The More Family Money, the More Complicated it Gets

Wealth management in high-net-worth families is complicated by relationships, and the vast majority of families believe a session with a financial adviser would benefit their children, a study says.

The 2014 U.S. Trust Insights on Wealth and Worth survey takes an in-depth look at the structurally diverse modern American family and finds that money issues become even more complicated in families with increased wealth when family dynamics are added to the mix.  

The traditional approaches to wealth planning are being challenged by changing family structures, multi-generational and extended family circumstances, evolving gender roles, and generational views on investing and use of wealth, the study contends. U.S. Trust found that family dynamics, including change in family structures and roles among men, women and multiple generations affect both immediate and extended family members.

The perspective of “mine, yours and ours” is the new reality of wealth management. Nearly half of wealthy families (46%) in the study experienced a change or disruption in the family dynamic, following a divorce, loss of a spouse or partner and subsequent remarriage and blending of families.

In contemporary families, women play an active role in wealth planning and decision-making as they make significant contributions to family wealth. More than half of women (52%) came into their marriage or relationship with financial assets equal to or greater than their spouse or partner, and one-third of women (33%) are now the primary income earner or contribute equally to household wealth.

Families that are more complex also have more complex challenges. A trend that is concerning among high-net-worth families is assuming financial responsibilities for family members and encountering new circumstances that families, in many cases, are unprepared to handle.

Six in 10 (59%) wealthy people have provided substantial financial support to adult members of immediate or extended family, including siblings, parents, children, nieces and nephews. Yet few (3%) have a financial plan that accounts for this. (See “When Adult Children Ask For a Loan.”

Threats to Family Finances

The top five circumstances that affect overall family financial well-being include: divorce, addictions, untimely death or disability of a primary income earner, medical crises and disagreements over inheritance or distribution of family assets. (See “When Financial Blows Make Clients Feel They Can’t Save.”)

Despite the prevalence of medical crises, and the threat they can represent to wealth, just 38% of married couples have a financial plan to address the cost of long-term care for both partners. Only one in 10 has a financial plan that accounts for the long-term care needs of aging parents.

The changing dynamic of the modern American family coincides with the ongoing transfer of more than $15 trillion in financial and non-financial high-net-worth assets over the next two decades. The majority of wealthy people today (78%), and particularly Baby Boomers, achieved financial success through creation, rather than inheritance, and at least half (52%) grew up in middle-class or lower-middle-class households.

The children and heirs of contemporary high-net-worth families, on the other hand, are likelier to grow up wealthy, and are the current and future beneficiaries of substantial family wealth. More than half (56%) of surveyed Millennials (ages 18 through 33) are second- or third-generation wealthy, and nearly half (48%) already have received a financial inheritance. However, the vast majority of wealthy parents (96%) think children aren’t mature enough to handle family money until they are at least age 25.

Only four in 10 (38%) wealthy parents with adult children over the age of 25 have fully disclosed their financial status to their children, and only 38% of wealthy parents strongly agree their children will be well-prepared to handle the inheritance planned for them. Parents of children of all ages appear open to rectifying this disconnect, as the vast majority (92%) believe their children would benefit from a discussion with a financial professional. 

Millennials Break the Mold

As well as inheriting their wealth, Millennials plan to put it to use in distinctively different ways, shedding new light on the direction and purpose of the substantial amount of family wealth changing hands in the coming years. Two-thirds (66%) of Millennials say their investing focus is on meeting long-term goals, and their approach is innovative, individualized and opportunistic. Other Millennial investing traits are:

  • Three-quarters of Millennials (75%) consider the social and environmental impact of the companies they invest in to be an important part of investment decision-making;
  • Nearly eight in 10 Millennials (79%) feel strongly that private capital from socially motivated investors can help hold public companies and governments accountable for their actions and results; and
  • Millennials are most likely to describe themselves as opportunistic investors, and they, more than any other age group, are using credit to make strategic and opportunistic investments including starting or growing a business.

“Most of the wealthy today are self-made and want their legacy to matter,” says Keith Banks, president of U.S. Trust. “They want to make a meaningful and positive contribution that will benefit their families, the companies they own, the communities they live in and society overall, but many lack the proper guidance and tools given the complexity of their lives.”

The very wealthy have a reputation for knowing how to use credit strategically to their advantage. The top five ways high-net-worth investors use credit are to invest opportunistically, buy real estate, pay taxes, fund education expenses, and start a new business.

Families come in all shapes and sizes, and the wealthy are not immune to the ripple effect of extenuating circumstances on overall family financial well-being, Banks points out. “While these circumstances are not unique to the wealthy, they can complicate an already complex wealth planning process,” he says. “Traditional approaches to wealth management need to evolve and incorporate the diverse perspectives, roles and contemporary needs of the modern family.”

The 2014 U.S. Trust Insights on Wealth and Worth survey is based on a nationwide survey of 680 high-net-worth and ultra-high-net-worth adults with at least $3 million in investable assets, not including the value of their primary residence. Respondents were equally divided among those who have between $3 million and $5 million, $5 million and $10 million, and $10 million or more in investable assets. The survey was conducted online by the independent research firm Phoenix Marketing International in February and March. U.S. Trust is part of the global wealth and investment management unit of Bank of America.

The survey results can be downloaded here