Billionaire heirs have a how-to-spend-it problem

“Let me tell you about the very rich. They are different from you and me.” F. Scott Fitzgerald could have added that they are also generationally different from each other.

For the first time in the history of UBS Group AG’s annual study of billionaires, new billionaires accumulated more wealth through inheritance than entrepreneurship: some $US151 billion ($228 billion) was inherited by 53 heirs in the year to April 6, versus the $US141 billion in fortunes of 84 new self-made billionaires.

For the first time, new billionaires have accumulated more wealth through inheritance than entrepreneurship.Credit: AFR

As the Swiss bank points out, the pivot may have been expected, but this “great wealth handover” is gaining momentum. More than 1000 ageing billionaire entrepreneurs are expected to bequeath $US5.2 trillion to heirs in the coming two to three decades.

What’s striking are the findings of a related UBS survey showing contrasting attitudes between the self-made and their successors. The main goals of second-generation billionaires are to enable their descendants to benefit from the same wealth — a priority of first-generation billionaires too — and to continue and grow what forebears had achieved.

But barely one-third of billionaire heirs cited “philanthropic goals/making an impact in the world and society” as their main objective. For first-generation billionaires, the proportion was 68 per cent.

Just 16 per cent of the heirs are prioritising “enabling or supporting others”, through, say, cultural legacies or sports sponsorship, compared with 48 per cent of first-generation billionaires.

The heir almost certainly doesn’t have the same experience of taking risks, owning mistakes and starting again after setbacks.

Yet at the same time, UBS identifies a tendency of second-generation billionaires to invest for social impact or managing businesses “in ways that address environmental and social issues”.

How to interpret these findings, which seem in part at odds with each other?

The survey sample has only 79 respondents, so one must be wary of drawing definitive conclusions. Still, there is a different sense of responsibility between the generations, different attitudes to risk and a division on philanthropic donations.

That perhaps shouldn’t be surprising. A self-made billionaire possesses the core business they built, where they will have become comfortable taking chances and dealing with inevitable failures. They will likely have a diversified, lower-risk investment portfolio to conserve the wealth thrown off by that business in dividends. These assets may in turn fund philanthropic activity that supports the causes the entrepreneur cares about and answers the expectations society has of the wealthy.

The heir almost certainly doesn’t have the same experience of taking risks, owning mistakes and starting again after setbacks. Even making money out of money might have seemed easy to them. After all, asset prices swelled in the low-interest-rate era after the 2008 financial crisis.

Maybe they inherited the family business, or maybe they received the proceeds from its sale. Either way, they will typically start out as a wealth manager, not an entrepreneur. They don’t see three distinct activities of running a business, managing a safe investment portfolio and doing philanthropy. Where they’re seeking social goals, these are mingled with financial returns from a more typically risky set of investments. There are few pure philanthropists among the billionaire heirs.

The need to legitimise their wealth in the eyes of society should be far greater among the second generation billionaires. They can’t defend their riches by saying they earned them by hard work. But if they’re reluctant to give money away because they didn’t earn it themselves (UBS says this is often the case), their next option is to make an impact with their investments. The philanthropy sector has its work cut out to show it could deploy those financial resources better.

More than half the billionaires surveyed regard one of their greatest challenges as instilling in heirs the values, education and experience to take over. That points to a duty to pass on more than just wealth. If the drive and risk appetite that created their riches can’t be handed down, maybe some wisdom in managing the wealth responsibly can be. The world can’t afford for this group to have more money than sense.

Bloomberg

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