In this edition we thought we would talk about an issue that is clearly on the minds of many of our clients at the moment, especially with the possibility of Labour moving into government in the near future, which is the best way to transfer money to children and/or grandchildren without managing to spoil their lives or leak family wealth in the event of a divorce.
Before we do that, you may have noticed that there has been some volatility in share markets over recent days, due mainly to the continuing trade war between America and China and also the fact that world growth is slowing down. In recent years, equities have been supported by enough economic growth to enable company profits to rise, but not so strongly as to lead to higher interest rates. Investors therefore worry when growth is too low or too high for this benign situation to endure.
There is a lot of uncertainty around at the moment with a possible no-deal Brexit looming, President Trump battling with almost every major nation or trading bloc in the world, China’s economy in particular slowing down, the long-standing nuclear arms treaty with Russia being ripped up, Germany heading into recession, the fear that Central Banks are not acting fast enough in response to changing conditions is all helping to create volatility in share prices, not to mention the added worries of heroic SeñorBenitez being replaced by Steve Bruce at St James’ Park and the England cricket team falling apart at the seams.
The main technical cause of the present stock market unpleasantness is that US shares are standing at levels that are too high to be justified on fundamental grounds. This can sometimes happen when markers are too exuberant, for example when expecting more and more support from the authorities by way of lowering already-low interest rates or by printing even more money. We expect that stretched valuations for US shares versus other global equities will converge back toward average historical levels over time, reinforcing the lesson that trees don’t grow to the sky. Of course, the timing of any such reckoning is unpredictable and may not come to fruition until the next recession, whenever that occurs.
The United States does have a heavy dose of high-quality, innovative companies that deserve premium valuations, but we see no reason for extraordinary valuations that project peak profit margins well into the future in the face of many risks. The incremental premiums above the historical average will eventually prove to be ephemeral and this will likely have a knock-on effect on other share markets around the world. This is not rocket science, just the normal working of the markets over different economic cycles. Nothing to worry about here, move on please.
The issue of transferring wealth to younger family members has become more urgent in recent times, partly as a result of the fear of a left-wing government led by a racist nonentity but also the widening gap between rich and poor. There seems to be no middle class in the USA any more. You’re either rich, very rich or poor. By today’s deﬁnition of ultra-rich families you are looking at net investable assets of a minimum of $50 million. The current statistics are staggering, especially in the States, where more than 6,000 individuals joined the ranks of the ultras in 2018, making a total of 70,540 (ﬁgures supplied by Credit Suisse World Wealth Report 2018). This represents an 8.5% jump compared to just 1% in the UK, where an increase of 400 brings the total to 4,670.
A total of 1% of the world’s population now owns 50% of global wealth, ironically with countries such as Russia and India leading the way, the richest 1% owning 57.1% and 51.5% of their country’s assets respectively. There is no doubt that a combination of both Quantitative Easing and almost zero interest rates provided by Central Banks have led to a massive asset price inﬂation. The wealthy have beneﬁted from the rise in equity markets, as well as rises in other physical assets such as property. The remainder of the population, who may have no assets or tend to rely on income from bank deposit accounts, have become even poorer as this has been the worst area for investment over the last 10 years. It is estimated that savers around the world have lost more than $1 trillion in interest due to low rates since 2008.
This growing inequality has led to an unbridgeable gap between the lower/middle classes and wealthy families, even if you lower the definition of “wealthy” from $50 million. For example, the ratio of pay for an American CEO of a large company compared to their average worker is now 475/1, in Germany it is 12/1 and in the UK 22/1. After 70 years of relative peace since the Second World War, there has been a capture by elites in all professions together with a widening dichotomy between rich and poor, old and young, north and south, black and white. No wonder Brexit happened and Trump got elected. And no wonder that older family members with capital to spare are now actively considering how best to transfer some of this wealth to the next generation.
Most people love their children and would do anything for them. This love sets up one of the greatest paradoxes of family wealth: many parents work day in and day out to amass wealth for their children and grandchildren and at the same time they fear that their financial success could ruin their families. There is an old Middle East saying which goes something like: “My father rode a camel, I drive a Mercedes, my son flies a jet, his son will ride a camel.” And it is true. Money can stunt children’s sense of perspective, independence and life direction, causing both entitlements about and dependence upon family wealth. It can also impede them in developing the emotional skills needed to live a healthy, independent life.
