Inherited wealth v self-made fortunes

It is not just how much money you have but where it comes from that affects the advice process, finds Maryrose Fison.

Access to financial planning services has long been the preserve of the rich and wealthy. But with more consumers coming into ‘new money’ from start-up businesses, inherited wealth and, at the other end of the spectrum, prize winnings from the lottery, the role of the financial planner has widened beyond mere provider of impartial financial advice.

While a number of factors can be said to influence retirement planning, notably age and gender, individual attitudes are also significantly dependent upon where money originates from, new research has revealed.

The latest figures from global investment firm Janus Capital Group show the UK is leading the pack when it comes to succession planning within Europe. In a survey of more than 6,000 consumers across six countries in Europe, the UK had the highest proportion of respondents saying they expected to pass on a significant amount of their wealth as an inheritance to the next generation when they died. Just shy of a fifth of UK respondents (16%) said they planned to leave an inheritance, compared to 5% in Germany, 6% in Spain, 11% in Italy and 14% in Ireland. For retirement planners up and down the country, the trend raises a number of important issues with regard to serving the needs of clients.

Psychology of wealth

Yellowtail Financial Planning founder, Dennis Hall said the approach to financial planning is invariably affected by the origin of clients’ wealth because this affects the way they view it – whether as positive or negative and their way of handling it.
“What I’m finding with inherited wealth is that some people are extra careful with inherited wealth. There is a feeling that it does not really belong to them, or it should not belong to them, or they do not want it,” he said. “Very recently we had a client come through who has inherited some money from her parents and we are several weeks down the line; she still has not cashed the cheque from her solicitor because she does not really know what to do with it.”

Other clients had expressed reluctance to make a financial plan, he added, and reported feelings of anguish at their new found financial status, especially when it disrupted existing hierarchies in their social lives.

“What I do see are people who are in a community where there is a pecking order established and they know where they fit and may be earning £30,000 or £40,000 or £50,000 a year and then all of a sudden there is half a million and they start to feel guilty about that.

“The approach is more about sitting back with people who have inherited wealth and waiting for them to come to terms with it, where necessary. Not everybody has that problem but a lot of people do and we try not to hurry them along into making a decision. These are fairly deep emotional problems that they are having around accepting their new found lot.”

By contrast, when faced with clients who have made their own fortunes, financial planning can often involve reigning back impulses until they have been thought through thoroughly, he added.

“With these such cases, we want to advise caution initially. Sometimes they will want to rush in there and use all of that capital perhaps to reinvest into their own business or into other areas and we just say: ‘let’s just check if you have a fall-back procedure. What if it all went wrong? What is it that you need to have established or in place to give you security for the rest of your life’. And when you have that conversation people begin to see where you are coming from.”

The role of education

For some clients however, the impact of receiving a lump sum of money can produce a ‘rollercoaster of emotions’ and the need for a crash course in financial awareness. Almary Green’s managing director, Carl Lamb, said he counted two lottery winners among his client base, with prize money totalling just shy of £1m and £2m, both for individuals who had come from humble beginnings.

Educating them on the options available was a primary objective after taking care of immediate concerns such as debts and mortgages, he said.

“In both cases they had modest mortgages and small credit card debts, so the first thing we did was make sure they were paid off. As far as moving onto the next stage was concerned, they were completely unaware of financial planning issues – factors like inheritance tax, capital gains tax, all the taxes that wealthy individual takes as part and parcel of their overall planning were all new to them. So then it becomes a role of education. Our role as a financial adviser became one of not only looking at their situations from an investment perspective but also to educate them. Education is vital in what we do.” 

Addressing different investment appetites

Attitude to investment could also vary depending on the source of the wealth according to Jock Cassidy, managing director of Middlesex-based Ashley Law. With clients who fall into both the inherited and self-made fortune camps, he said he had found the entrepreneurs tended to be the more adventurous investors in general.
“The clients who have developed their own wealth have very frequently got a fair understanding of the financial implications and would be more inclined to pay on a fee basis and look at more adventurous types of investment,” he said.

Examples might include venture capital trusts and emerging markets funds, as well as the more conventional traditional bonds and OIECs, he added.

But while the financial planners were in agreement that those who had made their fortunes were generally more financially savvy than their wealth-inheriting and lottery winning counterparts, this did not always translate into investment wisdom.
Mr Hall said financial awareness did not necessarily translate into the ability to construct a well diversified portfolio, the ability to select the right funds or the right asset classes to meet an individuals’ monetary goals.

“They’ll have looked into certain tax structures, where to shelter their money, and so on but that is not to say they have got a very good understanding of investment or modern portfolio theory or any of those things.”

He added that age was a bigger defining feature when it came to investment appetite, with clients becoming more wary of risky investments as they approached retirement age.

“Generally I find younger people have got more demands on their money and so they can instantly find a use for it, whereas older people have pretty much got their lives established and settled.

“Those people that have worked very hard and built up their businesses, that may be in their late 40s or early 50s and may be older – as far as they are concerned, the risk-taking has been done by them. They have done the risk-taking in their business and they are not really looking for high risky investments strategies. They may be involved in some high risk investment as a small portion of an overall portfolio but they are really concerned about wealth preservation.

“Whereas younger people who have come quite quickly into some money may feel that they can take some reasonably aggressive punts with that money because they see ahead of them a much longer period for them to recreate much more.”

Attitude to retirement and succession planning

And while the presence of great wealth can often open the doors to an early retirement and give rise to the realisation of life’s ambitions such as world trips, new research from Barclays Wealth Insights reveals origin of wealth can also have a bearing on how people spend their later life.

In the 12th volume of the bank’s Insights series, entitled ‘The Age Illusion’, more than 2,000 high net worth individuals from all over the world were surveyed on their retirement and succession plans. Tellingly, those who had made their fortune as entrepreneurs were more inclined to envisage always being involved in work – a state the report coined as ‘nevertirees’ – than those who had inherited their wealth. Just over half (57%) of those whose source of wealth was inheritance said they wanted to continue working in some capacity after the default retirement age, whereas more than two thirds (68%) of entrepreneurs felt the same way.

The report also revealed a rise in the number of individuals looking to pass wealth onto the next generation, with 65% of UK respondents saying they would like their children, grandchildren or family to benefit. Phil Smith, head of financial planning at Barclays Wealth UK and Ireland Private Bank, said the trend also revealed a preference to skip a generation with the succession planning.

“We are seeing increasing numbers of clients looking to pass on their wealth to their grandchildren. The reasons for this are often that their own children are already independently wealthy and passing on more wealth can make succession planning difficult.”