Retirement Weekly: Philanthropic giving: The secret for retirees to build a long-term financial dynasty

The “great wealth transfer”–wherein baby boomers have begun transferring a projected $70 trillion to future generations — has feverishly grabbed headlines for the last decade.

When we talk about the impending transfer of inheritances, real estate properties, and other big-ticket items to the next generation, we often talk about longevity. Or rather, how to ensure that when the first generation ceases to exist, their hard-earned wealth can keep their families afloat for generations to come.

In reality, this ideal picture of multigenerational wealth does not always (and very rarely does) play out how we anticipate. There is a long-studied phenomenon colloquially described as, “The grandfather buys, the son builds, the grandson sells and his son begs.” In theory, the first generation makes the family’s fortune. The second generation builds upon it, but they tend to spend somewhat irresponsibly. And by the third generation, which likely did not experience the hardships of building, they spend so irresponsibly that they, and their families after them, are back to square one.

In fact, this is so commonplace that 70% of wealthy families lose their wealth by the second generation, and a stunning 90% by the third.

Therefore, instead of asking ourselves how to make our money last after we are gonewe must ask how to make our money grow. How to build a financial dynasty that serves not just one family, but many families over multiple generations.

This type of dynastic wealth takes hard work and planning. After all, it must keep up with both inflation and family spending across multiple generations. What is the secret ingredient that allows the machine of long-term compounding to get stronger over time?

A philanthropic responsibility

It turns out, families with a large philanthropic component to their investment strategies tend to outperform those without them. While there are many reasons why, we hypothesize that families with aligned social interests tend to make investment decisions collectively, in support of the bigger picture, rather than for personal interest.

Of course there are countless stories of failure where family fortunes are squandered. However, philanthropic vehicles have been known to greatly hedge this risk through both behavioral and investment-based reasoning.

When building dynastic wealth, or perhaps if you want to course-correct an existing legacy, there are the three most important things to consider:

Discuss charitable values early and often with your family

Did you know that 78% of family wealth holders feel the next generation is not financially responsible enough to handle their inheritance? As a parent, no one wants to end up in this situation, but it is one that can be avoided by normalizing the topic of philanthropy with your children starting at a young age. Have discussions around the dinner table about the causes that you care most about. Involve your children and grandchildren in charitable efforts such as volunteering or giving money to research of a disease that has affected your family. Listen to what matters to them, too. Whatever the purpose may be, we find that families with a steadfast charitable focus have better financial outcomes in the long term.

Expand what ‘impact’ means to you

In the context of philanthropy, impact is not measured as empirically as many would hope, yet it is immensely important for a philanthropist to identify what success looks like to them. More obviously, traditional endowments move the social impact needle in the long term, but we’ve also found that investment managers are starting to invest client portfolios based on the social causes important to them and their family. In many cases, ESG (Environmental, Social, Governance) funds – companies with a sustainable business model or focus – have even outperformed non-ESG funds.

Let us also consider the venture component to philanthropic investing that could be exciting to the younger generations, and which can further strengthen the family wealth while driving considerable large-scale social impact.

Choose the right philanthropic investment vehicle

One of the fastest-growing charitable investment vehicles is the Donor Advised Fund (or DAF). In short, a DAF is an investment fund that is set up in the name of the donor – The Adam and Ana Jones Family Fund, for example – and then managed through a third-party manager that serves as the “back office” for the fund. Contributing to a DAF over time, rather than to individual organizations, could be a great way to maximize your philanthropic efforts and receive charitable tax benefits. And one of the most appealing aspects: the capital continues to grow tax-free until you and your family decide which nonprofits you want to support through the fund.

While we cannot control what happens to our family’s wealth once we are gone, we can build it with intention and careful planning to ensure its foundation is stronger, longer-lasting, and supports even more families for years to come. The secret sauce is not hidden within a one-size-fits-all financial plan. Rather, it is found when we focus on a purpose even greater than ourselves.

Peter J. Klein, CFA, CRPS, CAP is the chief investment officer and founder of ALINE Wealth, a wealth management firm for foundations, endowments, and business owners.

ALINE Wealth is a group of investment professionals registered with Hightower Securities, LLC, member FINRA and SIPC, and with Hightower Advisors, LLC, a registered investment advisor with the SEC. Securities are offered through Hightower Securities, LLC; advisory services are offered through Hightower Advisors, LLC.

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