We are often asked by clients: “How do we give our children (of all ages!) the benefits and opportunities associated with wealth and at the same time ensure they are responsible, grounded and others-oriented?” Or more poignantly: “How do we not ensure money does not mess up our kids’ lives?” There are of course no simple answers, with every family situation unique but three of the key success factors seem to be an intentional focus on values, developing skills and experience and providing the right mix of independence and support.
Parents try to teach their children good life values. For younger children you can create traditions and habits to teach core money lessons, such as labelling three jars—saving, spending, and giving—to encourage thoughtful choices, delayed gratification and generosity. But it is also important to remember that values are caught, not taught. Your children will pick up more from seeing the choices you make about how you spend your time and money than they will from what you say. If you want them to end up with good values, you need to live those values yourself. As psychologist Dr Kelly Crace put it: “If I followed you around for three weeks, I could tell you exactly what your top five values are.”
Children and grandchildren need to be taught money skills but they also need to learn from their own experience, including making mistakes. This is particularly important for teens and young adults. Consider helping them to start their own investment portfolio or encourage them to take a course about money. Teach them about budgeting. Help them to work out how they might save for an important purchase and consider matching whatever they can earn.
If a college student uses up their spending budget halfway through the month, letting them do without for the rest of the month can help teach them budgeting, self-discipline, and planning — all important life skills. My own father was ahead of his time in this respect. And be careful not to parent with your wallet. Money and time can solve most problems; but money can solve them too quickly. Some families use money and influence to allow children to avoid natural consequences, but those consequences are what helps them to develop the emotional skills they need to live a healthy life. Apart from a lifelong love of a football team, there are only two lasting bequests we can give our children. One is roots and the other is wings. (Too Megan surely? Ed.)
Children need the roots that come from clear boundaries, strong values and love. But as children develop into adults, they need to be able to differentiate. They need wings that are the space and encouragement to chart their own course. Significant resources too early can stunt this growth by acting as a shelter from consequences, offering undeserved opportunity and fostering dependence. Also, remember that growing up with financially successful or powerful parents or grandparents can cast a shadow on the rising generation. It can be paralysing and may feel impossible for them to live up to that standard. It’s important to foster and celebrate the child’s interests and dreams, no matter what they are.
When it comes to discussing the size of the family estate, it is often better to wait until children have begun establishing their own lives and careers before getting into the details. Consider using significant life milestones – when a lump sum can really help – as logical moments to share some of the wealth with the next generation or match their own contributions. Examples could include going to University, buying their first property, marriage, business start-ups or raising children, hopefully in the right order.
Issues of money and children are relevant for all families, at all levels of the economic spectrum, yet wealth seems to be an amplifier of all things good and bad. Wealth can bring with it a sort of gravitational pull - an energy around the money that is powerful and frequently distracting. If not properly managed, the very resources that should help a family flourish, can lead to its undoing. Parents would do well to prepare their heirs with the same dedication, discipline and resources that they have brought to creating and maintaining their own wealth.
As a general rule we are in favour of giving money sooner rather than later, but only if your own financial security is cast iron. Work out how much you might need on the assumption that you are going to live to a ripe old age and care home fees are required for a number of years. Then build in a margin for error just to make doubly sure. After that the rest is a judgement call on whether you can trust the younger generation to look after the money prudently, not as prudently as you maybe, but prudently enough. And don’t whatever you do cut down on your own spending during retirement. No regrets please, we’re British.
Finally, a random assortment of questions for you. Does the status quo have any moral authority? Will the Royal Family exist in 20 years? Who should pay for the costs of educating children? Would an inflation target of 4% be better than 2%? Is homelessness a reflection of a badly functioning economy? Is the financial sector larger than it should be and do we need more manufacturing? Is perpetual economic growth possible? Can you explain Schrödinger's cat? Why is the Laffer Curve not funny?
By the time of our next bulletin we’ll be out of the EU with an improved deal and everyone will be wondering what all the fuss was about.