More than 90% of wealthy families will fail to transition their wealth past the third generation. This fundamental truth seems to transcend both time and cultural boundaries. The Chinese proverb “rags to rags in three generations” says that family wealth does not last for three generations. The first generation makes the money, the second spends and the third sees none of the wealth!
In typically poetic fashion, ‘wealth arrives like a tortoise, but runs away like a gazelle’. Tortoises travel at less than 1 km/h whilst gazelles can reach as high as 80km/h and, unlike the English fable of the tortoise and the hare, this is not a lesson in perseverance. The message is clear: what takes a long time to create can be lost very quickly, and often is.
Yet for those of us involved in multi-generational asset structuring and planning, it is essential that we help our clients be the statistical outliers, the anomalies, and the exceptions to this apparently timeless rule. Bucking the trend is not easy…. but it is absolutely possible.
The key, as usual, is to understand the cause behind the effect. Ultimately, this is a human story and therefore it is the subtle influences on each individual involved that need to be considered when searching for a cause. It is tempting therefore to simply put it down to the fact that the ‘next’ generation grows up with different external determining factors to the generation(s) that created the wealth. This is highly likely in many families irrespective of wealth and entirely unavoidable, in truth, and means it is entirely likely that they will have different skills and attitudes towards wealth.
Whilst true, and important, simply saying future generations do not have the same skills as their wealth-generating forebears is ignoring another essential element of the equation – that the contributing factors and skills that go into wealth creation are not necessarily the same as the factors and skills required for wealth preservation. Thus, many successful families may simply try to emulate their own education and circumstances when preparing the next generation, assuming the same input will get the same output, and miss this essential fact that there are entirely new skills they need to be developing in their successors.
Another common problem is to focus solely on educating the direct inheritors of the wealth whilst neglecting the very real need to develop an effective team around them. It is not just the creators of wealth who must ultimately grow old and pass on, after all, but also the network of advisors and support staff that helped them. Succession planning must exist within support teams as well as within families, and yet again the human resources required within the current generation’s support team may not be the same as those needed in future generations.
There are two key areas of focus to sustain and transition wealth; the right kind of education and the right kind of family governance, both of which must be forwards looking rather than backwards looking.
This is where a family office comes into play. Family offices come in all different shapes and sizes ranging from an organisation purely focused on structuring a diverse portfolio of assets tax efficiently both for now and the future, through to an integrated business and personal affairs management vehicle including services such as concierge, PA duties, legacy planning, and family ‘board meetings’. Some are ‘single family offices’ that just look after one family, and others, like Boston, are ‘multi-family offices’ which look after several and share expertise and infrastructure.
What good family offices have in common, however, is that they provide this forward-looking planning that makes the difference in terms of the right governance and education. Consolidation of family affairs, paired with the right human resources, provides better governance – one set of advisors can share the family vision, get to truly understand their needs and aspirations, and plan appropriately for the future. Whilst doing so, this network will also proactively involve successors in the planning process, ideally from an early age, helping them develop the skills needed for wealth preservation as well as creation.
At Boston, our heritage as a single-family office has enabled us to understand this in great detail, thereby enabling us to provide multi-family office services to an excellent standard to our private clients. In addition to the structuring, planning, execution, and governance services we provide, we aim to contribute to that elusive education piece of the jigsaw too and help our clients become outliers to the statistics.