The next gen – how well prepared are they to inherit huge portfolios?

New research from two German business academics highlights the difficulties of passing complex portfolios over to the next generation and the importance of alignment between the two if the transfer is to be successful.

The massive wealth transfer over the next 30 years will place considerable pressure on the next generation to be good stewards of their inherited portfolio. But the question, says Marc-Michael Bergfeld and Frank Bannys from the Munich Business School, about whether the capabilities of the next generation is well aligned with the needs of the portfolio they will inherit, remains unanswered.

In too many cases, say the authors, portfolios that were built by senior generations are handed over without a profound analysis or discussion about the stewardship of these assets.  Also, often the analysis of wealth transfer involving a family business is focused on the business part of that transaction, and not enough on the family part of the transfer. The authors in their analysis consider the family aspect in greater depth – and they argue this is what family businesses need to do.

“The capabilities of one specific family might be ideal for a certain portfolio of entrepreneurial engagements, whilst the exact same portfolio might be doomed to fail for a different family with different capabilities,” says the research.

The authors reckon that the success of the transfer of a business to the next generation will depend on the “capabilities” of the inheritors – and the outgoing generation. The research says these capabilities can be summed up in four points:

• Broad knowledge and experience, which includes having well developed professional, personal and interpersonal skills;
• High motivation and a positive attitude, such as the will to perform and being a role model for others;
• A high level of physical and mental energy; and
• A high level of resilience, such as the ability to cope with stress, uncertainty and ambiguity – and also the complexity of mental processing so to be able to have the ability to reorient and restructure.

All these capabilities need to be developed to a high degree, say the authors. “Low motivation or a negative attitude will result in an overall low level of ‘capability’ of a family member of the next generation, even if the individual received the best education, is equipped with high levels of energy and has a strong resilience.”  

The authors add that, in many cases, not enough attention has been given to the importance of aligning the “capability” levels of the outgoing generation with the next generation. They further say there is a need to not only align the capabilities of both generations, but also the “capability demand” of the assets being passed over.

“The ‘capability demand’ of various assets in a portfolio can be determined by their current performance, their market environment, and the asset strategy being pursued,” says the research.

A successful transfer of owner or owner-operator responsibilities from the outgoing generation to the next generation requires sufficient alignment between the capability demand of the family’s assets as a whole, but also the capability supply of the family itself, say the authors.

It is important for the family to assess how robust or otherwise their portfolio is for the alignment to work. If the portfolio is robust then the alignment will be easier, but likewise, if it isn’t, then problems will emerge with that transfer.

The research says that some families have started this process of capability alignment. And those that have will reduce pressure and the burden on the next generation. It will also assure that inherited portfolios become a platform for future wealth preservation and creation.