Family Wealth: Part 1 - The Holy Trinity
Everyone knows the statistics: the first generation builds it, the second generation manages it, and the third generation loses it. In fact, according to a study by Times, 70% of family wealth is destroyed by the time of our grandkids. Why is that and is there some evil curse on the rich, one that can transcend time, culture and geography for these statistics to apply to anyone? So, let us examine the situation in more detail and try to understand the core issues every generation has to deal with as part of this family wealth chain.
The First Generation
Most people think of family wealth as the sum of financial assets in bank accounts, real estate, companies, or other forms of investments. But that would hugely undervalue and make a mockery of the talents, perseverance and energy it took to build the wealth in the first place. To keep going where others don’t and to put it all at risk when others won’t, is not for everyone. And that may very well be also the reason why it is so difficult to transfer this skill-set to the next generation. Certainly, there seems to be very little that is normal about the men and women who create something out of nothing.
The Second Generation
Nowhere must the contrast be larger than the transfer of wealth between the first and second generation. Think of the different set of circumstances and imagine the worlds of the two. All the attributes that make it possible to build the wealth, the struggle for survival, doing things that are different versus the oh so well-mannered world of the entitled and rich. It would not be surprising to think the second generation, the ones who went to finishing school and only ever flew first class, would be slightly embarrassed by the harsh world of the first generation. The second generation faces other problems: they need to fit in and prove to everyone that they belong. They also need to get over the fact that, in all likelihood, anything they will ever do will never live up to the accomplishments of their parents.
The Third Generation
By the time the third generation takes over the helms, in 60% of families, the wealth is already spent. Most probably due to behavioural reasons (95% of cases). You can imagine the transition from nouveau riche to old money and, if you thought the first two generations had little in common, the entitled generation is most likely completely dissociated with the family roots and early hardship to survive. The third generation was literally born with a silver spoon and it is tough to imagine there being any motivation to keep fighting and to take risks, when they have had everything handed to them at birth. The very fire that built the family wealth will all but be extinct by the time little prince and princess wake up to their responsibilities, to pass something on to the next generation.
It all seems very natural, like it is preordained. The holy trinity of family wealth, cleanse and repeat, just like every other cycle we see in day and night, in life and death, and also in building and destroying wealth. Looking at the circumstances, psychology and incentives of each generation, it would actually have to take a minor miracle for family wealth to survive more than three generations.
Please look out for Part 2 in this series: The View From The Fourth Generation. Exploring what has worked for a family business now in the fifth generation.