Wealth Transition and the Importance of Having a Succession Plan in Place

Wealth Transition and the Importance of Having a Succession Plan in Place

In years gone by, the concept of ‘financial advice’ meant literally recommending investments and building portfolios. Advisors would trek out to lunch presentations by all the mutual fund companies and promoters, then return to their offices and make some calls to unsuspecting clients, pitching them the next best thing, regurgitating soundbites from star portfolio managers. Whether or not the investment was deemed appropriate depended solely on the asset allocation determined in the first meeting. As long as everything fit into the agreed-upon overall mix of equities versus bonds, everything was good. There was no thought or effort put into defining what the client’s situation was and what his/her needs would be, and subsequently matching the investment recommendation to those needs. Thankfully, many advisors don’t operate that way anymore. Because of increased competition, they realize that they have to provide a lot more service and a better overall experience to retain their clients.

Financial planners in the truest sense work closely with their client to build out a financial roadmap that is used as a guide for all of the other decisions that will come. It can be an intense process, but well worth the effort. The more clarity that can be provided about the client situation, the easier it is over time to match the portfolio and create a perfect fit. Financial planners work closely with clients on cash flow management, budgeting, trusts, insurance, risk management, asset allocation, tax planning and estate planning. The last one – estate planning – is usually the hardest, as many people don’t want to come to grips with their own mortality. But sticking one’s head in the sand is not a solution. As we all know, death is inevitable, only its timing is unknown. However, not knowing when it will happen does not absolve us of the responsibility to plan properly in advance for the next steps.

One of the worst mistakes people make is failing to prepare for an orderly transition of wealth upon their demise. Most of us hold insurance and have named a beneficiary in our will. That’s a good start, but it doesn’t encompass all that is required to pass along wealth successfully. Helping clients transfer their wealth to the next generation could become one of the most important jobs for financial planners going forward. Communication and education are key to adequately preparing the heirs. Unprepared heirs are the overwhelming reason many fortunes are squandered.

Some clients find it difficult to broach the subject of wealth with their family. They don’t want their children to know just how much money they actually have and worry it could change the dynamics of their relationship. They built their wealth by working their fingers to the bone, either literally or figuratively, sacrificing a lot to get to where they are today. They want their children to have the same work ethic and drive. They don’t want them to rely on the estate of Generation 1 to be the retirement plan of Generation 2. They want their children to have the same values around hard work, pride in their work and be responsible citizens. The problem with that thought process is that the family will find out eventually (at the reading of the will) just how much wealth is involved. And if it comes as a surprise, they are more likely to view it as winning the lottery, let the spending begin.

So, if you want your legacy to continue and the wealth to be managed in a responsible way, it is time to ‘open up the kimono’ and bring your family into the discussions, sooner rather than later. A good financial planner will work with you and your family to create an effective succession plan. The better educated people are and the more open communication can be, the greater the likelihood your wishes can be fulfilled. Having transparency now can ward off potential squabbles among heirs down the road. By communicating openly, you can impart on your successors what you want your legacy to be, and you can all work together to determine what the family’s purpose and mission are. Everyone can buy into the process and take ownership of the results, with the entire family being accountable to the plan. The succession plan can be the roadmap for the estate in much the same way that the financial plan was the roadmap for the client while alive.

A seamless transition of wealth can be achieved by working with the entire family now. With the help of a good financial planner, heirs can be properly educated about managing their future wealth in a way that is respectful of the client and carries out his/her wishes in the most responsible way.

Stay tuned as we will be providing more articles and resources to assist on this topic.

Exponent Investment Management