It’s no secret that money can be the root of all evil for wealthy families unaccustomed to its power, sometimes leading younger generations to lives of inertia and wasted opportunities. Worse still are the horrifying stories of substance abuse, suicide and crime within the ranks of the ultra-rich.
But with dedication and planning, wealth can also be a blessing, enabling multiple generations to become fruitful in business, the arts, politics and philanthropy. The key to success is not so much in effective money management — although that is important — but in establishing and maintaining a harmonious and cohesive family.
“Wealth cannot be sustained if individual family members are not productive contributors to the family,” says Lee Hausner, co-author of “The Legacy Family” and senior managing director of First Foundation Advisors.
Hausner cites the Rockefellers as a prominent example of a successful multigenerational family. The enormous financial legacy established more than a hundred years ago by Standard Oil Co. founder John D. Rockefeller has helped fuel achievements of various family members and funded a philanthropic foundation that endures to this day.
Want to know the secrets to keeping the family fortune? Read on for eight best practices of wealthy multigenerational families.
Rich families really are different from everyone else. Managing and preserving the family’s assets is a big job, with potentially many “subsidiaries,” encompassing philanthropy, multiple investments, real estate and so on.
So it makes sense to design the family enterprise around a corporate model that spells out everything — including defined leadership roles and a succession plan; a mission statement outlining goals and values; a set of agreed-upon accountability standards; and a curriculum for educating and training future generations.
“Families have good intentions and strong desires, but they are informal entities,” says Stacy Allred, managing director of the Center for Family Wealth Dynamics and Governance at Merrill Lynch. “Although well-intentioned, their plans are not often well thought out. They need to put more formality around the structure of family.”
Once the concept of a corporate model is introduced to families, it becomes common sense, says Michael Liersch, director of behavioral finance at Merrill Lynch. “The majority of families commit to it, and they work hard to put some structure around preserving the family wealth.”
As in a successful business, a family needs a written mission statement based on its common core values that becomes a guiding set of principles for everything they do. Think of it as a sort of road map to ensure multigenerational financial unity and family harmony.
But after the values are spelled out in the mission statement, it doesn’t just get stored in a desk drawer. “The family has to articulate them and then live by them,” says Hausner.
For example, if hard work is one of the family’s values, each family member needs to understand what that means and demonstrate it. The family as a whole should also support and reward individual success in that area, she adds.
Mission statements don’t have to be carved in stone, according to Liersch, but should set an intentional course of action. They can be revised as the family evolves. They also don’t have to be extensive: Start with a one-page mission statement and add to it as the family grows.
People tend to achieve more when they are passionate about something. But finding a passion can be difficult if family members don’t hold achievements outside of wealth creation in high regard.
Families that understand the value of all contributions from individual members are the most successful, says Hausner. That includes intellectual pursuits or activities geared toward making the world a better place, she adds. “Healthy families look to see how they can help each family member actualize to become the best they can be.”
The way the family demonstrates its commitment to individual passions is by establishing solid paths for success. “Educational or career development becomes important in supporting a passion,” she says.
By giving subsequent generations a leg up — financially and emotionally — the family has a bigger stake in ensuring productive and positive contributions to the family and the community, according to Allred and Liersch, who co-wrote a report on wealth continuity in families.
Support doesn’t have to be exclusively from within the clan. Often, an outside mentor can establish rapport with younger family members and guide them on their chosen path.
Family meetings, where everyone gathers in-person, are the most effective way to communicate for a variety of reasons, including two important ones:
When families make the effort to gather in-person, it signals commitment.
By congregating in a room, families learn to build consensus.
Thayer Willis, wealth counselor and author of “Navigating the Dark Side of Wealth,” believes the practice of effective communication is one of the most important for families to master, and there’s always room for improvement.
When families don’t communicate, the situation can deteriorate quickly for everyone, according to Willis. “All it takes is two family members becoming estranged and not repairing it,” she adds. “Then it spirals downward pretty quickly because family members form alliances.”
Willis advocates planning family meetings around fun events, such as a vacation, because the bonding that occurs makes communication easier and more effective. “While it’s important for them to work together and accomplish things, it’s just as important to play together.”
While supporting family members in pursuing passions that will benefit the family and the community is worthwhile, no family wants to put its efforts — financial and otherwise — toward fanciful dreams or aimless soul-searching.
That’s where accountability comes in. “It starts with being really clear on the purpose of the money — clear on the privileges and responsibilities of being in a wealthy family,” says Allred.
Beyond investments and business enterprises that swell the family fortune, families should communicate the ways in which everyone can contribute to the growth of its human, social and intellectual capital, says Allred.
“The simple solution is to have meaningful conversations about the definition of success,” she adds. “In most families, it’s not financial.”
She has seen families effectively reinforce this practice by beginning the family meeting with each person delivering a story about accomplishments that have contributed to the family’s collective capital — whether financial, human, intellectual or social. Everyone else then recognizes and celebrates the individual achievements, reinforcing the supportive environment.
A family’s wealth won’t last if the younger generations don’t understand the value of a buck. “If kids grow up in a poor family, they understand that money is finite,” says Hausner. “But if they grow up in a rich family and no one ever talks about it, believe it or not, they don’t get the sense that it’s finite.”
Educating younger generations about financial matters is crucial so they develop a sense of what’s involved in the family enterprise and the ability to understand the language during interactions with financial advisers, says Willis.
Allred and Liersch believe the process should start young. If parents have instilled in their children a foundation of saving and spending, then talking about money becomes kind of like a “native tongue.”
Everyone wants to know their family’s unique history, and one of the most effective ways to establish a connection with younger generations is to involve them in preserving it.
Liersch suggests that younger generations collaborate on recording discussions with the family patriarch and matriarch as they recount how they made the family fortune. “They can ask (wealth creators) how and why they created the wealth and what they hoped it would do for the next generation,” he says. “And then they can update it yearly.”
This type of process reinforces the notion that the family is a privileged, collective unit with a shared purpose for the fortune, he adds.
Hausner says it’s also important to drive the family history forward by encouraging new traditions that involve physically getting together to form lasting memories. “In my own family, we started doing cruises seven years ago,” she says. “Last time, there were 52 family members, and because we’ve made this a tradition, we’ve become so connected to each other as a family.”
Philanthropy is one of the most important factors in successful multigenerational families, says Hausner, because as the generations coalesce around a social cause, they are also building internal strength by learning to collaborate on giving the money away.
Allred and Liersch say there’s another benefit: When heirs understand that 80% of the world lives on less than $10 a day, they gain perspective about the value of money. Philanthropy becomes a way to emotionally connect the family to the fortune because they can see the impact of their gifts.
Philanthropy can also be a practice tool for career development within the family, says Hausner. For example, if a family establishes a foundation, she suggests creating a junior board so younger generations can practice leadership and become financially competent. “They have to analyze budgets of those seeking grants,” she says, “as well as follow up with the recipients and learn due diligence.”