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Shirtsleeves to shirtsleeves in three generations

Key considerations for those who are interested in building intergenerational wealth.

“The father buys, the son builds, the grandchild sells, and his son begs” – Scottish proverb

History has proven that family businesses and their wealth preservation can be tricky. Why many family fortunes disappear over less than three generations, is commonly rooted in differences between family members, including:

  • Purpose, values and beliefs;
  • Investment mindset (often change from “growth” to “preservation” objective in later generations);
  • Human and intellectual capital; and
  • Lifestyles (once frugal, often become lavish).

Some families have managed to deal with this intergenerational transition successfully, with astonishing long-term wealth results. Every successful family business has its own fascinating story to tell, but there are some universal truths that we can perhaps learn from and apply to our wealth/retirement planning strategy.

Here are some key considerations for those who are interested in building intergenerational wealth, based on the insights of James E Hughes Junior in Family Wealth.

Embracing the team dynamic

We are deceiving ourselves if we believe that each family member’s finances can be kept independent of each other. Parents’ and grandparents’ financial planning is often derailed when children/siblings fail to launch, get retrenched, divorce or ill. Similarly, parents must frequently support grandparents financially who have not sufficiently provided for their old age. Below are some points on how families can approach shared family business affairs and resources despite their unique/individual differences. 

Practice a positive mission statement

State and share with your family that you will spend more time thinking about your purpose, values and beliefs. Record these, communicate and align them to the wider family who will make up part of your financial succession plan. The pursuit of happiness of each valuable family member within the framework (of a joint family purpose), seems key to the sustainability and progress of family wealth. It is important to consider how individual decisions will cumulatively impact the wider family purpose and individual members within the family.

Inter-generational planning takes practice

Naturally very few business models start with intergenerational thinking.  It is, however, important to try and identify, at an early stage (when a business is expanding rapidly), that it has the potential to transform into a family fortune. Getting this right can equate to enormous benefits for future generations.

When it comes to their financial planning, many investors consider long-term to be eight years or longer. Intergenerational wealth planning requires first generation (short-term), second-generation (medium-term) and third-generation/longer (long-term) thinking. This puts our fixation on short-term results/decisions in perspective and begs the question of whether our time horizon focus with wealth planning is placed correctly? 

Design a framework for decisions

A system of family governance and decision-making must be designed that can deal with disagreement/disputes, even in the absence of the founder. The nature and effectiveness of this family governance system will play a significant role in protecting and passing on your family wealth onto future generations. All decisions should be considered against the family’s purpose and values.

Start early to involve your family members with financial and other family decisions. Any benefits to fellow family members should rest on commercial terms (e.g. only interest-bearing loans are repayable, and market-related remuneration decisions are taken by the well-designed governance system).

The greatest challenge to all business operations is the successful transition of power and decision-making that will ensure the continued growth of wealth for future generations. One approach that can help is identifying a line of successors early enough and letting them “get on with it” (within the succession framework created). If your wealth is going to outlast you, test this framework while you are still around, so you can refine the family governance framework. 

Professional advice

Not everyone contributes the same way to a family structure. Every family member adds something unique and should be seen as contributing equally. Ironically many experts in family wealth preservation feel the future success of family fortunes, greatly rely on the intellectual and human capital development within the family. Independent financial advice gives each family member an equal footing, even if they are financially astute or not.

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