When it comes to passing down your wealth, single-digit millionaires are at an inherent disadvantage. Let’s be frank and say it right now: most banks don’t consider a single-digit million to be an exciting sum of money. It’s hard to qualify for full private banking, or the kind of top-shelf assistance that a full-blown family office can render.
All this means is that, by the time you’re done inflation, potentially toxic investments, and spend-happy descendants, your legacy to the great-grandchildren might shrink from a paid-up bungalow to maybe one McDonald’s Happy Meal. Here are some threats to intergenerational wealth, that single-digit millionaires need to brace for:
- Inter-family conflicts and rivalry
- Inheritors failing to understand the portfolio
- Lifestyle inflation across generations
- No diversification in sources of wealth / income
1. Inter-family conflicts and rivalry
The main threat to intergenerational wealth boils down to family relations. One of the wealth managers I’ve often worked with (and used to work for) surmises the situation as follows:
“Each generation tends to be a reaction against the previous generation. In the 1980’s when I grew up, we had yuppies who were disgusted by the love-and-fresh-air lifestyle of their hippie parents. In the 1990’s, I had children who were disgusted by my being a ‘corporate drone’ and my alleged materialism. Then in recent years we’ve seen the pendulum swing back, where the rebels of ‘90s are accused of ‘main character syndrome,’ naivety, and pretentiousness. So the values of the preceding generation tend to clash with the previous, and this impacts what they’re comfortable investing in.”
If a child grows up hating the previous generation’s rentier attitudes, for example, it’s hard for them to (internally) justify their own family’s rental property assets. There’s a certain guilt that comes with the wealth, and often an impulse to dismantle its source.
A personal anecdote here:
Back in the early 2000’s, I witnessed someone who was at risk of being kicked out of his own family, over the decision to include an investment that some family members considered offensive to their religion. This was all over one small component of a managed fund, that invested in a region of the world they considered hostile to their faith.
The argument was sufficient for some family members to consider purposely damaging the portfolio, by forcing the liquidation and sale of assets at rock-bottom prices. This was, in effect, a threat to make them all go broke together…unless the financial decision went their way.
This sort of thing is the reason private bankers and wealth managers charge so much, to act as third-party managers and mediators. I think the fees barely cover the cost of their therapy and happy pills.
But the point is quite evident: it helps a great deal to have a wealth manager, or some other non-family professional, to act as an intermediary. Most single-digit millionaires can’t afford a full-fledged family office; but they can at least find a financial planner, wealth manager, etc. who is focused on a long-term relationship.
2. Inheritors failing to understand the portfolio
In late 2008, I had an associate who sadly passed from early-onset Alzheimer’s. This individual had transitioned from a career in the maritime industry, to being a full-time trader; and he had a sizeable stock portfolio at the time he passed.
His spouse, however, ran their unrelated family business. She had no familiarity with his stock portfolio, or the stock market. Her husband, having been struggling for the past few years, seemed to have never found the opportunity to explain his portfolio or trading activities; something that I’d call forgivable, given the state of his declining health.
Now if you look at the date I mentioned, you might see the problem here.
In 2008, the practice of US banks selling CDOs suckers came to its logical conclusion: Lehman Brothers collapsed, people in $15,000 suits went to jail, and Singaporeans fled en-masse to the safety of the real estate market.
Over a short period, the valuable of my late associate’s stock portfolio plunged to about a third of its original value; a loss that we later figured to be upward of US$4.3 million.
Had his spouse understood her husband’s finances, as well as what to do with the portfolio, there was a better chance* she would have salvaged more from it. Results would probably have been even better, had there been some sort of expert manager at the helm.
This is something for single-digit millionaires to think about: once you’re gone, or incapable of making decisions, do your inheritors know what to do with the legacy you’re giving them?
Do they know when they’re supposed to sell your rental properties (if at all)? Or whether it’s your intention to liquidate part – or all – of your businesses to build a family trust?
It’s not just about wills and CPF nominations (that just determines who gets what). It’s about ensuring your inheritors know what to do with the legacy you’re giving them.
*I wouldn’t say guarantee, as in the 2008 bloodbath there were portfolios that shed a few million dollars overnight.
3. Lifestyle inflation across generations
I don’t need to explain this one too much, right?
- You eat in coffee shops and wear plastic watches. You leave your children $5 million, thanks to your thrifty lifestyle.
- Your children eat in cafes and wear mid-range watches, because hey, they have $5 million. They leave $3 million to your grandchildren, because they spent more than you.
- Your grandchildren, who were raised by parents that ate in cafes and wore mid-range watches, eat in restaurants and buy high-end watches. That’s the world they were raised in. They leave barely $500,000 to the next generation, etc.
In essence, each generation – being used to the luxury or financial security of the previous – ends up spending more. This carries on until the wealth is burned out.
Sometimes, trust arrangements can help with this. Some trusts allow you to impose certain conditions: you can, for instance, have the trust pay out only the interest or returns on the family portfolio, without allowing your descendants to touch the principal.
A very old school, Peal S. Buck example would be allowing descendants to spend the income generated from land holdings, but never allowing them to sell the land.
4. No diversification in sources of wealth / income
Imagine if your grandparents had left you with a massive stock portfolio, which was entirely invested in Tower Records. Or perhaps they left you with a massive portfolio invested in retail giants of their day, like Sears.
Those companies were blue-chips in their day. It’s too bad that today, the Sears stock plus $3.50 will buy you a $3.50 cai png lunch.
I feel this is an admittedly rare mistake among high-net worth types who invest in stocks, commodities, etc. But it does seem more common among those who built their fortunes on a particular business.
If the bulk of your wealth came from, say, mining operations – and your parents in turn ran mining-supply companies, then it doesn’t take genius insight to guess your legacy might involve excavators and mine shafts as well. It “runs in the family”, so to speak.
But in the past decade, we’ve seen new technologies disrupt and replace old ones at a record pace. From ChatGPT displacing underpaid writers like this one, to social media displacing traditional ad agencies, we’ve seen whole industries face sudden collapse in the face of progress.
That means that now, more than ever, you should avoid having your legacy be fully rooted in just one kind of asset. Without diversification, disruption in a single industry can wipe out most or all of the wealth you’re trying to pass down.
Objective, third-person managers are one of the best ways to preserve intergenerational wealth
You can’t be around forever, and you can’t assume all your family members are equally competent in financial management. Just as the ultra-wealthy set up family offices, single-digit millionaires can engage long-term financial professionals, who stay with the family across the decades.
If you have questions about this, reach out to us at single-digit millionaire (insert the CTA here); and you can also follow us for updates and issues that are around the corner.
