Global research tells us that wealthy families would prefer to pass nearly two-thirds of their wealth to their children, grandchildren and others. But while they may have the desire to build their legacy by passing on their wealth, many families grapple with a fundamental question:
Can our wealth benefit our generation and be passed on to future generations without it becoming a burden?
This represents one of the most challenging dilemmas that families of wealth face. Put another way, families question whether their financial capital (their money) can co-exist in harmony with their human capital (their family). There is significant evidence that suggests the two have more often than not been mutually exclusive. From stories in the press about in-fighting and lawsuits that tear wealthy families apart to research that suggests only 30% of families are able to successfully transfer wealth between generations, there seems little reason for optimism. After all, the shirtsleeves-to-shirtsleeves proverb is universal. [pullquote]Research that suggests only 30% of families are able to successfully transfer wealth between generations.[/pullquote]
But our experience tells us that sustaining the legacy left in the form of family wealth is indeed possible. After all, while they may not be written about as frequently, there are healthy and happy families who have and continue to sustain their wealth beyond the first or second generation for the benefit of their families and society. We constantly seek to learn from these families and share those lessons with others who also want their wealth to last and be a benefit to their families and communities.
As one of the first Multi Family Offices in Australia, our experience has allowed us to assist families in detailing a clear path to sustaining wealth across generations. Not surprisingly, successful families have shown us that the road to sustainability begins by building a foundation around financial capital. They make certain that their investing, tax and estate planning, and risk management activities are performed well and avoid the typical pitfalls of holding large concentrated stock positions, taking excessive leverage or risk, lawsuits, and overspending. They ensure that their investments are managed and grow, net of inflation, taxes, and spending, in such a way that their value compounds consistently over time, across market cycles.
Successful families ensure that all of their financial activities are managed seamlessly to avoid the unforeseen risks and errors that can hide in any crevice and cause the foundation of their wealth to crumble over time.
While stories of dysfunctional wealthy families abound, the reality is that financial security and family stability often go hand in hand. Families that want to leave a legacy of wealth that will pass through many generations need to take a multi-generational perspective to their family values and financial aspirations. Managed well, this allows them to focus on investing for the next generation, not just the next quarter. They seek out opportunities to trade liquidity for return.
This longer term thinking leads such families to focus as much on asset location as on asset allocation and to focus on wealth protection. As they do, other critical questions begin to emerge that highlight the potentially fragile nature of the infrastructure that surrounds their financial capital:
• Are any of our activities overly reliant on one person?
• Can I be sure that my advisors are coordinating their efforts with one another?
• Will there be continuity in the management of my wealth if something unexpected happened?
At this point on the road to sustainability, families begin to see their wealth not only as a series of activities that need to be performed, but also as an enterprise that needs to be managed. They build a professional infrastructure of advisors and providers that is completely aligned with their interests and can provide the legacy of continuity across generations for the management of their financial capital.
The natural progression from this stage is to invest in the capacity of the family going forward to ensure ongoing wellbeing in both a financial and emotional sense. Watch for the next article by Brad for this to be covered in depth.