First-generation entrepreneurs work so hard to amass wealth, surpassing all challenges and risks in order to generate a fortune that their children and the next generations will enjoy. But as the Chinese proverb would say, “wealth never survives three generations,” these people often worry that their hard work will go to waste after their death.
It is quoted that in 70% of cases, wealth will be destroyed by a second-generation and, 90% of the family wealth will be destroyed by the third-generation. Why is there a natural tendency for families to lose their wealth over generations?
The primary culprits tend to be:
absence of planning
dissolution of funds into more pockets
investments and fees
but the biggest foe is - family disputes.
Family wealth can be destroyed by misunderstandings and legal battles, and also tragically, many loving relationships are also lost.
Aside from the above, other reasons attributed to the bankruptcy and loss of generational family wealth include:
Lack of an optimal strategy for allocation of capital for growing the overall family wealth and missing an objective plan for the core business based on the industrial life cycle and competitive landscape;
Families lose the capacity to make sound business decisions to grow their wealth in future generations. This may be an aftereffect of owners becoming more distant from the management of their wealth;
An increase in the lifestyle expectations of family members resulting in increment of expenditure, which causes a decline in the degree of capital that can be utilised to generate more wealth over the long haul; The exponential growth of family members, faster than the growth of wealth over generations leads to the decline of per capita wealth.
Because of the tough grind involved, first-gen business people tend to be very overprotective of what they’ve accomplished and get emotionally attached to the business. Founders perceive their original business like another child, making it difficult for them objectively evaluate it. Oftentimes, it is the disbelief over the success and the load of tasks to be done that overwhelm these people, affecting their ability to make sound investment decisions that will help scale their business.
They usually are caught up between these three choices:
Injecting additional capital back into the business to keep growing;
Deploying a portion of the capital in other operating businesses with great development potential and in which the business family has expertise; or
Creating a diversified financial portfolio to preserve wealth.
What is significant here is to shift the attitude of the family from focusing on the accomplishments of the business as the measure of the family's prosperity to focus in on the growth and risks inherent in the family's overall asset portfolio.
The attention should turn into how the family will grow its overall wealth over time to address the family’s needs from generation to generation, instead of how the family grows the company over time. The family needs to transcend the company view to foster strategies for the family's wealth with the original company as part but not the whole strategy.
Nonetheless, to create this change in attitude, the founder needs to create some distance with the original business, reduce emotional attachment to it, and along these lines acquire objectivity and ensure that the interests of the next generation and whether they are equipped to drive this type of business are taken into consideration.
To keep family finances alive, the business family needs to grow family assets at a rate greater than; growth of the family, its business or different activities burn-through them. Family assets are consumed in different ways:
Core business activities/investments that lose money
New investments with some bets pay off but not others
Splits in ownership among family owners including divorces leading to a reduction in investable assets
Family activities and costs that do not create financial returns
To sustain and continue growing their wealth, business families need to bet large on one or a couple of risky investments to grow their wealth in every generation.
How to Be Prepared (Family Wealth Planning)
Any generations uncertain about their economic future often rely on family wealth to sustain their lifestyle. Through the establishment of structures such as foundations or trusts, high net worth families build generational family wealth.
These also help in transitioning a family’s wealth or shares to the next generation. Family wealth planning adequately guarantees that your family gets equipped to safeguard and grow their inherited wealth while overseeing significant family expenses.
Family wealth planning is the accumulation, management, and preservation of long-term financial wealth in the present and for the future of your family. Effective family wealth planning aims to align your financial goals with your family’s wellbeing. Your individual and family’s collective value impacts how you set and plan for long-term goals.
By engaging in open dialogue and communicating together can help in making these decisions. It can also help all of you comprehend the role and meaningfulness of wealth for a sustainable legacy. Contacting a specialist for guidance can assist you with carrying out an effective arrangement for yourself and your loved ones.
When Do You Need Family Wealth Planning?
Regardless of your level of income, it is important to have a family wealth planning strategy in place. A growing estate can become quite challenging to manage on your own if you intend to continue accumulating wealth.
Consultations and input from families about financial aspirations can help establish the foundation for family wealth planning. Nonetheless, an external advisor is eventually needed to ensure that it is followed through with.
Constantly growing assets of high net worth and ultra-high net worth families makes it even more complex for them to manage their wealth. In this respect, a Wealth Manager or Financial Advisor is vital to make it easier for you and your family to communicate and collaborate to manage your assets and resources.
Family wealth planning ensures your hard-earned money and assets are not squandered at the hands of your inheritors. Therefore, it also takes into consideration the significance of instilling values in your heirs to safeguard your achievements, guiding them on financial responsibility and stewardship.
Family wealth planners can help develop and instill a common sense of family purpose, a strong motivating force for you and your descendants to utilise your wealth in a manner that creates opportunities and supports their community. They can develop custom investment strategies to assist in maintaining your wealth for the future.
Your Family Wealth Pathway at Absolute Wealth
We, the Absolute Wealth Advisers, prepare your family to be responsible custodians of wealth and utilise it to maximise their potential. We are one of the only wealth management firms in Australia to develop a far-reaching, dedicated process that assists our clients in successfully safeguarding, creating and transferring wealth across generations.
assist in relieving the burden of your wealth by avoiding mistakes and losing money
help you use your money to inspire and propel your children without hindrance
help educate and prepare your children for the day when your wealth becomes their obligation
implement effective financial strategies to maximise returns across generations
create and communicate clear guidelines around money and avoid family disputes
treat your wealth as a dynamic, ongoing concern so that it continues to serve the ever-changing needs of your family.
This will enable you to:
feel confident that you have a team of trusted advisers helping you manage your wealth
be clear on what is important to you and your family and how to use your money to support family members
have a process for making decisions to avoid mistakes and family disputes
feel informed and confident about the future of your family and its wealth.
Our journey will not only encompass; investments, estate planning, taxes and governance structures but also, next-generation education, philanthropy and record storage.
We will handle:
day-to-day administration, liaising closely with your broader advisory team (typically your accountant and lawyer)
facilitate regular meetings
set and implement financial strategies
measure and communicate results.
We will be on call to assist with all of the financial opportunities and obstacles that might arise for your family along the way.
We care about your family harmony and its financial wellbeing and by design work with a limited number of families for the long term. We consider The Family Wealth Pathway as a true partnership and expect to work very closely with you and our family for years if not decades.
@Paul Barrett of Absolute Wealth Advisers is one of Australia's most experienced Private Wealth Managers. He is a financial expert in high net wealth divorce, estate management and inheritance. Contact him here