Helping rich kids break the rule… and keep the inheritance

New courses are attempting to teach heirs how to avoid blowing their inheritance.

Summary: Citi has been running courses to teach wealthy heirs how to focus on preserving and growing their inheritance in an attempt to break a long-established maxim that 70% of family inheritance is lost in one generation and 90% in two generations.
Key take-out: A new generation of heirs are now able to learn about how to preserve the family wealth.

Key beneficiaries: General investors. Category: Economics and strategy.

The Swiss poet Johann Kaspar Lavater once said, “Never say you know a man until you have divided an inheritance with him.”

A similar truth can be said of the inheritor. Research conducted by Jay Zagorsky of Ohio State’s Center for Human Resource Research, found that half of all family wealth after an inheritance is badly spent or lost via investing. Other studies, like George Hester’s Family Wealth Counseling: Getting to the Heart of the Matter, show that as much as 70% of family inheritance is lost in the second generation, a figure that reaches 90% by the third generation.

Teaching wealthy kids how to…stay wealthy

Considering that aging baby boomers hold a third of the $64 trillion in total U.S. wealth, even a modest improvement in one generation’s ability to hold on to wealth has real consequences alike to the family and society at large. Perhaps that is why Citi Private Bank has, since 2002, tried to untangle the barbed wire on the inheritance frontier, by offering families with at least $25 million in assets a NextGen program.

Turning the Lavater remark on its head – by focusing attention on the recipient rather than the giver – Citi’s NextGen program tries to create a smarter breed of inheritors by proactively exposing them to the industry’s best practices before they are visited by the family windfall.

The week-long Citi programs generally cover topics like investing, entrepreneurship and family legacy planning, through everything from simulated trading to case studies. This is not entirely unique, of course; private banks like GenSpring and UBS, and associations like The Williams Group and the Institute for Private Investors, all offer something similar. To read about GenSpring’s efforts, for example, read our Penta article “Teaching Rich Kids About Value.”

But in the case of Citi’s programming, a former Harvard business professor led an interactive Q&A on the characteristics of successful entrepreneurs, while investment specialists gave practical lessons on portfolio balancing. Among Citi’s more theatrical offerings, run with the help of auction house Christies, was a mock auction whereby participants were divided into teams and given a budget. Teams reviewed a mock catalogue with titles, dates and background information, before the auction opened. The winning team avoided going over budget and best explained their rationale for each purchase, such as the piece’s rarity and how it fit in with other purchases.

“It felt like three years of university in one week,” claims 2013 New York NextGen attendee Pelin Akin, who attended events ranging from an intense morning of simulated foreign exchange trading, to pleasant evenings of cocktails and dinner, where networking was unofficially on the menu.

Citi’s educational efforts – as contrived as they might sound to some – should be considered by any folks who think their children will develop the necessary wealth management skills by osmosis. “Teaching potential heirs about the temptation to spend the money before the estate is distributed, may encourage more of them to invest or save their inheritances,” Zagorsky concluded in his academic study on inheritance.

Nearly 150 kids a year enrolling in wealth management courses

Citi holds three NextGen programs each year – in New York City, London and Singapore – and attracts some forty to fifty sons and daughters to each event. Participants must be at least 21 years old, but the average age is 26, and the events often have participants from twenty different nationalities.

“The unique laws and situations of our clients require strong communication within the family,” says Money Kanagasabapathy, Citi’s NextGen director. That’s a head-scratching remark, until he explains that Citi’s programming can teach someone in the Middle East how to operate a business within the confines of Sharia law, while also advise an American scion how to efficiently navigate the U.S.’s universal taxation system, which taxes earned income on a worldwide basis.

More importantly, the NextGen events are an opportunity for participants to network with peers from around the world, forging relationships through joint problem-solving. That’s the extra sauce that Citi brings to the table. The more spirited cross-cultural discussions might revolve around marriage planning – How do you have a conversation with your betrothed about a prenuptial agreement? – or how to efficiently move money through different tax jurisdictions.

Participant Pelin Akin is, for example, a 26 year-old heir apparent to Akfen Holding, a publicly-traded but family-controlled conglomerate based in Turkey. The Turkish native graduated from the U.K.’s Surrey University in 2010, and began her career as a financial advisor at Deutsche Bank’s Madrid office. Upon returning to Turkey, she trained to become an executive at TAV Airports, in which Akfen owns a controlling stake. She is now a member of the board at Akfen and TAV, in addition to holding a number of other advisory positions, such as Chairwoman to the board of the London School of Economic’s Contemporary Turkish Studies program.

Citi’s program director explains that NextGen heirs like Akin, typical of the program’s client base, move comfortably between different cultures and are less likely to consider any one place home. Furthermore, he says, that global awareness is “exponentially greater than [with] their parents,” allowing them to not only think beyond local investment opportunities, but also to leverage their network of global contacts to achieve family goals.

The NextGen program helps with that leverage, of course, with 1,000 alumni worldwide, many of whom stay in touch and throw ideas around via social-networking groups on Facebook. But Citi also supports its alumni network beyond the classroom with a separate website, access to unique research reports, and invites to upcoming events. Citi’s recent NextGen participants also receive a mobile app to view event-related materials.

Does the wealth-education program you have in place for your child encourage them to think globally and plug them into a worldwide network of peers? It’s not a facile question. The preservation of family wealth in the future will undoubtedly require sophisticated international skills and overseas contacts – it’s not a bad idea to give your kid a head start on that front.

This article has been reproduced with permission from Barron’s.

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