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Investment Training for the Second and Third Generations

Client Alert
January 19, 2021

Originally published in Crain’s Cleveland on January 18, 2021

Consider this scenario. Mom and Dad started the business from the ground up. Over the decades it has expanded into a money-making machine. They are able to sell the business and it results in a multimillion-dollar payday for their labors. The excess money has allowed Mom and Dad to invest with various financial advising firms, several fund management groups, and directly with new startups and joint ventures. Their experience has made them savvy investors, with a detailed understanding of how much to invest, when, and where. They cannot justify formation of a full family office with dedicated investors to manage the funds, but Mom and Dad have set up a trust fund for the children to allow these investments to continue to grow over the years. Eventually, Mom and Dad pass. Their children enjoy the fruits of their labors, and, by the time the grandchildren are adults, Mom and Dad's savvy investments are gone. 

How does this happen?
There are many articles, theories, and research on why a family business or investment money rarely makes it to the third generation. However, one pervasive theme tends to stick out: the second generation and, in turn, the third generation, are untrained on how to manage, invest, grow, and use their family money in a positive, lasting way.
It makes sense. Mom and Dad had to learn every nuance of the industry and how to make every dollar count - they lived the on-the-job training that made them savvy investors. The next generations did not have that same "hard knocks" experience - they were taught by Mom and Dad, private schools and higher education. They did not have the urgency of making every dollar count because there were plenty of dollars available.

So, if Mom and Dad have enough money to create wealth for generations to come if it is properly cared for but they do not have enough to justify the cost of a full family office, what can they do to train their children on the importance of long-term investing for their benefit and more importantly for future generations?

A strategic family plan
What if there was an investment training opportunity for the second and third generations? Owners of family-run businesses, startups, or early-stage ventures are looking for investors to finance their expansion, create their new technology, or develop their next real estate project. These raises are the perfect opportunity for young investors to learn how to conduct direct investing at low buy-ins and allows them to discuss the pros and cons of an investment. A team of experts including the business owners (Mom and Dad), their financial advisors and legal counsel can collaboratively work together to set the plan into motion.

For example, if a client conducts a financing raise at $50,000 a share, Mom and Dad might buy one or two shares of the company. However, their children, who are in their 20s and 30s, most likely, cannot manage an investment that size. As part of the training of this second generation, Mom and Dad offer an opportunity to the children: if the children can pool together $25,000 between them, Mom and Dad will match those dollars to assist with purchasing a share. The children form an investment entity to hold the share in its name and any distributions made are divided among the children. The children would learn to read the PPM for the company, comprehend how the investment could grow or flop and understand how their investment entity will work on their behalf. They are interested and invested (both literally and figuratively) in the outcomes of the company because their personal money is invested.

This process results in Mom and Dad guiding their children through a valuable lesson: when, where, and why to take a risk with their own dollars. The second generation is able to learn directly from the most experienced resources they have, their parents, while they are still alive, able to answer questions, give advice, and discuss opportunities.

This is but one example. By providing clients, their children and grandchildren unique investment opportunities, structured in a way that provides profit and a training opportunity, clients' assets are more likely to grow and last over generations.

If you are interested in learning more about family boards, training and preparation of the next generations, and planning for long-lasting family wealth, consult a financial advisor and legal counsel. 

Cassandra L. Manna is an attorney at Brennan Manna Diamond. Contact her at 216-658-2206 or clmanna@bmdllc.com. Richard W. Burke is a member, Exec­utive Committee, at Brennan Manna Diamond. Contact him at 330-374-5255 or rwburke@bmdllc.com.

Corporate GrowthTrustsbusiness and corporate lawRichard W. BurkeCassandra L. Manna
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