Introduction
The old saying goes: “from shirtsleeve to shirtsleeves within three generations.” According to the Oxford Reference website, it is a “Proverbial saying, early 20th century; meaning that wealth gained in one generation will be lost by the third. The saying is often attributed to the Scottish-born American industrialist and philanthropist Andrew Carnegie (1835–1919) but is not found in his writings.”
How can wealthy families stop the cycle?
Research into this topic (Collier (2004) and Hughes (2004)) shows us that successful families who have broken the vicious cycle apply a different measure of wealth.
“Wealth” for those families is more than just financial wealth.
Families that have been successful in planning for and succeeding with intergenerational wealth see beyond the horizons of finance to other types of wealth. These further measures of wealth may be less countable but are still more important to succeed than financial wealth.
The literature shows different definitions of family capital. The most common types of family capital mentioned are financial capital, human capital, social capital, and cultural capital. However, I find these terms too cold, and too abstract. How can we come to not only understand the family wealth concepts outlined by Collier and Hughes but integrate them into our own and our family members’ lives? The key lies in making them easier to approach; you can translate these four types of wealth into easily understood concepts that anyone can apply to their daily lives, and this article is going to tell you how.
What personally inspired me to create this system? It all started when I was working as an international tax advisor at a major accounting firm. I always got this empty feeling after a meeting discussing highly complex tax issues with clients. I felt there was more to be discussed, and more to be worked on. The technical issue was solved, but the big picture, the real issue hadn’t been touched. I had a meeting with an unpleasant client who was making all sorts of donations, but he was just doing it for beneficial tax treatment. He didn’t care where the donations went to. That’s not the way to do it.
The other shoe dropped when a client told me something which has stuck with me: he said his children are like the five fingers of his hand– he needs all of them to be able to hold something. When I heard that, the wheels just started turning. That inspired me to create a system that would help people like him pass on not just their wealth, but their knowledge and wisdom to their children.
First, let’s just take a look at the four types of capital:
Family Capital
Financial Capital
Financial capital describes the financial wealth of a family. That means the families’ possessions, physical and paper assets, properties, and cash.
Human Capital
Human capital describes the members of the family.
The members of the family can have high or low self-esteem, they can be physically healthy, they can be emotionally resilient or not, and they can have achieved a high level of education or not.
A family with a high level of human capital is more likely to succeed than another family because each one of the family members is performing in their role as best as they can (i.e. “the best possible version of themselves”).
You can see human capital at play again with another saying about losing family wealth quoted in this article from Forbes Magazine: “Among wealth advisors, there is a saying: the first generation makes it, the second generation spends it, and the third generation blows it.”
This is a pattern we see very often, where the first generation of wealth builders are a set of extraordinarily driven and successful people.
This is sometimes despite, or perhaps even because of, having only achieved a very rudimentary education.
The second generation then inherits the wealth and tries to keep the wealth together. Some feel guilty about spending the wealth, because their parents worked so hard to build it up, that a lot of other things had to be put aside. Every penny their parent spent so much time and energy in making is irretrievably lost forever, once spent.
Finally, with the third generation, the pattern of entitlement is often seen. This generation can tend towards not reaching their educational potential– or other behaviors like substance abuse, behavioral addiction, et cetera.
Social Capital
Social capital describes all the connections a family has. There is some truth to the fact that the better connected you are, the more likely you are to be economically successful.
A way a family can increase social reach is through philanthropy. Philanthropy is an interesting topic in and of itself, as it not only increases the social reach or social standing of the family, but it can also be the basis for intergenerational legacy building; it can be the “glue” that binds the family together.
Cultural Capital
Cultural capital describes one of the most intangible forms of capital.
Cultural capital describes the values, mindsets, and ethos of a family that is carried forward from generation to generation.
It is to me a personal joy every time I can hear the stories of the families’ wealth being passed on to the next generation.
Sometimes the stories are sad, sometimes they show the sheer luck a person has had in the past. Most of them show the grit and determination of family members several generations ago that built the basis for the current generation’s wealth.
Interestingly, it is not always the first moneyed generation that built the wealth that can now be enjoyed. In many cases, I find that their parents played the pivotal role and that this “true” first generation planted the seed that then propelled the family into financial success. From this example, we see the importance of family values and the passing on of these values from one generation to the next.
A successful intergenerational wealth transfer
We should recognize that an intergenerational wealth transfer cannot be achieved without strong family values that tie back to all four forms of family capital.
But how do you increase your family capital?
From a practical perspective, these four forms of family capital cover what needs to be done within a family to start the process to create a successful intergenerational wealth transfer.
But, for practical purposes, we here at The Cecily Group have developed a slightly different approach:
- in all four forms of family capital you need to have a certain level of wealth;
- you need to focus on the right thing, do it well, and be mindful of your time;
- you need to work with the right people and foster healthy family relationships, and finally;
- behind everything you do, there needs to be a larger purpose that glues the family together.
These four things can then be brought together into a set of family values that endure over generations.
But family values are not static: They need to be flexible enough to change and flow with the times, to remain relevant for future generations.
Also, the history of the family (cultural capital) needs to guide future values decisions. The perpetuation of family values, bridging the gap between generations, ensures that that which makes the family strong remains in the family.
