify the family group. This could take the form of an older family member shifting from an executive role (freeing up space for someone younger) to a strategic diversification role (making space for more family members to get involved). Another option is to allow for regular ‘pruning’ of the family enterprise tree, which requires a specific process. Essentially, the ideal setup here is to have a diversified set of operating and non-operating assets where everyone can have their own space – what is referred to as a “business family” and not just a family business. Pruning is allowing family members to separate and do their own thing.
Managing this family wealth transition dilemma
HNW families are the ones most affected by the long tenure of the incumbent generation in the family enterprise. Because there are two working-age generations in waiting, a shift in thinking is needed so that they are both accommodated. This should be addressed by the highest levels of family governance and sits within the areas of family human capital, and risk.
This was also posted at [andsimple.co].
