One of the leaders in the area of family wealth consulting is James Hughes. In his book, Family Wealth—Keeping it in the Family, he asks the question, “Can a family successfully preserve its wealth for more than one hundred years or for at least four generations?”
The problem is that family wealth is not self-perpetuating. Studies have shown that 90% of wealth transfers fail by the third generation supporting the proverb: Shirtsleeves to shirtsleeves in three generations.
So what are the reasons that the proverb still rings true? James Hughes offers 7 possibilities.
- Wealth preservation has always been a measure of financial capital. Very few families measure wealth beyond the financial. Financial, intellectual, social, human and even spiritual capital all need to be nurtured and passed from one generation to the next. True intergenerational wealth is measured by the connection of the financial capital with the intangible family capital
- Families fail to understand that wealth preservation is a dynamic, not a static, process and that each generation of the family must be a wealth-creating generation.
- Families often fail to apply the appropriate time frames for successful wealth preservation. Time should be measured by the generations. Patience is a virtue in everything a family does.
- Families fail to comprehend and manage the external and internal liabilities on their family balance sheets. Hughes reminds us that the ultimate liability of a family trying to preserve its wealth is finding itself in a blissful state of status quo, supporting an assumption that there is nothing to worry about. But what could be developing is a state of decay.
- Families fail to understand that the fundamental issues of wealth preservation on qualitative, not quantitative. Some questions to consider:
- Is each individual member thriving?
- Is there a culture of inter and intra-generational cooperation and servant leadership to foster family engagement?
- Do the family members know how to leave the family wealth management business so they do not feel they have to leave?
- Does family leadership seek to enrich the family’s human, intellectual and financial capital in order to achieve the individual pursuits of happiness of family members?
- Families fail to tell the family’s stories. Story is the connective tissue that links the financial wealth with the human capital. Hughes says that “stories are the glue that binds together the individual members of the family. Family stories give members a sense of unique history and values they share. . . .”
- Families fail to understand that the preservation of family wealth over a long period of time is unbelievably hard work. There is a large risk of failure couple with a magnificent but distant reward.
All of these require a process. Hughes reminds us that “most of us know that a process, often a difficult one, is essential to the achievement of any endeavor. Most of us also know that abandoning the process too soon, because it seams too hard, is the most common reason that endeavors fail. . . . To embark on the long-term wealth preservation is an act of extraordinary courage for a family. . . . If you are courageous and you want to be a wealth creator in the most profound sense, get started. There is no time to waste.”
Give us a call! Tell us what you are trying to accomplish! We’d love to help.
