Navigating the psychological impacts of wealth
Whether you’re a wealth creator or have inherited it, the psychological impacts of wealth can have profound impacts on the recipients. At the Modern Affluence Summit in London, panellists discussed how they have navigated wealth, family dynamics and the impact of wealth on psychological wellbeing.
When it comes to wealth transfer between generations, families often fall into a trap. They typically pay a lot of attention to how they will pass down their money and other assets, but frequently neglect to consider some of the emotional and practical challenges that come with the territory. Or, put another way, much is done to prepare the wealth for younger generations, but not enough is done to prepare younger generations for the wealth.
This risks poor outcomes for all concerned. Cazenove Capital participated in the Modern Affluence Summit in London, which took place in September. One such example of this was discussed at the summit by a panel focused on wealth transition, that sought to understand the perspectives from young and old.
It concerned a successful entrepreneur who didn’t make his wealth obvious to anyone and hadn’t discussed his business with his wife or children in much detail. One day, he was offered a huge amount of money for that business. He was super excited about an early retirement and leaving enough to his family to ensure they will be well looked after. But when he spoke to them, they were surprised and anxious about the implications for their family.
He found his lack of communication was now resulting in problems that affected his relationships. His partner was shocked and felt there was a lack of trust.
“That’s an example of how not to do it,” says Wesley Harrison, Wealth Planning Director at Cazenove Capital.
Perspectives from inheritors
Piers Linney, Co-Founder of Implement AI, former Dragons’ Den investor and first-generation wealth creator, emphasised the importance of giving children the necessary skills they will require to navigate the future, and to start planning for this at an early age.
“I never thought about it properly until my father died,” he said. “Then I realised: I am mortal. And that’s when I started doing a lot of planning. My children never quite understood that they go on holidays that their friends don’t, that they do things their friends don’t, so recently I’ve started preparing them, as I realised that my time will come.”
JJ Hodari, Angel Investor and second-generation recipient of family wealth, who was speaking on the same panel, said it’s essential that children are well prepared for what is to come. “We can give the next generation advice financially, but we need to set them up psychologically as well,” he said. This can be hard for older members of some families, who might find it hard to talk about the more emotional and personal issues that are involved.
Dragons’ Den investors: Piers Linney (second right) said his father’s death prompted him to start talking to his children about wealth.
The role of expert advice
To facilitate a smooth transfer of wealth, and avoid some of the common emotional problems that can arise, it’s important to be guided by a trusted adviser.
Advisers need to take a fully holistic approach that considers equally the recipients of the wealth as well as the those who have generated it. “It’s important to work with an adviser who spends time getting to know the whole family, including younger members, rather than just focusing on the person who’s made the money and is controlling that money,” Wesley suggested.
One effective way of exposing younger generations to the wealth they are set to inherit can be to involve them in purpose-driven activities. “Philanthropy and impact investing is a good way for the next generation to get involved at an early age.
It helps them to understand how money is being managed, they can influence how it’s being spent, said Cazenove Capital’s Lyn Tomlinson, Head of Impact.
Picking up on the theme of philanthropy and impact investing, JJ emphasised the importance of finding a purpose. “I don’t think focusing on the financial aspect is the important thing,” he said. “It’s trying to find meaning beyond wealth. That’s something really important to set up the next generation with, because if you’re just chasing money, I don’t think that’s going to necessarily give you happiness.”
Romane Howsam, CEO of Lymited, a digital platform for luxury collectors – and, like JJ, a second-generation wealth recipient – highlighted a sense of stewardship that comes with the money. “I feel the obligation of being a custodian,” she said. “So I wouldn’t necessarily see it as a pot of money that I can play with. Yes, I see it as a means for my children to feel safe, and potentially their children later on as well. But it’s also about finding your own purpose and meaning, as in what you’re really good at, and trying to improve on those skills.”
JJ commented that mixing across social divides is also a helpful approach. “There can be a social dislocation which, if it grows and grows, is not good for anyone,” he said. “So we need to teach the next generation to give back into society, even if it’s only for selfish reasons. It’s easy to be an extremely wealthy person and not have to mix with any anyone from outside your class. But I don’t think that’s a good thing for society in general. We need to bridge that growing gap.”
He illustrated the point by highlighting some of his own experiences. “I work with musicians, and founders. The musicians don’t earn very much money, but they seem to have quite a good time. And I also find the same with founders.”
Learning to let go
A successful transfer of wealth also depends on older generations learning to let go in the right ways over time, said Wesley. “If you’re self-made, the only way you’re going to be comfortable handing it over is by, at an early stage, being able to talk about it, trying out with little bits and pieces, making sure your kids do what fulfils them and are not terrified by what they have,” he said. “It’s a journey. It won’t happen overnight.”
Romane concurred. “I think it’s really helpful when parents take that initiative – I’ve done that with my dad for the last two or three years. So now I’m the one who’s talking about: How are we going to continue? Where do you see me? And what’s my purpose with this? He’s let me do my own thing, but it’s helpful if the initiative is taken on quite early.”
Wesley also emphasised the importance of a light-touch approach. “Where I’ve seen families being really successful is not forcing their kids to either be in the family business, or to look after the money,” he said. “That way, it’s not an overwhelming burden for them.”
At Cazenove Capital, we work with families and their advisers from across the UK. We help them to navigate complex issues connected to family wealth. This includes planning, philanthropy and facilitating the transition to the next generation.