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The Key to Giving (and Receiving) Generational Wealth

By Cameron Rogers

It’s no secret that money is deeply personal. And when you factor in money across generations, it becomes a family affair. Intergenerational wealth (and the planning around it) is often talked about conceptually, but too rarely with the candor, thoughtfulness, and tact that needs to accompany it.

And it’s an important topic to address. Over the coming years, the United States will witness one of the greatest transfers of wealth in history. By 2030, American women are expected to control much of the estimated $30 trillion in financial assets coming from the Boomer generation.

But both endowing and receiving wealth can get complex. Families need to navigate through different preferences about types of investments, a broader strategy or philanthropic purpose, or even a particular investment advisor. Those things, carefully chosen by the one generation, might not feel right to the next. And it’s these differences in preferences that tend to be the fault line across generations — where intention and execution are often muddled.

As a financial advisor on Ellevest’s Private Wealth team, my responsibility is to serve as a bridge between generations. With the complexity of this kind of planning comes a tremendous opportunity to understand each other and collaborate.

An image of two women running together on the beach.

Why is this so complex?

Some of the complexity tends to be the form of the wealth itself. If wealth is mostly passed on as cash, a beneficiary has a clean slate to create their own legacy … but that’s not how it’s usually done. Typically, when wealth changes hands, it’s in the form of what created the wealth, such as a business or an investment in a company — really, anything but cash.

Here’s a scenario to consider: A young woman graduates college and begins a career in sustainable engineering — a long-time passion of hers. Post-graduation, she learns that her grandparents have endowed a stock portfolio to her. But to her surprise, the stocks passed on to her by her grandparents are businesses that don’t exactly jibe with her idea of sustainability. Her immediate intuition is to sell out of everything in the portfolio, so she can begin fresh with her own, values-aligned investing.

She tells her family of her decision, which triggers frustration and panic. They interpret her desire to sell as being ungrateful, and they worry about the tax implications of selling out of holdings without a plan. The family asks their financial advisor to help manage the situation. The advisor makes the case for not indiscriminately selling out of the portfolio — but he fails to deliver an action plan for diversifying the portfolio into more sustainable investments over time. The family finds itself at a stalemate, and everyone’s frustrated.

Strategies for navigating the fault line

Understand the market, past and present

Today’s financial landscape is very different than it was even one or two generations ago. When I look back to my grandparents’ prime earnings years in the 1960s, energy companies were highly valuable, in addition to the likes of IBM, General Motors, Kodak, and General Electric. In 1990, consumer staples — companies that make food, beverages, and household products — represented the largest portion of the S&P 500 at 14% of the index, while technology represented only 6.3%. Now, technology companies represent more than 27% of the S&P 500, and the household names are Facebook, Amazon, Apple, Netflix, and Alphabet (aka Google).

Why the history lesson? Whether you are endowing or receiving wealth, it’s important to understand the backdrop of when and how wealth was created, and how that differs from the environment today. Knowing which companies were seen as the “right choices” then (and how that’s changed today) helps everyone understand what’s behind the decision-making process and can spur empathy — a great communication tool.

Lead with data

The experience of the young engineer and her family boiled down to failed communication — the intentions on each side just weren’t clear enough. It’s easy to point to communication as the solution to all intergenerational issues, but it’s harder to actually communicate effectively. Family meetings alone won’t get you there. In reality, discussing wealth across generations is like having a conversation in different languages. And sometimes, talking about these issues can bring up a lot of emotion, which can actually make communication harder.

In these situations, the Ellevest team likes to use data as a starting point for sharing different visions and purposes around wealth. Leveraging data helps to take a lot of the emotion out of the conversation and levels the playing field — because numbers are numbers. Data also helps a lot to make each person’s preferences more tangible and valid.

In the case of the young woman, we would advise her to use data to show why her investment portfolio is at odds with her passion and profession. Maybe she can share information on the amount of hazardous waste her share of these companies is producing, or their metric ton ownership of carbon emissions. At Ellevest, we’re able to offer a diagnostic on the individual equity investments in your portfolio to look at the impact on the world these investments can have — it is a very powerful way to show why these issues matter.

In the case of the elder generations, we would work with the family’s tax advisors to lead with data that shows the tax implications of selling out of these stocks without a plan. We’d also work with the tax advisers on the development of an annual tax budget that the family can use to transition to a more sustainable portfolio over time.

Align investments with philanthropic giving

One way for generations to collaborate around wealth is through aligning investments with their values around giving. Capital is a powerful force, and when we invest, we participate in a powerful recycling of capital. But if we’re not intentional about our investments — if we don’t know or don’t understand what we own — we risk misusing that power if our investment capital conflicts with the human, social, and philanthropic capital we provide to society.

This is an important consideration for philanthropic-focused families. Far too often, I’ll look at a family foundation’s investment portfolio and see company holdings that are at direct odds with the family’s broader giving strategy. Talking about that family focus on giving, and working together to make this alignment a priority, anchors generations across a shared set of values. It can also catalyze younger generations to be not only beneficiaries of wealth, but stewards of it.

Use your advisor as the bridge

Your financial advisor should be the bridge between your family’s generational gaps. In my opinion, this is where the advisor to the engineer’s family fell short. He had been a trusted advisor to the elder generations for decades, but he wasn’t taking the next generation’s preferences seriously. Even when it comes from good intentions, the inability to collaborate with both generations can lead to frustration across the entire family.

The wealth advisory industry is also set to change dramatically in the coming years. Over the next decade, 37% of financial advisors plan to retire. Families should use this time to develop a relationship with an advisor who can strike a balance across generational needs and can act as that bridge. That means looking for someone with a background in investing who can collaborate with estate planning advisers, who is technologically savvy and able to communicate in many ways and on many platforms, and who knows about impact investing.

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Disclosures

© 2020 Ellevest, Inc. All Rights Reserved.

The portfolio diagnostic or “health check” is completed by Ethic, Inc. an SEC-registered investment adviser that serves as sub-adviser to the Ellevest Intentional Impact Portfolio, a separately managed equity account.

All opinions and views expressed by Ellevest are current as of the date of this writing, for informational purposes only, and do not constitute or imply an endorsement of any third party’s products or services.

The information provided should not be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice.

The information provided does not take into account the specific objectives, financial situation or particular needs of any specific person.

Investing entails risk, including the possible loss of principal, and there is no assurance that the investment will provide positive performance over any period of time.

Information was obtained from third-party sources, which we believe to be reliable but not guaranteed for accuracy or completeness.

Cameron Rogers

Cameron joined Ellevest after 10 years at JP Morgan, where she advised both high net worth families and institutional investors on investing and wealth planning. Today, she’s a financial advisor on Ellevest’s Private Wealth Management team, working with clients to help them develop personalized, long-term investment portfolios that align with their goals and values.