Why Wealthy Families Lose Their Fortunes and how developing the family’s human capital reverses the trend
Over 90% of family fortunes disappear within 3 generations of their creation, according to a study conducted by the Williams Group wealth consultancy; meaning the great-grandchild of the initial wealth creator gets nothing in 9 out of 10 cases!
Taking a “helicopter” view of my own experience as a legal advisor to some of the wealthiest families in the world led me to consult multiple colleagues (other lawyers, trustees, wealth planners, tax advisors) who agreed to share their experiences with me.
What follows are the top 5 reasons that explain family wealth destruction in practice:
1. Family RisingGen/NextGen Planning is Ignored
Many families don’t invest in developing the specific skillset and mind-set their younger members require as the family’s future decision-makers, wealth-creators, and legacy-drivers. There are a number of reasons: the “wealth creator” is usually tremendously busy; children are often sent off to boarding school or are educated in another country; finally, there is no perceived serious need to invest in and equip RisingGens/NextGens, leading to wealth destruction and in some cases, broken lives (drugs, mental health issues, and worse).
Conclusion: RisingGen/NextGen Planning is often not considered a priority until it’s too late.
2. Entrepreneurial Spirit is not Developed
An amazing wealth creator is often followed by successive wealth spenders, in whom the entrepreneurial spirit has not been nurtured or encouraged. The fact is there is no automatic inheritance of entrepreneurial talent. Like any skill worth having, it needs to be developed over time. Generationally-successful families understand this.
Several of my “entrepreneur” clients would come to my office with one or more of their children, who would listen, observe and learn from a very young age, often becoming great entrepreneurs themselves; other clients would never come with their children, and in fact take measures to exclude them from participating in the family business in the future.
Many families switch from a 1st generation wealth creation mind-set to a 2nd and 3rd generation management and preservation mind-set – and never recover.
Conclusion: When entrepreneurial talent is not developed, the family forgoes an important wealth creation opportunity and restricts the potential for RisingGens/NextGens to outperform their predecessors.
3. Divisions Arise because of Lack of Common Purpose
Families increase in number over time but when they lack a common purpose, assets are often divided between members and then squandered. A friend and colleague who runs one of the biggest Multi-Family Offices in the world with great success asks each prospective client one simple question:
“What is the wealth for?”
As simple as this question is, the answer is often very difficult to articulate. Those that hesitate, unwittingly admit to a lack a clear family purpose, and run the risk of eroding the “glue” that holds families together through the generations.
Conclusion: A lack of common purpose leads to a “cash-out” rather than “buy-in” attitude. The family may soon lose economies of scale, the power of the family’s collective mind, and a shared vision (i.e. to be a force for good).
4. Family Disputes left Unresolved
Family disputes arise and are left to fester unless there is an accepted and agreed conflict resolution mechanism to solve them. A lack of transparency and trust leads to divisions, and this phenomenon is shared with corporate and sporting teams, governments and so on so there’s nothing new here.
What distinguishes families from the others however, is the nature of the relationships, where “blood is thicker than water”, making it more difficult for family members to separate the “ideological” (i.e. someone’s genuine opinion) from the “personal” (i.e. relationship to the person you disagree with).
Conclusion: Families that don’t have a dispute resolution mechanism with clear rules of expression, often end up as dysfunctional, with members suffering both financially and emotionally over time.
5. Succession Taxes Not Properly Planned For
Benjamin Franklin once said: “In this world nothing can be said to be certain, except for death and taxes”.
When both death and taxes strike at the same time, it can be devastating for families emotionally and financially if they don’t have an updated “death simulation” scenario that reveals potential weakness in the wealth ownership system. A constant tracking of where owners and their heirs reside, as well as keeping abreast of tax changes in key jurisdictions ensures peace of mind so that when the inevitable happens everything is in place for a smooth transition.
Conclusion: Lack of proper succession planning is like shooting oneself in the foot: it’s preventable, it shows a lack of care, and it hurts like hell!
I have spent a long time researching, analysing, and visiting with some of the “10%” of families that have succeeded in keeping their family fortunes beyond 3 generations. The aim? To find out what they do, that the other 90% families do not.
Successful Multi-Generational Families apply the strategies and techniques to their family and family wealth that they have successfully applied to their businesses and wealth creation.
In other words, they apply what has made them successful in a business context to their family context.
I would further break that conclusion into three parts: successful families have a clear purpose; a time-bound strategy; and the right people to execute and achieve the first two.
Let’s explore each in turn:
1. A Clear Purpose
A business has a purpose, which is communicated to:
a. Employees to make sure they are engaged,
b. Customers who want to buy their products or services.
This is the “WHY” of what a business does. Most families are not clear on purpose and even if there is one, it is not often understood by the different generations.
What the Successful “10%” Do
Successful families take the time and create the space to develop a family purpose, towards a “buy-in” rather than “cash-out” attitude. When members understand that the family is a structure to help its members develop and succeed, those same members will be drawn to finding ways to help the family and its business.
Here’s an example of family ‘purpose’: “to maintain and help grow our family fortune and legacy as a force for good in the world, while encouraging individual members to fulfil their natural potential.”
One can find a family purpose by asking the following questions:
- What is the core purpose of our family
- What is our family wealth for?
