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“Preserving Generational Wealth.”

“Preserving Generational Wealth.”

[7 minute read]

“Shirtsleeves to shirtsleeves in three generations” is the adage that curses dynastic wealth. But it’s not just a saying: according to the Williams Group, 70% of wealthy families lose their wealth by the second generation, and a stunning 90% by the third. A lot of this is due to the arithmetic inevitability of the same pie being split among more descendants, rather than outright irresponsibility. But there are still a lot of important insights for people managing wealth with the very long term in mind.

How do you create something that lasts an incredibly long time? How do you protect yourself and your family’s wealth over generations? As always, you can learn a lot from looking in unusual places.

There are the obvious basics of building a strong, broad foundation. It was 4,000 years before humanity built anything taller than the Great Pyramid in Egypt. We live closer in time to Cleopatra than she did to the builders of the pyramids. In simple financial terms, this is a well-diversified investment portfolio for the increasingly volatile times ahead. Once diversified, it’s all about the miracle of compounding. The key determinants of success are predominantly psychological: it requires a long time horizon and self-discipline. Ninety-seven percent of Warren Buffett’s net worth came after he turned sixty-five.

Source: Getty Images

There are other basic foundational considerations, many of which are often surprisingly neglected. An RBC Wealth Management survey of high-net-worth individuals found only 54% of respondents said they have a will. And while 26% said they have a full wealth transfer plan in place, a remarkable 33% said they had done nothing to prepare. There can also be a significant cost associated with procrastinating- in the form of higher transfer taxes from a larger estate.

Source: Research by RBC Wealth Management and Scorpio Partnership, June to August 2016. The 3,105 participants were independently sourced high-net-worth and ultra-high-net-worth individuals living in Canada, the United Kingdom, and the United States.

The very oldest things are both resilient and adaptable. The Long Now’s study of long-lived institutions uses the elegant example of the shrine at Ise in Japan. It’s in a constant state of renewal. It has been meticulously rebuilt every 20 years for the last two millennia. This is a clever means of gradually easing structural stresses that accumulate over time. Amusingly, of 1,000 companies over 300 years old, 23% are in the alcohol industry, and this doesn’t even include pubs, restaurants, and hotels that may sell alcohol. Stress-relief is critical to endurance.

Source: Getty Images

Families can also be made brittle by accumulating emotional tensions. When talking about wealth with your family, it’s better to have several slightly awkward conversations while you’re alive than one big one when you’re dead. Sadly it’s not just preparing for pleasant reflective questions like “How do you want to be remembered?” but also “Who do you want to take care of your care if you’re incapacitated?” In a survey from U.S. Trust, 64% of respondents admitted they had disclosed little to nothing about their wealth to their children.

A simple way to safeguard against future recklessness is a detailed plan for wealth. It takes the average recipient of an inheritance 19 days until they buy a new car. The need for continuity and education can be preserved by a single advisor working across multiple generations. Appointing a single, impartial trustee is also an effective strategy.

The truly longest lived things show a remarkable capacity for reinvention. The “immortal jellyfish” is unique in the biological world for being able to completely renew itself when under stress. Scientists are still not sure if it ever dies of natural causes. Of the 50 biggest companies operating in 1917, only 3 are still members of the S&P500 in their current form. At a time when the average age of businesses is shrinking rapidly, service companies have proven better at reinventing themselves than commodity companies.

Source: Getty Images

This also means a psychologically difficult diversification away from concentrated sources of wealth generation (like the family business), to diversified sources of wealth preservation. Having personally watched many of my senior colleagues get virtually wiped-out by their concentrated employee ownership in broker-dealers in 2008, what made you rich may not keep you rich. According to Bloomberg Businessweek, the survival rates for American family businesses aren’t great: with roughly 30% surviving into the second generation, 12% into the third generation and 3% into the fourth.

Wise Counsel Research examined the qualities of families that successfully retained wealth over 3-6 generations. They call them “generative families” because of their vitality, creativity, and ability to continually reinvent themselves over generations. Their work found 6 common qualitative features within generative families (all explained in more detail in the extremely comprehensive linked presentation):

  1. Long-term commitment
  2. Extension of family values to business
  3. Disciplined, focused, professional business
  4. Deepening the talent pool: Collaboration with non-family leadership
  5. Professionalization of family leaders
  6. Entrepreneurial attitude encouraged in each new generation

Family enterprises can be surprisingly enduring: of 5,500 companies over 200 years old in 41 countries, 56% of them were in Japan, and most of them are small family businesses. Japan has a strong commitment to generational transition and a focus on sustainability over profits. Similarly, younger generations are increasingly focused on sustainability. Millennials and Gen Z are more likely to donate to charity than any other generation. The pandemic seems to have intensified that commitment. There has been a colossal upswing in interest in responsible investing. This is an area we think is best approached though a long-term thematic sustainable strategy, a topic we will cover in depth in future.

For better or worse, a whole new generation has recently been introduced to the stock market through social media platforms. However it requires experience and guidance to provide the correct education to distinguish speculation from investment. RBC found that the earlier financial literacy education starts in general, the more confident inheritors feel in managing what they receive. Recent research showed 66% of those starting before age 18 as confident in their grasp of financial topics, versus 58% who started between 18 and 35, and only 41% for those who learned later.

The final element of preserving generational wealth is to make your successors themselves resilient and adaptable in their own right. Trust documents are written to distribute funds to beneficiaries to help pay for their health, education, maintenance, and support. But inherited wealth can also support an emerging entrepreneurial spirit. One survey found that 66% of Millennials aspire to start their own businesses, and 61% of them feel they would have more job security by owning their own companies. Trusts can either seed money to start a business, or provide a cushion to enable them to be more ambitious with their goals. As Buffett puts it: “A very rich person should leave his kids enough to do anything, but not enough to do nothing.”

The unifying conclusion on preserving generational wealth is that any long-term plan needs to be resilient enough to withstand unanticipated shocks, but adaptable enough to evolve across generations. This allows it to flow in tandem with a world that’s seeing an accelerating rate of change.

Recommended Reading:

  1. Wise Counsel Research: Resilience of 100 Year Family Enterprises (94 page presentation deck)
  2. The Long Now: The Data of Long-lived Institutions (23 minute read)
  3. BBC: Why are so many old companies in Japan? (12 minute read)

Have a great day!


Tom Morgan
Director of Communications and Content
The Knall/Cohen/Pence Group

Work (317) 571-4525

Cell (917) 656-2742

The Standard & Poor’s 500 Index is a capitalization-weighted index that is generally considered representative of the U.S. large capitalization market.

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