Inheritance is About a Lot More Than Money

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Hello and welcome to The Way Forward. I'm Scott Winger, editorial director of Barron's Advisor. Today we welcome Matt Wesley, managing director of the Center for Family Wealth Dynamics and Governance at Merrill Lynch. Matt and I are going to discuss the best strategies and avenues for working with high-net-worth families on estate planning, philanthropy, environmental, social, and governance investing, and helping to ensure that parents can motivate, not hamper, the future success of their children. Matt, thank you very much for joining us.

It's my pleasure. I'm glad to be here.

Matt, so our listeners know, you've studied sociology, theology, and law. Those skill sets and themes must be of great use in counseling clients and crafting solutions to clients' issues. Tell us about that.

Sure, sure, Scott. My checkered past. So as I look at this, when I think about the work that I do with families, obviously the legal background comes in handy, although I'm not practicing law in any way, shape, or form any longer. One of the things that I realized over my years as an estate planning attorney was that families are having to live with the structures that attorneys create for very long period of time, sometimes 100 years. These trusts can go on for a long time. And so having that kind of background allows me to understand and appreciate the structures that families are living with. The sociology background was actually— comes up more than you might think. It was an undergrad degree for me. And so I wouldn't say that I'm deeply studied in it, but one of the things that it attuned me to was the importance of groups and how groups function and what goes on in groups. Obviously, a family is a group. It's probably the most basic group that we have in our society. Really understanding those group dynamics and understanding how groups construct themselves, how they build themselves, how they understand themselves, how they make meaning is absolutely critical. The theological background is surprisingly relevant in that the work that I do with families is oftentimes what I might call pastoral. That's completely secularized. It's not in a religious context in any way, shape, or form. But the work of listening, of encouraging, of organizing, of strategizing, of— there's an old saying in ministry that you want to comfort the afflicted and afflict the comfortable. And all of that is very much in play in the work that I do with families.

I imagine so. I imagine that within the specialties individually of sociology, of theology, and of law, listening, making sure that people feel like they've been heard, is really paramount to a successful outcome. And then layer on top of it the notion of family wealth, perhaps considerable family wealth, and ensuring that all players feel like their wishes have been heard and to a certain extent will factor in the outcome, it's got to be pretty key.

Yeah, absolutely. No question about it. And how you become responsive to the individuals within the family system, given the fact that oftentimes the family has a hard time hearing from one another for all sorts of different reasons, the roles that have been established and the preconceptions that exist, the complexity of the issues involved. Sometimes it just requires an outsider to help the family slow down enough to listen and to hear one another. Then obviously, as a facilitator coming in and hearing what people are saying, looking for the points of synergy and synthesis becomes a critical role for for the outsider consultant or advisor.

So when you're meeting with families, when advisors are meeting with families, these are families that are looking at confronting transitions. Many times, no doubt, they're confronting it with a positive outlook and harmony. But what are some of the key challenges that families in transition face?

