How To Dodge Doom for Third Generation

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The New York Sun

It isn’t just a lust for gold medals that we share with the Chinese; it’s also the challenge of protecting hard-earned wealth for generations to follow. The old adage “shirt sleeves to shirt sleeves in three generations” has a Mandarin translation, “rice paddy to rice paddy,” the managing director of BNY Mellon Wealth Management, Thomas Rogerson, says.

Mr. Rogerson, who has helped families manage their affairs for 25 years, says that more than 70% of families who build fortunes lose them by the end of the second generation. More than 90% of the time, the money has been lost by the end of the third generation.

This sobering reality is not due to bad tax planning or to poor money management; rather, it is because subsequent generations have not been properly groomed to take over. “If they can’t get the next generation to pick up the ball, game over,” Mr. Rogerson says.

Speaking recently before a Yankee audience assembled at the Nantucket Historical Association, Mr. Rogerson said that perhaps the most essential element in this training is communication, acknowledging that talking about money “is something we don’t do in New England.”

Also, few well-to-do families engage their children in making financial plans or choices. Mr. Rogerson uses the example of a poor teenager going out to buy a car: The hard-up youngster typically will do extensive research, investigate all financing options, and learn a great deal in the process. The rich teenager normally doesn’t have a clue, since his parents do the buying.

Mr. Rogerson and his wife educate their own children, who range in age from 5 to 15, by providing them with a small pool of money that they are encouraged to invest, using their returns, whether meager or copious, to finance their family vacation.

The first year the children shot for the moon, and the family ended up camping out in a tent. Stung by that disappointment, the youngsters invested the next year in money market instruments, which allowed for a somewhat upgraded — but hardly lavish — visit with relatives. The third year they got it just right, and the family enjoyed a real vacation.

Though most of us would have little appetite for such a sacrificial teaching experience, Mr. Rogerson encourages us to generate opportunities for some sort of communal decision making. “The first major decision that kids make together should not be the settling of their parents’ estate,” he says. “Making decisions that have consequences is a very powerful tool.”

The second generation is usually better-educated than the first, and often becomes lawyers or doctors, for instance, while the third generation often moves into the arts or into unconventional professions, such as members of ski patrol, or park rangers. “The first generation is not always approving of the third generation’s job choices,” Mr. Rogerson says. And that can discourage family unity.

“Most people worry about two things,” he says. “How much is enough, and when do we tell them? The worry is that telling your children too early that they stand to inherit may engender a sense of entitlement; if you tell them too late, they are not prepared.”

There is also the issue of how much to leave them. “Leave them what you prepare them for,” he counsels. “If you want to leave them nothing, that’s fine. But be sure they are prepared for that.”

Mr. Rogerson approaches these issues by working with families to think differently about themselves and about their wealth. Probably his most important message to clients is that they need to think of themselves as a unit. “It’s the ‘we’ that many families miss out on,” he says. “Family should trump everything.”

Philanthropy is also a powerful tool in training families to work together and to make decisions jointly. He and his wife have encouraged their young children to make donations to worthy causes both individually and as a unit. That means they actually have to talk to each other and argue their case.

Also, he tries to reorient how his clients look at their assets. “Families that lose their money the fastest have the wrong definition of net worth,” he says. “It’s not a dollar number.”

Instead, he describes five types of capital, the last and least important of which is financial. The most important is human capital, such as a person’s or family’s unique capabilities, including talents, health, happiness, ethics, and character. Other categories are intellectual capital, which might include traditions, faith, and education, and social capital, or how the family interacts with the community.

“Families that are able to preserve wealth tend to be healthier, by any definition,” Mr. Rogerson says.

Most people have a lot to learn before they begin to tutor their heirs. Mr. Rogerson says 60% of high-net-worth individuals don’t know the annual returns earned by their managers, are not familiar with the fees charged, and haven’t evaluated their risk levels or their tax exposures. Is it any wonder that they haven’t prepared their heirs to take over?

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