Data & Research June 20, 2014

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.
Reported by

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.

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

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. 

Compliance June 20, 2014

Council Examining Practices for Outsourcing Plan Services

The Department of Labor’s (DOL) ERISA Advisory Council is examining practices for outsourcing employee benefit plan services.
Reported by

In an issue statement, the council notes that certain functions by their nature must be outsourced to a third party, while others are outsourced for practical reasons, but there is an emerging trend toward also outsourcing functions that have traditionally been exercised by plan sponsors or other employer fiduciaries, including functions such as investment fund selection, discretionary plan administration and investment strategy. In addition, the council says, there’s an emerging trend towards using multiple employer plan structures as a mechanism to “outsource” the provision of retirement plan benefits particularly in the small company market.

According to the council, outsourcing plan services presents questions about the allocation of legal responsibilities and risk for activities of service providers on behalf of plans, including responsibilities imposed by the Employee Retirement Income Security Act (ERISA) and responsibilities allocated and risks assumed service contracts. The council contends the allocation of responsibilities and risk is not always well understood by plan sponsors and other employer fiduciaries and they may misunderstand what their legal responsibilities continue to be when services are outsourced.

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

“While the Department of Labor (DOL) has issued guidance in several areas regarding both plan sponsor and service provider responsibilities, there is no uniform analytical framework for understanding outsourcing, particularly in the context of fiduciary services,” the council says in its issue statement. The council intends to draft recommendations to the Secretary of Labor for consideration.

It says its examination will focus on:

  • Identifying current industry practices and trends regarding the types of services being outsourced (both fiduciary and non-fiduciary) and the market for delivery of those services, including differences in outsourcing practices by type of provider, plan size or plan type;
  • Clarifying the legal framework under ERISA for retaining outsourced service providers, including both plan sponsor and service provider responsibilities, and suggest areas where further DOL guidance might be helpful;
  • Making recommendations to DOL about current best practices in selecting and monitoring outsourced service providers, including identification of performance standards, benchmarking of costs and mitigating conflicts of interest;
  • For fiduciary services, exploring the differences between status as a fiduciary under ERISA section 3(16), 3(21) and ERISA section 3(38) and the scope of co-fiduciary liability in the outsourcing context;
  • Identifying current contracting practices with respect to outsourced services, including provisions such as termination rights, indemnification, liability caps, service level agreements, etc. that might assist plan sponsors and other fiduciaries in negotiating service agreements; and
  • Examining insurance coverage and ERISA bonding practices of outsourced service providers to assist in understanding the extent to which risks are shifted from plan sponsors and other fiduciaries to service providers.

The American Benefits Council (ABC) urged the ERISA Advisory Council to avoid adding an additional layer of complexity for retirement plan sponsors.

“We respectfully request that the DOL take caution to not add another layer of complexity related to plan sponsors’ decisionmaking as it pertains to the procurement of plan-related services from suppliers and vendors who reside outside the company,” Allison R. Klausner, assistant general counsel for benefits, Honeywell International Inc., said in testimony before the council, speaking on behalf of ABC.

“The Council would support DOL initiatives with regard to outsourcing work relating to the delivery of employee benefits, but only so long as it is not one that limits the freedoms of the plan sponsor to make corporate decisions that fit its corporate culture and the personality and needs of its workforce,” she added.

Klausner told the council about the process Honeywell uses to select outsourcing providers, but noted while the system works well for her firm, every company is different. “Any government initiative in this area should permit continued flexibility for American companies as they provide benefits to their workers and retirees in an effort to support their collective health and financial well-being,” she said.

«