Preparing Your Rising Generation to Sustain Family Wealth
After a family business has been successful and the family has accumulated wealth, what happens next? The answer has less to do with the business climate and more to do with the preparation and commitment of the young family members who must take their places as leaders and overseers of the family’s wealth. Will they be a creative force, adding to the family’s wealth and legacy, or will they be the generation that uses up the resources? This article describes how successful multi-generational family enterprises prepare heirs for family leadership. It draws from the ongoing 100 Year Family Enterprise Research Project, which includes interviews with leaders from more than 70 wealthy families worldwide.1
This article focuses on how to help families of substantial wealth sustain wealth transfers beyond the third generation. It explores and elaborates on the key elements that have allowed some families’ wealth to last for generations. We call these generative families, meaning that they have prospered economically and have developed a sense of family connection that has contributed to leadership and success across generations.
The Rising Generation and Sustaining Wealth
Raising children to become productive members of society is a challenge faced by every family, but a wealthy family faces additional complexity. The saying “to whom much is given, much is expected” starts to capture the challenge. Parents don’t believe they created wealth so their children can spend it as fast as possible or be unproductive.
Sustaining wealth is one of the greatest challenges for legacy-driven generative families. Families of wealth need to educate and prepare their children and grandchildren for the responsibilities of growing and protecting wealth and assets, and for using the freedom and opportunities they have been given to make positive contributions to the world. Such education takes more than good intentions or a trust fund that restricts spending.
One of our key findings is that a generative family is anchored in two major achievements. First, the family has developed a successful business or set of family enterprises that spans generations and creates substantial family wealth. Second, after the family has generated this wealth, it commits resources, time, and energy to building a family that adapts over generations and has a strong sense of shared identity. The latter achievement is the focus of this article.
Money, or financial capital, looms large in the life choices of a younger-generation family member. As a family spans generations, the extended family defines the pursuit of capital more broadly than just in financial terms. This serves to unify and motivate the family to stay together, because money alone is not enough. For generative families, sustaining wealth requires the development of the following additional types of family capital:
Human capital: Knowledge, skill, and personal dedication of each family member.
Relationship capital: Connection, organization, and mutual support of family members.
Social capital: Contributions to the family’s community and environment.
Spiritual capital: Commitment to a deeper purpose and a legacy of shared family values.
Expanding these types of family capital demands more than individual households in the family teaching their children. The many households that comprise the generative family need to work together—as a “tribe”—to create educational, service, and personal-development activities that will enable members of the rising generation to work together and develop skills specific to upholding and promoting the future of the generative family.
Families rise and fall, and a connected multi-generational family is rare. But generative families succeed because they develop an extended tribal community where the rising generation contributes ideas and creates capital of all types.
Thinking through Generational Differences
Consider the cultural differences among those who create wealth and those who are born with it. Many of the wealth creators we interviewed came from modest circumstances and are “immigrants” to the experience and use of wealth. They remember what they had to do to achieve their wealth. Their children and grandchildren, however, are “natives” to wealth. It has always been part of their lives and they are aware that they did not create it, which may create anxiety about what they would do if it were not there.
For a wealthy family with a rising third generation, it’s important to develop and affirm the values and purpose of the family’s wealth. The family must answer the question “What is our wealth for?” in a way that engages the rising generation. Children growing up in a wealthy family cannot be expected to understand the limits, value, and purpose of wealth. The family must help them, by explaining its values, to appreciate the opportunities created by wealth and understand the responsibilities that come with it.
In most families, adult children are expected to go off and seek their fortunes. In a legacy family, the fortune and its benefits are already there, posing a challenge and an opportunity. Each young family member should be encouraged and expected to spend some time outside the family before committing to joining the family business. The rising generation must develop credibility and demonstrate capacity independently.
The generative family is engaged in next-generation development in the following two areas:
- as a household, helping young family members develop values about money and wealth; and
- as an extended family, working across family branches to develop skills and commitment to the family enterprise.
We will look in turn at each of these pathways to personal development.
How Parents Create Stewardship
An environment filled with the trappings of wealth can reinforce a sense that children born into it are special in undefined ways, affecting children’s expectations about their futures. Sometimes this specialness becomes a sense of entitlement. The goal of the wealthy household is to actively teach the purpose of wealth in order to help children move from entitlement to stewardship—the responsibility to sustain and add to wealth.
But where to begin? Parents teach about responsibility through verbal and non-verbal communication and by example. They must be active and engaged to help their children develop solid values and a clear commitment to the notion of family stewardship. Generative families do not expect this to happen automatically; they actively seek opportunities for learning and communication.
The first step in fostering stewardship is finding a way to communicate about wealth. Consider this account from a South American family leader about the connection between communication and values:
I raised my children to be leaders, and to live by the family values. We started working with the children, and therefore you begin at the beginning. Every single night we’d have a little chat. Communication didn’t start when they started in the business. It started when they were age four or five, at the breakfast table or at the basketball court. We try to have dinner together every night. Every Sunday we would go to church. We would be together. I think that strengthened family values. My wife is great. She’s the chief emotional officer. When you give people enough love and you respect them, they become secure.
Values also are transmitted through example. A family’s work ethic and values often are passed down informally. When children are exposed to the business, they tend to absorb certain expectations before the expectations are explicitly laid out. Consider a Middle Eastern family leader remembering his introduction to the business:
I was just invited to meetings since I was five or six. If there was something happening—a meeting happening on the weekend or I was on holiday—I would just get dragged along to the meeting. There were always guests at home who were business guests, and partners. So we spent a lot of time with them. You couldn’t help but hear although you didn’t always understand it until later on.
A value is about a feeling, but it is also about having a clear idea of what the value actually means and the capability and commitment to do something about it. For example, generative families usually expect and require family members to work, but their definition of work is also usually flexible. One surveyed family considers jobs such as being a volunteer coordinator for a family charity as a form of employment that should be salaried. Another family developed what it calls the “Passion Project,” where each young family member is invited to develop a business—funded by the family—to demonstrate persistence and commitment.
Continue reading this article now.
Dennis T. Jaffe, PhD, is a San Francisco-based advisor to wealthy families. He is the author of Cross Cultures: How Global Families Negotiate Change Across Generations, Stewardship in your Family Enterprise: Developing Responsible Family Leadership Across Generations, and Working With the Ones You Love. He earned a BA in philosophy, an MA in management, and a PhD in sociology, all from Yale University. Contact him at [email protected].
Endnote
1 The 100 Year Family Enterprise Research Project is conducted by Wise Counsel Research. This article was supported by the generous contribution of Merrill Lynch. It is based on “Releasing the Potential of the Rising Generation,” a working paper available from Amazon in print and electronic formats. https://www.amazon.com/Releasing-Potential-Rising-Generation-Long-Lasting-ebook/dp/B01B8S0160.
© Investment Management Consultant Association (IMCA)
