Most discussions about wealth creation treat the investor as an isolated individual. For Muslim families however, building wealth is not merely about creating riches to sustain themselves in old age. Rather, it’s about creating a foundation that will be used to grow in subsequent generations.
Compounding has the potential to help build wealth over time for Muslim families. The key is to have the right systems in place as early as possible, and then for those systems to withstand transition.
Why Generational Wealth Is a Different Goal
Saving for retirement and building up generational wealth have very different objectives. Saving for retirement is about building up a sufficient sum of money in order to live off of it in your retirement. Building up generational wealth on the other hand is about building up something that will not get depleted and where the principal continues to work. In such a case, the money that is being left behind for the next generation is not just a sum of money but also a solid system that they can continue to build on.
There is a massive difference between saving for retirement and building up generational wealth. While retirement saving is designed to create a big enough pile of cash that can be drawn down to cover living expenses in your old age, creating generational wealth is about building up a pile of money that will not get drawn down at all, or at least not completely. The wealth is meant to keep growing and in retirement, it can be used to create a legacy, to leave a foundation for future generations to build on. So, the investment horizon for creating generational wealth is much longer than for retirement saving. If you have children of 10 years or younger, that means you are investing for 30 years but more importantly, you are investing for 50 or 60 years. That is a long time for returns to build up and by the time your kids are 25, you could have already started a halal investment portfolio for them 10 years prior. Over long horizons, compounding has the potential to grow such investment meaningfully. However, please always remember the rule of risk that is present in every investment to some degree. Therefore, actual returns depend on market conditions and other factors too.
The Structures That Make It Real
Intention without structure doesn’t transfer. Below are some of the practical pieces that Muslim families can consider.
Don’t underestimate the power of starting small. A simple custodial investment account for your little ones need not contain a fortune to get the ball rolling. And all it takes is time (even just a few minutes to set up an account online with an initial deposit to get the account open and start building savings for your child). Compounding over time is a powerful thing. So while a few thousand dollars may not seem like a lot right now, even a modest sum invested in a managed portfolio (built by professionals) at age 5 in a custodial investment account left to grow untouched until your child is of age to access the funds to use for whatever purposes they desire by the time they are 18 (for example), has a potential to grow meaningfully by the time your child reaches young adulthood.
However, one should keep in mind that actual outcomes depend on market conditions and that investments involve risks; thus, results are not guaranteed.
Make a will (wasiyyah). A wasiyyah is a way to ensure that your wealth is distributed according to your wishes after your death. Since the state will distribute your wealth if you die without a will, your intentions will not be carried out. The wasiyyah is a document that is drawn up by an estate attorney who is knowledgeable about Islamic inheritance.
Inheritance laws. Yes, there is Islamic inheritance law, which outlines the quantum that needs to be distributed amongst various family members in the event of a Muslim’s demise. The intent here is to see to it that the closest relatives are provided for first. It is therefore crucial for each of us to get familiar with the share allocated to specific members of our family before we have built up wealth. Otherwise, the manner in which our wealth is structured will end up being at odds with our objectives once the wealth has been created. As an illustration, the share of children in a Muslim’s estate is increased in the event that the deceased had left behind no parents or siblings. Thus, the manner in which assets are placed into joint ownership, distributed by way of a will, and added to a custodial account or trust would all need to be considered with a view to ensuring that all of the various inheritors are provided for in the manner prescribed by the Quran.
Split up your money by the reason you are saving it. The money you have for retirement and the money you have for your children to create wealth in future years are two very different pools of money. When you have a true emergency and need to come up with a large sum of money to fix a problem, you don’t want to take money out of your retirement accounts and potentially have to pay a lot of penalties for withdrawing the money prior to retirement. This is exactly what would happen if you had mixed the two pools of money together. By keeping the two separate and recognizing the two separate purposes that the two pools of money are for, you can keep your retirement money safe for retirement.
Create an investment portfolio that is low maintenance to keep running from generation to generation. Most DIY portfolios are set up to require constant attention to achieve optimal returns. As the primary investor ages and can no longer manage the investments, they tend to fall by the wayside. They may even go out of Shariah compliance with the original intent of the halal investing. A well-structured managed portfolio can be set up to continuously rebalance and to screen on a regular basis. It is likely to continue to thrive long after the initial investor has stopped managing the funds.
The Shariah Compliance Problem No One Talks About
For Muslim families, there is a further layer to consider when it comes to managing their wealth through the generations. The conventional wealth advice generational wealth strategy does not automatically maintain itself in terms of Shariah compliance.
A portfolio of stocks which was screened for the original investor at the time of their death will likely be some way from being halal 5 years later as the heir(s) do not know how to screen or even need to. Non-Shariah-compliant investments will have been added. The purification obligations of investments that have been in the portfolio for some time will not have been tracked. What sounded so good in the first place is now lost to the heir(s) of the original investor.
So as to maintain its halal nature through the generations, managed halal portfolios can be a more sustainable way to transfer wealth from one generation to the other than buying and holding individual stocks. Continuous screening, up-to-date compliance tracking and periodic rebalancing as they come due form the core of a managed halal portfolio and keep the individual stocks held within it halal for the investor and his or her heirs decades later.
Starting the Conversation in Your Family
Generational wealth isn’t about starting with a large amount of money to be distributed in the future. It starts with a start. Here are some practical starting points for you and your family.
Open up a custodial halal investment account for your children. The initial amount doesn’t have to be much to start off with as compounding will do the heavy lifting for you once you give it enough time.
Write or update your will, or wasiyyah, as this is the most important financial task in front of you especially as you have investable assets and no will.
Document your investment strategy. In other words, outline the portfolios you hold, the accounts they reside in, and your objectives for growing that wealth. This will give your heirs a clue as to what they’ve inherited and why you had chosen to invest your money that way.
Speak with your family and others about wealth transfers to the next generation. Your wealth will be transferred and best preserved when your next generation has been instructed and possess the proper values and financial tools to preserve what you worked so hard to build.
Building It on a Halal Foundation
Musaffa's Ready-Made Halal Portfolios are designed to remain Shariah-compliant and aligned to our investment strategy over the long term, without the need for constant monitoring and management by the investor. This can serve as a strong foundation for families looking to grow their wealth over several generations.
Musaffa US Core, Musaffa US Growth, Musaffa US Income and Musaffa US Innovation portfolios all come in 5 different risk levels. Invest for yourself, invest for your children or invest for both of them – these portfolios will stay on track whether you are monitoring them or not.
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Disclaimer: The content is for educational purposes only and is not a substitute for personalized advice from Musaffa. It does not constitute fatwa, legal, or tax advice, an offer, or a solicitation to buy or sell any security or investment strategy. The information is believed reliable as of publication date but may not reflect recent changes, and Musaffa does not guarantee its accuracy, completeness, or timeliness. Musaffa's Shariah compliance screening is based on AAOIFI Shariah standards. Any methodologies or assessments presented are for informational purposes only and should not be relied upon as the sole basis for any investment decision. It is important to conduct your own research or consult with a financial advisor or tax professional before making any investment decisions. All investments involve risk, and the value of securities and other investments may fluctuate due to market conditions, economic factors, or other external influences. Content may include historical or hypothetical data. Past performance is not indicative of future results. The views expressed are those of certain Musaffa personnel as of the publication date, are for informational purposes only, and may change without notice. They may differ from views of other areas of the firm, and any forward-looking statements are not guarantees and may not come to pass. Logos, brand names and external links are used for identification only and do not imply endorsement. For additional information and statements, see our disclaimers: https://musaffa.com/disclaimer
Nusrat Ahmed
Nafisahon