A leading money manager explains how 70% of a family's wealth is burned by the 3rd generation - and shares the 10 questions you should ask yourself to avoid that fate
- John Parise, managing partner and founder of Copper Beech Financial Group, says that bickering and communication issues between family members leads to a 70% reduction in a family's wealth over three generations.
- In order to combat this irrational behavior, Parise details 10 deep and meaningful questions that you should be able to answer in order to preserve your wealth long into the future.
- "How do you want to be remembered?" he asks.
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When it comes to financial planning across generations, many investors drop the ball.
Loose strategies, unclear objectives, and ineffective implementations all work to undermine countless hours of hard work and discipline. For one reason or another, wealth preservation and management seems to fall by the wayside in the hustle and bustle of everyday life, and soon Uncle Sam reaps the rewards of all that time you spent saving and investing.
John Parise, managing partner and founder of Copper Beech Financial Group doesn't think it needs to be this way - and he should know. He's been advising clients for over 32 years, and has seen massive amounts of wealth disappear for reasons that could've been avoided if a solid plan was in place.
"A lot of it goes away in bad planning amongst family members - they don't get along," he said on The Meb Faber Show, an investing podcast. "If you look at every study, 70% of the wealth is lost in the third generation - not because of taxes, not because of bad estate plans. It's because the kids don't get along or the family doesn't get along."
Although indignation towards relatives might seem like a trivial reason for letting a family's wealth deteriorate, it highlights the need for an overarching financial plan and strategy.
Humans behave irrationally when it comes to money and finances. Just ask Nobel laureate Daniel Kahneman, who spent his life spotlighting a plethora of evidence-backed cognitive biases prevalent in the judgement and decisions we make.
"People are people - and they are inconsistent," he said. "They have egos. They have different ideas and thoughts."
He added: "Imagine trying to get people to agree on one topic, or one direction. It's very, very hard when you deal with 30, 40 family members."
In order to quash some of this uncertainty, Parise touts a method he refers to as "a discovery via questions." The goal is to discover where a family needs help, and the questions incorporate deep and meaningful notes that are designed to reveal your true financial preparedness.
Parise has hundreds of questions for prospective clients, but a good place to start is with these 10. They're designed to "help you discover the truth" and mitigate some of life's overarching uncertainties.
1. "How do you want to be remembered?"
2. "If something happened to you tomorrow, what would happen to your business?"
3. "Is your estate plan public or private?"
4. "Is your family wealth protected from in-laws and outlaws?"
5. "Have you calculated your estate settlement costs to your family should you pass away?"
6. "Are you comfortable moving forward with the legal documents you currently have in place?"
7. "How often does your advisor team meet as a unit to strategize on best practices for your family?"
8. "Do your children possess the necessary financial literacy skills and values to be good stewards over the wealth they will inherit?"
9. "Has your family established an estate bank?"
10. "Has anyone calculated the net composite rate of return of your investment portfolios?"
The answers to these questions will undoubtedly vary amongst individuals, but the point is to get you thinking about the future and assess where/how you're currently positioned. If you're having trouble answering some of these, it may be time to seek outside assistance.