Why inherited wealth is at risk of mismanagement

In 2016, the richest man on the planet, Bill Gates, started a storm when he intimated that his children would not inherit his vast wealth, but that he would rather give it out to charity so that the young ones could fend for themselves.

Bill Gates’ decision is not isolated. Warren Buffet, the third richest man, who also lives in modesty, has made similar remarks.

What informs this decision by the wealthy?

INHERITED WEALTH
A research done by Williams Group Wealth Consultancy based in the United States, found that 70 per cent of inherited wealth is lost by the second generation and 90 per cent by the third generation.

Forbes confirmed this assertion in their Forbes 400 self-made metric scores.

BOOSTRAP
In 1984, 24.75 per cent of the Forbes 400 wealthiest people in the world were extreme inheritors doing nothing to grow their wealth.

The extreme bootstrappers, those who grew up in extreme poverty and made it to the list were only 2.5 per cent.

In 2014, the extreme self-made billionaires were 8.5 per cent, while the extreme inheritors were only 7 per cent of the elite group; the tables have turned.

GROWTH

The net worth of the 400 was $125 billion (Sh12.5 trillion) in 1984 and over $2.29 billion (Sh229 billion) in 2014.

The change is, therefore, both a product of wealth growth and a diminishing inheritance.

The evidence is not hard to find.

Stephen Lovell, a descendant of John Forsyth, a shirt making entrepreneur in Canada, is a bitter man after his mother squandered the family wealth not long after the death of his grandfather, the patriarch.

SQUANDER
Jason “Jay” Gould was an American railroad developer, a ruthless and an unscrupulous businessman around whom the term robber baron was coined.

He was one of the richest men in his time.

Upon his death, his eldest son squandered his wealth and within decades, the billions were gone.

FAMILY FEUDS
Locally, from Mr Kihika Kimani’s wealth to Mr Gerishon Kirima’s billions, tabloids are awash with stories of dwindling fortunes of men who were rich but whose wealth has been mismanaged or fought over by family members.

The family duel in the two major supermarket chains Tuskys and Naivas have seen the companies stagnate or underperform while economic indicators favour growth in the retail industry.

Sadly, while suffering from stroke, Mr Kenneth Matiba’s wealth evaporated right before his eyes.

MANAGEMENT
There are many reasons fuelling this trend.

Many parents find it difficult to discuss money with their children.

In the end, the money skills and discipline learned by parents over the years in toil and entrepreneurship is not passed on to the next generation.

Financial illiteracy makes newly inherited wealth at risk of mismanagement and squander.

TRAINING

Wealth advisers across the globe agree that if the family members are engaged early, the probability of the wealth surviving longer is higher.

Bad attitude, ingratitude and entitlement form the second set of challenges for wealth inheritors.

In raising their children, rich parents make efforts to ensure their offspring do not face similar challenges they experienced.

The children are not equipped socially by being trained to be humble, respectful, thankful, diligent or merely with negotiation skills with which they can get what they need.

CHILD REARING

In the end, the children become arrogant and fail to coexist in a competitive world where character still reigns supreme.

Thayer Willis, author of Navigating the Dark Side of Wealth: A Life Guide for Inheritors, says family wealth can be a curse.

In an article shared in Forbes magazine, the writer says most wealthy families put too much emphasis on finance and not on the psychological development of the children.

HARDWORK

In the process, inheritors get confused on their identity and lose out on the role of work and life purpose.

Tellingly, there is an intrinsic value in work, as it gives one a purpose and a sense of value that cannot be replaced just by numbers in the bank.

On the flipsside, there are families that have done well in passing on wealth from one generation to another.

INCISIVE

The Rockefeller made money using his sons, strategically positioned across Europe and involved his grandchildren from the onset.

The results are visible. William Randolph Hearst, an American media mogul, left his fortune for his children but ensured none was involved in the running of the business.

They sit in the trust board with a diluted voting power but could not be employed therein.

ENTREPRENEURSHIP

He, instead, encouraged them to seek their purpose elsewhere.

Asian families in Kenya have done a better job at equipping the next generation with entrepreneurial and money skills.

The Nakumatt Shahs, the Bidco Shahs, The Sameers and the Chandarias all run trans-generational enterprises.

There are 8,500 dollar millionaires in Kenya, according to the Knight Frank Wealth Report 2016.

WEALTH TRANSFER

The ultra-rich — with a net worth of $30 million and above — are about 105.

The main concern for this band of the population is generational wealth transfer, the report said.

While the will helps to put things in perspective, it is not enough to ensure an enduring trans-generational wealth.

Mr Odhiambo is the CEO of Elim Capital. @odhiamboramogi