Looking beyond the “third generation trap” we explore the nuanced and unique relationships between grandparents and grandchildren and the impact this has on modern wealth transitions in Asian families.
by HSBC Global Private Banking
The challenges of passing wealth down through the generations are common, almost all cultures have their own version of the old adage “wealth does not survive past three generations”. While the West might say “rags to riches to ruin,” in the East the expression is “rice paddies to rice paddies in three generations.”
The relationship between first generation wealth creators and the rising third generation is conventionally seen as a cautionary tale around wealth transfer. It is, however, more important than ever as Asia goes through a great wealth transition.
Sustaining and transferring wealth is a challenge that affluent families face. However, younger generations are finding new ways of ensuring the longevity of their family’s wealth and business. And at the heart of this is the family dynamic between the first and third generation - the unique bond between grandparents and grandchildren.
Grandparents today are more likely than earlier generations to play an influential role in their grandchildren’s lives1. In Asia, the first generation have especially strong ties with their grandchildren and are highly invested in their upbringing and education. They want to hand down more than just wealth, playing an important social role as transmitters of cultural values and knowledge2.
It is a markedly different relationship than the one they have with their children. Grandparents and adult grandchildren can serve as confidants to one another, and grandchildren are often able to be more open with their grandparents than their parents3.
“There is more of a struggle between the first and second generation about talking about things that matter,” says Steven Weekes, Head of Trust and Fiduciary Services, South East Asia at HSBC Global Private Banking. “Whereas grandchildren and grandparents talk a lot about things that matter to each of them individually and not just about the business.”
The first generation create various structures to provide their grandchildren with support for their education and lifestyle maintenance.
Increasingly we are seeing this support lasting longer, until the grandchildren are in their thirties and forties.
“For many first generation clients, they are currently more concerned about the needs of their grandchildren than their children, particularly their education,” Weekes notes. “Often, their children are already working in the family business or engaged in careers and able to support themselves.”
The first generation also step in to play a bigger role if the second generation are unable to do so. For instance, if their children were to pass away, the grandparents intervene to care for their grandchildren both physically, and financially.
Affluent grandparents recognise the individual ambitions of their grandchildren and use their wealth to provide support. This could be through financing the younger generation’s entrepreneurial spirit or their desire to help people through philanthropy.
"The first generation would like to allow the third generation to pursue their dreams," explains Weekes.
Wealth creators focus on growth, quite different compared to the younger generation who do not merely invest but also share wealth within the community.
There is also recognition in the younger generation that not every venture has to be a wealth-generating one. In one example, the first generation passed away leaving behind a trust that allowed the eldest child to open a childcare centre. It was a rewarding initiative that wasn’t going to return a huge investment but allowed the younger generation to follow their dreams.
As much as the first generation want to enable their grandchildren’s personal fulfilment, managing how they use the wealth must be done in a way that protects the family’s interests and promotes family unity and harmony. The balance is key.
The third generation needs to be given the freedom to pursue their own ventures and investments and make positive change in the world, whilst acknowledging the sense of duty which often the earlier generations feel towards the family business.
It’s a delicate balance between protection and control. The first generation didn’t have any vetting protocols when they were achieving their goals, so it can feel unfair to stifle the ambitions of the younger generation. It is also risky to allow uncontrolled spending.
In reality, there is no perfect solution. Families require a mechanism in place to ensure the needs of the family are met while the third generation have the freedom and the funds to pursue their own entrepreneurial ventures. This may be outside the core family business as individuals make their own investment decisions.
Some families may agree on rules that mitigate risk and avoid family disputes, or even set criteria around ventures not directly competing with the family business. Others might appoint an impartial third party to be the deciding vote caster on a venture proposal or create an agreement that a portion of any profits go back into the family business.
Stewardship of family resources in a professional and systematic way allows an open and transparent process to support the third generation and ensures a sustainable ecosystem for passion projects, ventures and investments; while allowing the family business to diversify and evolve to meet the needs of a changing world.
The best way to ensure a smooth transition is by preparing the third generation for the wealth they will inherit. While giving them a fine university education is extremely valuable, many important lessons originate at home.
“We encourage our clients to do a living will; talk to your children and grandchildren through the process, so they can hear your hopes and expectations,” advises Weekes. “That communication is so important for all generations, but also future generations who will have no direct contact with you. How else will they hear about what you wanted to achieve, or what values you want to pass down? This also encourages all generations to listen to their children and grandchildren’s needs and aspirations. It also minimises the chance of family fall-out or disputes.”
We are committed to offering our knowledge and support through our Next Generation programme to engage younger generations and provide them with foundational knowledge about financial management so they are prepared for the wealth they will inherit. Our programmes also provide a networking platform connecting like-minded individuals going through the same experiences.
“As a trustee, we have been working with Asian families for 75 years and facilitating smooth wealth transitions. We partner with our clients to work out how the wealth can pass forward, and not just to the third generation but even the fourth and fifth,” says Weekes. The insight we’ve gained through many years of walking alongside families to support their unique needs means we’re able to help families transition the wealth from generation to generation. To learn more, contact us or your Relationship Manager.
1 Bao, L., & Huang, Y. (2020). Parenting and Grandparenting. ↩
2 Mehta, K. K., & Thang, L. L. (2012). Introduction: Introducing grandparenthood in Asia. ↩
3 The Oxford Handbook of Emerging Adulthood & Dimensions of Grandparent-Adult Grandchild Relationships: From Family Ties to Intergenerational Friendships (2005) ↩