How can your wealth survive through generations?

For many, stewardship of hard-earned wealth across generations has been challenging. Everything from reckless spending to ill-thought through investment strategies, to relationship breakdown can dramatically destroy family wealth.

There have been examples, through history, of dynastic families who have been amongst the wealthiest in a nation, who have largely lost everything. The Vanderbilt family built the US railroads and amassed a huge fortune, but through excessive consumption and gambling were far from wealthy, just four generations later.

For the Huntington Hartford family, who created America’s first grocery chain – now referred to as “Walmart before Walmart” –  it was a series of failed business transactions. For the Pulitzer family – famous for the Pulitzer Prize –  it was the concentration of their wealth in an 800-acre citrus farm in Florida, that was then ruined by disease.

Stages of wealth

Aside from the nobility and the aristocracy, the vast majority of family wealth has arisen from entrepreneurial activity. Typically, there has been a period of successful wealth creation, perhaps with the founding and growth of a business.

Generally, some years later, a period of wealth consolidation follows – with, perhaps, the partial divestment of a business (e.g. via a stock market listing, trade sale or with the investment of a private equity fund). Liquid family wealth outside the business will therefore grow significantly.

Finally, with the eventual disposal of the business and/or the existence of a larger group of family stakeholders, plus the investment of family wealth in liquid investments, a period of wealth distribution commences. By this stage, there will be a host of different family members with differing objectives.

For any family in the latter stages of wealth consolidation or in wealth distribution, there are three main challenges:

• Holding together a disparate range of family members, with different ages and interests

• Ensuring that wealth is not misused or recklessly spent, and

• Ensuring that wealth is wisely invested for the future.

At Clarus, we believe there are important strategies that will maximise the opportunity for success in your family.

“I think it is very difficult to motivate the third generation because they have lived a better life than we did. We spent a lot of money on them, and they have lots of money coming in. When they ask you for a huge salary it means nothing to them. Unless they can see that they are in power and are getting wealth quickly, they get really despondent and, it has to be said, not all of them want to work. Some, I would say about 50% are not really motivated. This is basically the problem we have, and I don’t know what the solutions are." Farouk Yousuf Almoayyed, founder of family business in Bahrain

Core ingredients of intergenerational wealth transfer

A combination of our professional experience, and academic research in this area, demonstrates that there are four core ingredients to successful intergenerational wealth transfer:

·       Work-orientated family values with a stewardship orientated mindset which encourages entrepreneurship and endeavour in future generations

·       A clear family governance structure that governs family strategy, behaviour, communication and dispute resolution via a family charter, and clear decision-making processes

·       A disciplined investment strategy that encourages appropriate risk-taking to deliver above-inflation returns, and

·       An approach to income and capital withdrawals that is proportionate and not excessive, and with suitable accountability around capital investment.

These ingredients are illustrated in this diagram:

Conclusion

At Clarus, we know that being wealthy brings many challenges – in particular, if you wish to sustain that wealth through future generations. To maximise the opportunity for success, it is critical that disciplined thinking takes place in the following areas: (1) family values, (2) family governance, (3) investment strategy, and (4) income and capital withdrawals.

We can help you consider each of these topics, building a long-term and sustainable plan for the preservation of your family wealth. We take a strategic view, working closely with you to build an integrated approach that is unique to your family.

Nick Perryman is Vice Chairman and Partner at Clarus Global Capital, and Chairman of its Investment Committee. Previously, he spent nearly two decades at UBS where was a Managing Director. He is co-author of the book, Leadership in Wealth: Mastering the Opportunities of Wealth in your Family, Firm and Society. He holds master's degrees from Durham and London universities, including in finance and organizational psychology, and is a doctoral researcher at Durham in financial services leadership, risk and governance. He is a Chartered Fellow of the Chartered Institute for Securities and Investment.

Bibliography

Coles, R. (1967). Children of crisis: A study of courage and fear.

Eckrich, C. J., & McClure, S. L. (2011). Working for a family business: A non-family employee's guide to success. Palgrave Macmillan.

Jaffe, D. T., & Brown, F. H. (2009). From entitlement to stewardship: How a prosperous family can prepare the next generation. The Journal of Wealth Management, 11(4), 11-28.

Schervish, P. G. (2006). The moral biography of wealth: Philosophical reflections on the foundation of philanthropy. Non-profit and Voluntary Sector Quarterly, 35(3), 477-492.

Zellweger, T. (2017). Managing the family business: Theory and practice. Edward Elgar Publishing.

Important notice

This article is provided for general information, discussion and educational purposes only. It reflects the views of the author at the date of publication and is not intended to constitute, and should not be relied upon as, investment, financial, legal, tax, accounting or other professional advice. It does not constitute an offer, solicitation, recommendation or invitation to buy, sell or hold any investment, financial instrument or service, nor should it be regarded as a personal recommendation or as taking account of the objectives, financial circumstances or needs of any particular person.