Yeah, that's a great question. And I think one of the things that, that people tend to do when they think about transitions is they think of an event, that there's some precipitating event that creates a transition, when in fact the transition— most often the kinds of transitions we're talking about are really a phase of the family's life. And oftentimes that phase is much longer than you might expect. It might, it might start even with the birth of children and how their characters developed over time. But it really takes on some momentum, maybe 5, 10 years before the actual event of transition is going to occur, and sometimes even longer than that. And it usually peaks after the transition has happened when the new reality has sunk in, and, and the points of greatest potential tension exist there. So these arcs are long. And, and so being prepared for them and understanding what they're about becomes important. I'm going to take your question and flip it a little bit and tell you what I think really makes for successful transitions, and then we can extrapolate from that the reverse. Yes, please do. Somebody once asked me, they said, what's the one thing that you think families should focus on in these times of transition? I said, I'm not clever enough to come up with one thing, but I think there are that really come to the fore for me. And they are, first of all, that the family has a strong commitment to one another, to being together as a family and moving through that process. And part of that commitment is a real care for one another, a desire to put one another's best interests at the center of the conversation, to recognize it's kind of a one for all and all for one approach to the dynamics of care and compassion within the family. And that might be seen as contrary to the third element of this little stool. And the third element is the element of candor, that families that tend to do really well are able to be honest with one another. While that may seem that it contradicts care, it actually supports it. That we know that we can trust people when they're honest with us. That honesty breeds a degree of care as well, which isn't to say that you bring up every little thing, but on the big stuff and the important stuff, you're honest with the family. Then the final piece of it is that the families, and this might even be the most important piece, is that families committed to learning together. Uh, one of the things that we hear a lot about in Family Dynamic Circles is the responsibility to prepare the rising generation, and we'll probably get into that a little bit later on. But my experience is that the future is always containing challenges that require adaptation, and that preparation is not enough. Preparation helps you get ready for the battles, that have already been fought and the challenges that have already been met. But it doesn't prepare you to adapt. Families need to become learning organizations where they're constantly learning and constantly growing together in their understanding of one another and of the challenges they face in the future. I would say those are the four big pieces: the commitment, the care, the candor, and the willingness to learn. And that probably the challenges are sustaining those things through the transition and having people really engage in those four elements in a thoughtful and concerted way.

I'm glad you reiterated them right at the end. I was about to do that because I think they were so vital for people as they try to carve out takeaways from this conversation. Yes, the commitment, the care and concern, the candor, the learning, and then, for me, you actually added one at the end, which is planning is, to quote the cliché, it's worth as much as the paper it's printed on or the screen you're looking at because, of course, in actual operation, it's being able to adapt to what actually happens, responding to the world as it decides some of what's going to happen. You can have a great plan and maybe you'll be able to execute it flawlessly, but parts of it might very well have to change. And of course, it's hard to think of any significant thing that any human being has touched or encountered in the past, you know, year and a half that has not been laid asunder or altered by COVID. So I think it's great that you're underscoring the importance of preparation. Because if you're not prepared, you can't even begin to tackle and succeed with what you hope to. But it's being able to deal with what you're not expecting.

Yeah, yeah, exactly, exactly.

I want to spend some time talking about how much parents should consider leaving their children in their wills, or even sometimes before they, they pass. And to tee up this part of our conversation, I want to read this quote from you from a few, a few years ago on this topic regarding the proper amount or percentage of inheritance. You said, 'The answer is as much as you prepared them for. It really puts the emphasis on what, on what should be the emphasis, which is not the amount of money, but rather the readiness of the children to receive that money.' I think there's a common notion out there, just continuing your quote, that wealthy kids inherit cash and stocks and bonds, but they don't. They inherit structures like trusts and foundations and limited liability corporations. You have to know how the foundations and the structures, structures and how the LLCs work. I thought that was a really potent quote, and I'd love you to pick it apart and emphasize for our listeners today how that really strikes at the notion of what advisors should be doing with their clients.

