I have the great privilege to work with families who wish to sustain their wealth to benefit multiple generations.  This can be quite a challenge.  Families that have worked extremely hard to build wealth find it just as difficult to preserve wealth over time.  The concern is that a wealthy family could go from shirtsleeves to shirtsleeves in three generations.  The first generation creates the wealth.  The second generation consumes the wealth and the third generation is starting all over again.  

While there are many strategies that can be put in place to preserve multi-generational wealth, here is what I’ve learned from serving affluent families over the years.  There are two critical factors that will have a greater influence on this goal than anything else: recognizing tipping points and viewing family wealth as an enterprise. 

The surprising thing is that neither of these are strategies, per se.  They are both about mindset, about taking a certain perspective.  Here are some of my best ideas about how to preserve family wealth.   

 

Recognizing Tipping Points

A tipping point occurs when the strategies that led to success in the past are no longer effective.  Tipping points require a new mindset and strategic vision for how to achieve your goals in the future.  

When it comes to preserving multi-generational wealth, one of the most important things you can do is recognize a tipping point.  Let me explain what I mean.  Here are key tipping points for multi-generational families:

  • A first-generation wealth creator has accrued a significant amount of wealth outside of the business.  The wealth creator is not only responsible for running a business, but now also overseeing significant personal wealth. This dual responsibility has become a burden.
  • There is a transition in leadership between the first and second generation within the family, the family business or both.
  • A successful family business is about to be sold, netting out more liquid wealth than the family has ever had to manage.
  • The structure of the family wealth has become so complex and so ungainly that family leaders no longer have a purview of their entire holdings and feel out of control.

These are the critical tipping points when families with multi-generational wealth should recognize that the strategies they’ve used in the past to manage their family wealth may not work as well in the future.  The risk to these families is that if they keep doing things the way they’ve always done them, their wealth could dissipate significantly, despite their best efforts and intentions. 

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"I enjoy serving multi-generational families because I value trust and discretion. They often have very complex financial lives and multi-generational stakeholders who see things in different ways. I find satisfaction in leading a team of advisors in a united effort to serve these families exceptionally well."

Recognizing The Family Enterprise

After working with numerous families who have come to these tipping points, I’ve come to see the importance of a mindset change.  I recommend that family members facing these situations view their wealth as their new family enterprise.  This can seem like a strange concept at first, maybe a bit too formal, but I believe this is very important.  Let me explain.

Many multi-generational families realize wealth from a business, often a family business.  To their way of thinking, the family enterprise is the family business, not their wealth.  This is where the shift in mindset needs to take place and here’s why. 

Many multi-generational families have so much complexity in their wealth that they need to treat it like a business if they are to preserve their wealth long-term.  For instance, when it comes to running the family business, most families recognize the importance of:

  • Having a core mission that the business is organized around and managed to achieve.
  • Having strategic leaders in key positions, such as a CEO, CFO, COO or other roles.
  • Mentoring young people so they mature in their roles and become future leaders.
  • Reporting accurate information so stakeholders can make informed decisions.
  • Having a long-term strategy with milestones and regular meetings with stakeholders.
  • Making course corrections when market changes require them.

Family members would not think these situations are too formal or restrictive to running a great business.  In fact, they are essential to running a great business.  But when it comes to managing family wealth, which often has the same level of complexity as a traditional enterprise, these formal structures are often missing.   

So here is a guiding principle that I believe can really help a family with the goal of preserving mulita-generational wealth.  If you come to one of the tipping points I described above, it is best to think of your family wealth as an enterprise and put a plan in place to manage the wealth much the way you would manage a successful business.  This greatly increases the likelihood of achieving the goal.

 

Two Options For Managing Family Enterprises

But this raises some important questions.  Once you decide that you need a family enterprise, how do you create one?  What are your options?  What is most effective and affordable?  What landmines should you avoid? 

In my experience, leaders of multi-generational families usually have two options for building a family enterprise to manage their wealth:

  • They can try to do this on their own.
  • They can bring in a team of experts to help them manage the family enterprise.

There are pros and cons to both approaches.  Depending on your goals and the level of complexity in your family enterprise, you can try to do this on your own.  However, this approach can become challenging for families as it requires a significant commitment of time, energy and financial resources.  Here are some considerations in trying to build and operate a family enterprise on your own: 

  • Can you commit the necessary time to building the family enterprise while managing the family business?
  • Do you have the desire and energy to manage the enterprise?  Beyond the time commitment, managing family relationships and personal family wealth can be quite taxing from an emotional perspective.
  • Are you willing to commit the financial resources to build a family enterprise?  The financial commitment can be very significant to hire and retain talented resources, build a technology infrastructure to support the enterprise, rent office space, etc.
  • Who will lead the charge and serve as CEO of the family enterprise?

There are also many advantages to having an objective third-party come to the table.  Someone with experience in creating a family enterprise can provide a lot of benefits.  I have come to think of this role as the family enterprise partner.  A Family enterprise partner can serve as an extension of your family in building and operating a family enterprise.  The benefits of working with a family enterprise partner can include:

  • Experience in knowing how to structure the family enterprise expeditiously.
  • Time savings for family members by the partner working with a wide range of advisors.
  • Expertise in documenting the structure of family wealth, which can be very laborious.
  • The ability to bring in the right experts at the right time: attorneys, accountants, insurance specialists and other advisors as needed. 
  • Objectivity when it comes to managing family relationships and sometimes conflicting interests.
  • A sounding board and trusted ear when conflicts occur.
  • A strategic advisor on important, wide-ranging family issues.

 

Criteria For A Family Enterprise Partner

A family enterprise partner can be a game-changer when it comes to managing and preserving multi-generational wealth.  But what should you look for in such a partner?  I recommend these seven criteria:

  1. Someone who will put the time and energy into understanding your family: values, goals, generations, conflicts, dreams.  Confidentiality is key.  Trust is key.  You are looking for someone with a demonstrated history of helping lead a multi-generational family.  You are looking for someone to be your most trusted long-term partner.
  2. Someone who can help unify your family members and stakeholders around a common vision for what you want your wealth to do for the family.  
  3. Someone who can help you draft a family mission statement and a strategic plan to make that mission come true.
  4. Someone who will take a disciplined and comprehensive approach to document the structure of family wealth today.
  5. Someone who can lead and unify the complete range of trusted advisors that serve your family today across all generations and interests: accounts, estate plans, corporations.
  6. Someone who can provide accurate, timely and relevant reports that indicate whether or not your family enterprise is moving toward or away from the mission. 
  7. Someone who will take a long-term perspective and commit to being your partner as you face new challenges, decisions and tipping points. 

 

A Resource To Help

If you would like more information about what a successful family enterprise partner does and how this can benefit your family, I’d like to recommend a resource.  I’ve recorded a short on-demand webinar with my colleague, Lisa Olson.  The webinar is called How To Preserve Multi-Generational Wealth: Five Key Strategies To Build A Sustainable Family Enterprise

The webinar goes into much greater detail about the process of building a sustainable family enterprise and how it will benefit your family.

 

The information contained in this article is provided for informational purposes only. No illustration or content in it should be construed as a substitute for informed professional tax, legal, and or/financial advice.