Four Reasons Why Wealth Transfer Fails and How Advisors Can Help

May 24, 2018

JERSEY CITY, N.J.— According to a new white paper, “Parent Trap: Avoiding Common Multigenerational Wealth Planning Pitfalls ,” released today by BNY Mellon’s Pershing, 60 percent of family fortunes are squandered due to a lack of communication and trust, while only 3 percent disappear due to poor wealth planning*. This statistic underscores the important role advisors play, particularly when working with high-net-worth (HNW) clients.

“Wealth transfer tends to be a sensitive topic for many families,” says Katie Swain, director of financial solutions at BNY Mellon’s Pershing. “Most families are reluctant to address the topic to avoid inter-family conflicts. But putting off the inevitable is counterproductive to wealth preservation, and is, in fact, the main reason why families experience an erosion of wealth over time.”

However, only a tiny portion (7 percent) of families think that interpersonal family dynamics are likely to lead to a loss of wealth, while a significant majority (nearly 80 percent) believe that investment strategies, financial constraints or the macro economy are likely to be the main culprits of their dynastic demise.

“Advisors are in a prime position to play a critical role in generational wealth management,” adds Swain. “There’s a tremendous opportunity for advisors who are aware of the potential pitfalls and have the right tools and approach in place.”

Through original research and interviews with financial and generational experts, BNY Mellon’s Pershing, in conjunction with Beacon Strategies, examined the factors critical to success in sophisticated and sustainable multigenerational wealth transfers, along with obvious and not-so-obvious traps for advisors to sidestep when dealing with this lucrative, complex market.

Key findings include:

  1. Looting the legacy: The further removed successive generations are from the wealth creators, the more difficult it becomes to maintain the inheritance. Advisors can help families identify shared values and develop a vision for how they want to use and preserve their wealth, which can be critical in connecting different generations to a united cause and vision. Advisors can also be instrumental in putting in place a governance process that passes from generation to generation and leads to more successful planning.
  2. Monarch to mentor: Successful legacies depend on relinquishing control. One of the main problems with wealthy families is reluctance on the part of matriarchs and patriarchs to relinquish control. Advisors can have an important role in helping family elders move from a leadership role to that of a coach, teacher and supporter. 
  3. Transactional traps: Purely transactional gifting—without a vision or a clear, well-thought out reason—can lead to confusion at best, or waste of money at worst. Gifting should not just be viewed as a tax mitigation tactic. Advisors should help their clients develop a vision for what they want to accomplish through gifting, and work with them to communicate that vision to beneficiaries.
  4. Death and divorce: Higher divorce rates have resulted in more blended families, creating more opportunities for accidental disinheritance. Advisors should ensure that beneficiary information is updated on a regular basis to help prevent unintended consequences after a divorce or death.  Advisors can also play a role in facilitating inter-family communications in important estate planning decisions to help make the transition after the passing of a family member easier and smoother.

“Advisors can’t simply check the box when working with their clients on estate planning,” concludes Swain. “As too many horror stories attest, the original intent can easily get missed, especially when memories and marriages have long faded.”

For information on Pershing’s Wealth Solutions, please visit: http://www.pershing.com/wealth. To access the full paper, please click here .

* Preparing Heirs: Five Steps to a Successful Transition of Family Wealth and Values.” gsb.stanford.edu.2004

About BNY Mellon's Pershing

BNY Mellon’s Pershing and its affiliates provide advisors, broker-dealers, family offices, hedge fund and ’40 Act fund managers, registered investment advisor firms and wealth managers with a broad suite of global financial business solutions. Many of the world’s most sophisticated and successful financial services firms rely on Pershing for clearing and custody, investment and retirement solutions, technology, enterprise data management, trading services, prime brokerage and business consulting. Pershing helps clients improve profitability and drive growth, create capacity and efficiency, attract and retain talent, and manage risk and regulation. With a network of 23 offices worldwide, Pershing provides business-to-business solutions to clients representing approximately 7 million investor accounts globally. Pershing LLC (member FINRA, NYSE, SIPC) is a BNY Mellon company. Additional information is available on pershing.com, or follow us on Twitter @Pershing.

About BNY Mellon

BNY Mellon is a global investments company dedicated to helping its clients manage and service their financial assets throughout the investment lifecycle. Whether providing financial services for institutions, corporations or individual investors, BNY Mellon delivers informed investment management and investment services in 35 countries. As of June 30, 2018, BNY Mellon had $33.6 trillion in assets under custody and/or administration, and $1.8 trillion in assets under management. BNY Mellon can act as a single point of contact for clients looking to create, trade, hold, manage, service, distribute or restructure investments. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation (NYSE: BK). Additional information is available on www.bnymellon.com. Follow us on Twitter @BNYMellon or visit our newsroom at www.bnymellon.com/newsroom for the latest company news.