Yeah, thank you. I appreciate you picking up on this. I think it's critically important when clients come to us, they're asking essentially 3 questions when they come to the Center for Family Wealth. And the 3 questions are, how much should I leave my kids? How do I talk to them about it? And how do I prepare them to receive the wealth that they're going to receive? And that first question is almost always a quantitative question. How much should I leave my children? When in fact, I think the question should be, how well prepared are my children to receive the wealth that they're about to receive? And what is the amount that I can leave them that won't burden them, that won't create problems for them? That will be liberating in the process. That question of getting children ready for wealth and the implications of it becomes paramount in the process of planning. When I take a look at that dynamic, we tend to see some core competencies that are useful to think about. And some of these are competencies that advisors have a really profound impact on. The first competency might be considered financial competency. How do people earn money, save it, spend it, share it, invest it, borrow it, protect it? Those are skills that anybody leading a normal financial life in our cultures has to understand. How do I insure my car? How do I understand health insurance? How do I understand my retirement plans? And what do I do in order to save money? How do I give it away wisely? Everything that is part of a person's normal financial life falls in that bucket. The second bucket is really wealth competency, which has to do with the structures that people inherit. As that quote says, people don't inherit money when the estates are large, larger than, say, tax-exempt. Exempt amounts. And tax planning comes into play, and trusts are established, and maybe there are foundations and other entities. That's what they're inheriting. And if they don't understand those structures and they can't make those structures work, then they're disempowered. And so how do we work with people to help them understand the structures? And not only do they inherit the structures, they inherit the advisors that that come along with those structures. So an inheritance in a truly wealthy family is going to include not only these trusts, but they're going to inherit lawyers and accountants and financial advisors. And how they work with those people becomes critical to their success as individuals. The third competence we see is governance competence. And this isn't necessarily true in all families where where some people may set up estate plans that just divide the assets between the kids and they all go their separate ways. But if there's, for example, a foundation that they have to manage together, they have to learn to operate together as a team. And what that means to operate together as a team is what we mean by governance competency. And so how do they resolve conflict? How do they get aligned with one another? How do they create the accountabilities that they need? If they're going to own, say, a family cabin together or they're going to be running an investment partnership together, they have to learn those skills, which are oftentimes underutilized in families and underdeveloped in families. And it's where a lot of the problems come in down the road through the transition as children try to learn how to work together. And then the next competency would be business competency. If they're left assets that they need to make productive, so for example, real estate or an operating company or some sort of an investment entity, they need to know how to turn that capital and make it as productive as possible. And then the final competency would be philanthropic competency. We all know it's easy to write a check for a couple hundred dollars, it's really difficult to give away $200,000 and have it be meaningful gifts. So, those would be the competencies that we point to. Not every competency needs to be developed in every family, but I would say that financial advisors can play a huge part in those first two competencies, the financial competency by helping adult children of their clients develop financial plans and really understand the basics of saving and investing and just doing a lot of hands-on education with their clients' children. And then with wealth competency, obviously financial advisors are well-versed and understand these structures of wealth. So helping people understand what those structures are and how they function and what their roles and responsibilities are within those structures can be a useful thing for advisors to plug into.

I appreciate the depth of that answer. I want to pick up on a word you used a few moments ago but play off of it. You were talking about education, and I'm sure that there are advisors and others must confront families all the time where children might be brilliant, but as is true for virtually all of us, our brilliance might be in limited areas. But I want to turn to education for families that are high net worth, they often have the privilege of not even being burdened by the, you know, the very high cost of higher education for one, let alone two or three or more children. But even for families of mass affluent, living mass affluent lives, or even those at a lower level, is there a general thought that you convey or that you have on whether parents should fully cover the cost of education for their children if they can?

Yeah, that's a great question. And, you know, it varies from family to family, and part of it's going to depend on the values that that family has and how they place value on education. I want to circle this and loop this into what we were talking about just a moment ago. One of the things that I think we think of when we think of educating children about wealth is we view it as kind of a book learning sort of thing. They need to understand what a stock is and what a bond is, but oftentimes they don't actually touch those things. And so when we view preparing children, we view it a lot like driver's education. There's certainly a classroom component to teaching a child how to drive, but there's also real-life opportunities opportunity to, to engage in driving, for example, first in the parking lot and then on the city street and then in, in busier traffic and then ultimately on the freeway. And first they do it under adult supervision with mentors and then maybe with family members, and then finally they're allowed to drive on their own. And, and so I think that's a great analogy to what we're doing here. So one of the things, and I'm coming back to your question about education, one of the things that we see in wealthy families is that stuff just shows up. There's a new car in the garage, there's art on the wall, there's a new sofa, and nobody really gives much thought as to where it came from. So I'm not sure that the goal here is to either pay for or not pay for college education, but to truly understand and appreciate where that money is coming from, where it's going, and how it's being spent. To give the child an actual experience of understanding that, it will go a long way towards helping them connect this education they're receiving with the financial lives that their parents have. Whether or not the child is responsible for certain expenses, as they're away from college, there's great value in making them responsible for at least some of that. At the very least, creating transparency around what it's costing and maybe even helping children by saying, here's an account that you have to pay your tuition and your school books and your expenses. At home and the dorm fees so that as they're, as they're going through college, they actually have the experience of managing a budget to get themselves educated.