- What difference do we want to make in the world around us?
2. A Time-Bound Strategy
Successful family businesses and fortunes have a clear strategy; several in fact – a growth strategy, risk strategy, marketing strategy – which is time-bound i.e. short/medium/long-term.
This is the “HOW” of achieving results.
Many families don’t have a time-bound strategy, or if one does exist, it’s not being executed properly because they lack clarity on how they are going to achieve their goals
What the Successful “10%” do
Successful families define a time-bound family strategy, inviting representatives from all generations to be involved. Like any successful team (i.e. sporting or professional), members will buy into and execute the strategy even if they disagree, as long as their voice has been duly heard and considered at the outset.
Here are two examples of a time-bound strategy:
In a very wealthy European family, a strategy has been devised to allow each family member to work in the family business and receive shares, by going through a pre-determined set of “hoops” that the family helps them achieve. Those that don’t go through the hoops, won’t work in the business, won’t receive shares, but instead receive a pre-determined amount in cash.
Another family strategy, for an Asian family this time, was to exclude any family member from executive power positions in the business going forward; not because they weren’t smart or capable, but because representatives from all generations saw the risk of mixing business with family as being too great and against family unity and growth.
Each strategy was unique to the family concerned and fit for the purpose to be achieved.
One can find a family strategy by asking the following questions:
- Where does our family want to be in 5 years, 10 years, 50 years?
- What are we doing today to ensure we reach our definition of “success” tomorrow
- What are we doing to keep the entrepreneurial spirit alive so that we have Family RisingGen/NextGen wealth creators rather than just wealth spenders?
3. The Right People to Execute and Achieve
In successful businesses, you have to ensure you have the best people in the right positions.
This is the “WHO” of making things happen.
In a family, there is a temptation to waive this golden rule to accommodate family members. Those that place family members in important positions, knowing they are not qualified or the “right fit” add to the chances of being on the wealth destruction path. Others who invest in upgrading the skillset and mind-set of members to ensure it is ability rather than nepotism that applies, increase the odds of being on a wealth growth path. Why? Because in the latter case, RisingGens/NextGens become a family strength rather than a family liability.
What the Successful “10%” do
They tailor-make development programmes for their RisingGens/NextGens that develop the skill-set, mind-set and core competences to ensure they better contribute to the success of themselves and their family going forward.
Take the example of a multi-generational family that has instituted a leadership development programme beginning at 18 years of age going well into their 30’s that equips and develops according to maturity and objectives:
- It begins with a leadership foundation course designed to develop character, build confidence, and ignite leadership potential through adventurous training;
- It evolves into a cognitive and practical leadership task training under time/resource pressure;
- Finally, it ends with “you are the CEO” training, that simulates running a multi-jurisdictional multi-dimensional business, under the guidance of top business practitioners in business who have actually been in these roles in their careers.
To give further detail, this particular programme has regular assessment “pit stops” so that both the family and the members themselves can track their evolution with specific time-bound recommendations to continue their progress. It is a prime example of setting people up for success, which is a win/win for all concerned.
One can help develop family members by asking the following questions:
- Do we have the people within our family with the capacity to commit to the purpose and implement the strategy going forward?
- Do we ensure Rising Gens/NextGens have the knowledge, skills and pedigree to be contributors to the family’s different interests (philanthropy, business, wealth, cohesion, entertainment, education)?
- Are we setting our younger members up for success or are we casting them on the path towards failure?
A holistic Programme that develops family members must encompass the five following areas:
- Financial knowledge: to be able to converse intelligently with all the family’s asset financial asset advisors (investment managers, asset managers, bankers, etc.) and understand the dynamics of the investment management process.
- Governance and Wealth Planning: to be able to interact with lawyers, wealth planners, tax advisors, and contribute towards effective family decision-making, conflict-resolution and asset-holding structures.
- Leadership Development: to develop the skillset and mind-set to lead others with resilience and agility in an increasingly complex environment.
- Entrepreneurship: nurturing the wealth creation spirit with practical tools to further develop the family business and/or create future family revenue channels to diversify growth opportunities in a changing world.
- Personal Empowerment: to develop self-awareness, a clear vision of life priorities and goals, as well as an inner belief and personalized toolkit to achieve them.
Out of “Purpose”, “Strategy” and “People”, it is the final category – People – that is the key driver; because it is people who define a purpose and execute a strategy, not the other way around.
Family Wealth can be used as a force of good, both within the family, but increasingly in the world at large. Family foundations can often achieve success in philanthropic programmes and development areas where governments and corporates are simply too large and bureaucratic to act. But to be able to use wealth for good in any area, the wealth as well as the people behind the fortune need to be nurtured, nourished and grown.
For this to happen, of all the different forms a “capital” a family possesses, it is human capital that remains head and shoulders above all others (financial, social, intellectual, etc.) as the greatest determining factor of how a wealthy family’s fortune will evolve over time and what will remain for successive generations to use within the family and to bring value to projects in the greater community.
There are tools out there to help families reach a clear purpose, a time-bound strategy and the right people to execute – and I have shared a taster of some of these with you – but nothing will work without the users of these tools first being equipped and prepared themselves.