It is a sad, but true fact that the vast majority of family fortunes do not survive past the third generation. In fact, a particular 20-year study of 3,000 wealthy families discovered that 70% of the families had lost their wealth by the second generation, and 90% had lost it by the third generation. This unfortunate phenomenon has been going on so long, in fact, that nearly every world culture has a saying about it. Here in the US, you might hear, “The first generation builds it; the second maintains it; and the third loses it.” Elsewhere, the idea might be stated as “rags to rags in three generations,” or “rice paddy to rice paddy in three generations.” The point is, in order for families to build and maintain the type of financial legacy that can “beat the odds,” they must be proactive, intentional, and perhaps most of all, committed to transmitting solid financial values to the next generation, and the next, and the next.
The beginning of each year is traditionally a time when many of us reflect on what has passed and begin to plan for what lies ahead. It’s also the perfect time for those who are acting as stewards of family wealth to take a fresh look at the family enterprise, to assess how things are going, and to potentially make a few adjustments that can maintain forward momentum into the future. Here are three “resolutions” for multigenerational wealth-building.
1. Maintain a culture of “wealth mindfulness.”
In order for values around wealth to stand the test of time, they must be “taught” as well as “caught.” In other words, families who are building multigenerational wealth are intentional about imparting positive behaviors and attitudes about money and finance in each generation. This should ideally start when children are young and can revolve around simple lessons about the importance of saving, deferred gratification, and sharing with others. As the children mature, they become ready to learn more about the sources, structures, and governance matters surrounding family wealth. At some point, as those in the next generation near the time when they will take the reins, they should be brought into relationship with the professionals in finance, taxation, and investment who are providing counsel and guidance to the family organization, so that they will have the knowledge and contacts needed to become the decision-makers.
2. Cultivate a commitment to philanthropy.
Some families may have an annual tradition of gathering to talk about various causes or organizations that are doing work the family would like to support. This may include presentations from various family members, both younger and older, about the organization and why it deserves consideration. This can lead naturally into discussions about the importance of vetting charitable organizations to ensure that the donated funds will be used wisely; about the family’s values and how they impact decisions around philanthropy; and even about the need for family members to get directly involved with the work of the organization, rather than simply “writing a check.” Family organizations who utilize donor-advised funds (DAFs) to help manage charitable giving may wish to discuss upcoming plans for directing gifts or even potential changes in priorities. The point is, when a family organization engages thoughtfully and purposefully in philanthropic work—and frames that engagement as a responsibility that is passed from generation to generation—it can increase the likelihood that the family will be successful in maintaining multigenerational commitments.
3. Evaluate the need for professional assistance.
While it is true that most family fortunes are initially achieved by a basic commitment to hard work and perseverance, it is also the case that over time, factors such as investment policy, tax considerations, and good estate planning may become more and more important. At a certain point, most multigenerational family organizations will have acquired the professional assistance required. But it shouldn’t stop there; professional relationships should receive ongoing evaluation and maintenance. As laws around taxation and inheritance change, adjustments need to be made to the organization’s policies and, perhaps, even its governance structures. Periodic review and assessment by the organization’s leadership and consultation with professional experts are important to ensure ongoing efficiency, compliance, and relevance.
As a fiduciary wealth manager and advisor, Mathis Wealth Management is dedicated to helping clients make their financial goals a reality. Whether that involves guidance around investment policy, referrals for estate planning services, financial counseling for future family leaders, or any other aspect of sound financial management, our commitment is to provide guidance that always places the client’s interests foremost. To learn more about how we provide up-to-date information on important financial topics, visit our website to read our recent blog articles.