It sounds like what you're, what you're underscoring are the themes of responsibility, initiative, and values, you know, that if they're going to receive a higher education and maybe receive other gifts or other quality of life perks that come with being raised in their family, whether it's a fairly modest income or one that's quite extensive, that they appreciate and understand what goes into creating that later on for themselves and hopefully for their own families.

Yeah, that's exactly right. And, and if you put them in experiences where they actually have to feel the, uh, the experience of working with the money and demonstrating responsibility around it, they actually learn a lot more than they do if you just sit them down and, uh, and explain the cost of a college education and then you write all the checks. So the more that you can engage them in that process, the better. Great.

You're based in Bellevue, Washington, so Technology Wealth is extensive in your community.

Yes.

Wealth is relatively new for REACH. How are those families, as you found it, different from those with more decades of intergenerational wealth?

That's a great, that's a great question. So one of the things that, that we see in generational wealth, and particularly when you get to the third and fourth, fifth, sixth generation, is those families have accomplished something that is really profoundly difficult. Which is to move from the creation of wealth to the sustenance of wealth. There's a great quote by Nathan Rothschild who said that it takes a great deal of boldness and a great deal of courage to make a great fortune. And once you have it, it takes 10 times as much wit to keep it. And so I think the big challenge for people who are wealth creators is underappreciate the fact that collaboration is going to be a necessary skill in the next generation. And that, that collaboration is hard. It's really hard to get a family to collaborate for 30, 40, 50 years in that second generation. So it's well set up for the third. And the families that have managed to hang on to wealth have figured that out. And it turns out, if you look at the statistics, only about 10% of wealthy families manage to hang on to wealth through, uh, through the third generation. And so the the odds against success are long. It's a hard road to hoe. So most of the wealth creators that we run into who are first-generation wealth creators are focused on creating structures that they think will contain the issues, that they're going to create trust and put restrictions on the trust and all the rest. But our experience is that culture, family culture, will eat those structures for breakfast. And so the families that have been around for a while know and understand that fact, understand the culture issues and work really hard on it. Whereas oftentimes first-generation wealth creators are a bit blind to the power of culture and the power of culture to undo all their great planning.

When you were saying a moment ago about the difficulties of sustaining wealth for 30, 40, 50 years, it made me think that— and I presume this is probably true for all families, of course, including my own— on occasion, it can seem like it can be hard to retain anything for 30, 40, 50 minutes.

Yeah, exactly.

So what do you do when there is significant strain in a family that threatens a positive outcome?

It's interesting. When I look at families that are moving through this process, I tend to see two different tendencies. One tendency is to drift apart, and that's the vast majority of families. If there are tensions within the family, they just tend to avoid it, and it tends to lead to a drifting apart. There are some families that you read about in the newspapers where it explodes into real conflict. But those are the minority. One of the things that is true, I think, in the literature about families, and you go back and you read the family therapists, they would tell you that a central dynamic in families is anxiety, that people are constantly anxious about different things. Parents are anxious about their kids, whether they're going to get into a good college, how they're driving their life. Once they get out of college, that anxiety tends to continue. Likewise, the kids are anxious about various things. There's this tremendous amount of anxiety. What we found is that the thing that allows families to hang together and stick together is focusing not on the anxiety, but focusing on things like having a common purpose. What's the purpose of this wealth and how do we expect this wealth to be used? And secondarily, what are our core values? What are the principles that we're going to follow as we move forward? And then finally, what are our common interests? How do we as a family perceive the common interests that we have together? And oftentimes when you begin to forge those things and you do a great job of listening to the family and you take into account all these various perspectives and viewpoints, you're able to begin to forge the bedrock material of what the family truly values as almost a moral vision of the family. Who are we and what do we want to become? Now, obviously, if conflict escalates, it there are other interventions that need to happen and maybe communication skills and even forms of formal mediation and things like that. But for the average family, just simply figuring out how are we going to come to agreements where our common interests and our individual interests are aligned, and do I understand your interests well enough to support those? That's where that care comes in. Then also the the commitment to, to what is our common interest together. And it may be something as simple as saying, okay, if we pool our money, we're going to be able to invest in many more and different kinds of assets than we would be able to do if we, if we all went our separate ways. And that's valuable to us.

