Why ultrawealthy fortunes are at risk
Among ultrawealthy clients, all money is becoming old money, as nearly half of U.S. billionaires are over age 70 — setting up a potentially huge transfer of wealth to the next generation, according to a new report by UBS and PwC.
However, those fortunes could be at risk.
Since 1995, 70% of billionaire fortunes did not remain intact past the first generation. Another 20% did not remain intact past the second generation, according to the study.
"I was a bit taken aback by how quickly wealth can be diluted," Mike Ryan, chief investment strategist at UBS Wealth Management Americas, says. "It tells me that wealth can truly be fleeting."
Aging billionaires are expected to transfer approximately $2.1 trillion to their heirs over the next 20 years, the study says.
Those fortunes may be diluted as they are divided up between heirs. However, the report also shows that fortunes held by European billionaires often last through more generations than those held by America's wealthy elite. About one-third of billionaire fortunes in the U.S. are held by second, third or later generations, compared to slightly more than half in Europe.
While there are differences in the legal structures between countries, there is no "silver bullet," says Steven Crosby, senior managing director of Global Private Banking and Wealth Management at PwC.
"What you need is good advice and superb governance. If you look at the common thread in any multigenerational family business or enterprise, they have good governance. If they don't have it, then the dilution monster gets them," Crosby says.
He adds that it also helps ultrawealthy clients navigate tricky issues, such as what to do if the next generation in the family is interested in something other than the family business.
Another key difference between American billionaires and their counterparts overseas is the higher rate at which Americans choose to sell the family business.
"We'll take the money in exchange for the business, and invest it and live off the dividends," Crosby says.
He adds that European billionaires more frequently insist that children and grandchildren get involved in the family business, but at a low-entry-level position. Essentially, the next generation learns the business from the bottom up.
And, Crosby adds, "it helps if there is a chateau or a farm or a vineyard – something that the family can lock onto as part of the family identity."
ON THE DECLINE
Ultrawealthy clients' fortunes also face economic headwinds.
"For the first time since we've done this reporting, billionaire wealth did not grow faster than global GDP," says John Mathews, UBS Wealth Management Americas' head of Private Wealth Management and UHNW.
Worldwide, the number of billionaires rose in 2015, but their overall wealth fell by $300 billion, the report says. The last time the report showed an overall dip was in 2011. The report cited additional factors, such as commodity price deflation and an appreciating U.S. dollar.
"One year doesn’t make a trend, but two could. So next year we'll be looking to see if events like Brexit or the U.S. election have had a lasting impact," Matthews says.
Ryan says the post-crisis growth has been slower than previous expansions.
But he adds that UBS thinks the economic expansion will continue, and that fresh fortunes may be made as new technologies transform businesses and create opportunities.