And I imagine ESG is an important part of that conversation.

Yeah, and this— but that is very true, and particularly with the rising generation What we see in the rising generation is obviously a significant amount of awareness around not only the importance of ESG and how ESG functions, but also the fact that the companies that are paying attention to those things oftentimes are doing quite well. They're the ones that tend to be having disproportionate market growth. Now, I'm no expert on ESG, and I would always advise people in making ESG investments to go speak to their advisors about it. But I think advisors are well served to really understand the world of ESG because it's, it's gaining a huge amount of traction within the rising generation. And I think increasingly in the, in the incumbent generations as well.

And we've really seen an extraordinary change in awareness and interest and evolution in the products that are available. And then fortunately as well in the investment returns that no doubt are helping drive all of the attention. Well, you know, I have to say, Matt, this has been a great conversation. We're coming up near our time limit. So I want to ask you one final question. In which we conclude with a Barron's tradition, asking our guests for one final actionable idea that advisors could put right into practice. Can you tackle that for us?

Yeah, it's a great question. There was a buddy of mine who raised the question of what would you, what would you tell people if they're first starting out with a family? And what would you recommend they do? And I thought about it for quite a while, and I came up with something that is deceptively simple. And the recommendation or the statement I made to him was I would encourage people to stop, look, and listen. Stop what they're doing and get out of the scripts that they typically run through With clients, we are so solution-focused and so solution-oriented that we oftentimes miss really important things that we should be paying attention to. And stopping just allows us to do that. Look, see what's going on, really observe what's happening, what's happening with your client, what's happening in their, in their lives, what's happening not only in the markets, but, but in the intersection of the markets and and the well-being of the clients that you're serving. And then listen, ask really good questions, ask questions that are provocative, that get people to think. And I think if advisors just do those 3 things, their relationships with their clients are enhanced, and the opportunities for actually serving not only the clients but their families go up dramatically.

It's great points because I think when we stick to the script too closely, we miss right what's right before our eyes and our ears, the facts that should actually drive the decision, not what we think should drive the decisions. I think it's great to underscore how important it is to engage and absorb and to do that actively. Matt, I want to thank you very much for your time and sharing your knowledge. And thanks to everyone for listening. I'd like to ask everyone to tune in next week for the Barron's Advisor podcast, Actionable Intelligence, with Steve Sandusky. Steve will speak with Lauren Williams, a financial advisor with a very different kind of resume. She's the first American woman to medal in both the Summer and Winter Olympic Games. Be sure to watch for that podcast next week on Barron's Advisor. Matt, I'll give you a chance to, uh, I wanted to thank you again for being with us today.

It's my great pleasure. I thoroughly enjoyed the conversation.

Thank you. And until next time, thanks for listening to another edition of The Way Forward.

This podcast was brought to you by Wells Fargo Advisors. Looking for a firm your clients can't outgrow? Wells Fargo Advisors offers financial advisors full balance sheet solutions with wealth planning, investment products, banking, and lending that meet the needs of affluent to ultra-high net worth clients. Build your practice your way and on your schedule with independent and employee model options designed to meet your needs today and tomorrow. Learn more at joinwfadvisors.com.