The Four Abundances
Our approach here at The Cecily Group is to focus on what we call the four abundances. By bringing the abstract notions of “family capital” into a tangible framework– consisting of a defined process with easily achievable steps– we help families define their goals and find themselves.
The four abundances are comprised of:
- the abundance of wealth;
- the abundance of time;
- the abundance of relationships;
- and the abundance of purpose.
Let’s take a look at each one in turn.
Four Abundances
Abundance of Wealth
The abundance of wealth equates to the financial capital of the family. Since this is already a concrete notion, there is no need to “translate” this one.
Abundance of Time
How can our clients gain more time? They can gain more time by focusing on what they do best. By bringing them to a mindset where they say, I do this best, I have delegated all these other tasks to family members or external partners. That frees up a lot of time for them to focus on their next project, or to enjoy their abundance.
This means making sure that you and your family members each work in your area of unique ability. The unique ability of a person is highly individual. The trick of a successful family is to identify the unique abilities of each family member and utilize and leverage these unique abilities in the context of what the family is trying to achieve.
Abundance of Relationships
The abundance of relationships is similar to the social capital of the family.
However, the abundance of relationships also focuses on maintaining good relationships within the family and having the right set of advisers and employees at hand to enable the family to pursue their purpose (all four forms of family capital).
This is again where the unique ability of each adviser comes into play as well: In most cases, not every unique ability needed for a project is to be found within the family. The successful family then has the mindset of focusing on what they do best and delegating the remaining tasks to capable people who work within their areas of unique ability.
Abundance of Purpose
Finally, we have the abundance of purpose, which describes a family defining its purpose. This doesn’t necessarily mean that a family has only one single purpose. Many successful families have a multitude of purposes.
The purposes should be aligned with the different family members’ unique abilities and the unique abilities of their advisors. If there is a mismatch, then issues may show up later on that could have easily been prevented from the outset. Success can be assured by correctly assessing and being sensitive to each family member’s unique ability.
The mindset is to take advantage of the family members’ unique abilities in the best possible way to increase the reach of the family. This is where social capital is covered: through the abundance of purpose, but also the abundance of relationships. If you have family members who work within their unique ability they will be more successful and happier within the family, and they will contribute something to the family’s purpose.
What does an abundance of purpose look like?
Some famous billionaires have found a bond through their abundance of purpose: Bill Gates and Warren Buffett are both really big on philanthropy. Bill Gates now focuses on charitable work rather than software, and he is flourishing in this task. Retirement wouldn’t have been beneficial— as a hard worker, he needed another purpose once his wealth was established. You can see how the public perception of him has gone from deeply negative in the ’80s-’90s to quite positive these days through this process. Warren Buffett and Bill Gates are big-time buddies and have been friends for many years; here’s a video of Gates making Buffett a birthday cake! Warren Buffett started an initiative to ask wealthy people to donate most of their wealth. They’ve had a friendship for many decades which all started with this abundance of mutual purpose.
On a personal level, regarding the abundance of purpose, I have been extraordinarily lucky to have had two outstanding grandfathers who were very values-based. One was the CEO of McGregor Europe (a clothing company). He always did that in very values- and purpose-based style. No matter if you were a cleaning lady, he always valued each person’s contribution. He was very egalitarian. I remember once when I was a young man, in the summer I worked for him for a week to earn some money. I worked in one of their cargo logistics center, basically having to shift around boxes full of clothes. Some women packed the clothes into these boxes. I remember when I went down to these ladies and they were like, “you have such a cool grandfather, he’s such a nice man and so fair.”
My other grandfather was also very values-based, but he chose early retirement and thoroughly enjoyed traveling the world, enjoying the abundance of time at the end of his life.
Family Values
How families can create Family Values
Successful families need to take stock, see the status quo and make a commitment to improving their four abundances. We have developed a holistic assessment that gives families a tool to get a bird’s-eye view of where they are in these terms. We have also created Family Council cards, which allow a family to discover their four abundances together, as well as to define their family values and family purpose.
The Holistic Assessment
To achieve a successful integration of the four abundances in your wealth planning, we use a colorful matrix—a holistic assessment. This is the first stop on the way to beginning to understand the steps that must be taken to assure a smooth intergenerational wealth transfer. It shows you where you are and where you could go. The Cecily Group guides its clients through the assessment, assisting clients with their individual needs. Using our experience of the pathways family wealth typically follow, we can guide you to a realistic and doable set of steps that will assure your family’s wealth for the next generation. The idea would be to start one row at a time, in no particular order, focus on these questions and work towards improving the measures of success. We can help clients understand what is realistic and what they should focus on. In some cases, we can help directly, for example by showing them which measures can be taken towards improvement, even for the most difficult of problems. Some steps can be as simple as introducing a reporting tool to compare the performance of their asset managers. We can then help them define what their family values are, using the Family Council cards. All family members are then introduced to the concepts and through communication, learn more about their families’ wealth and how to maintain and grow it.
The Family Council
There are many families where the principal dies without a plan, and all these assets pop up, which is a positive thing on the one side, but it could have been managed so much better and with intention– by having all of the family members involved early on and having a common purpose. That’s exactly what the Family Council is all about.
Imagine you suddenly inherit a house in the south of France: it can be very stressful especially if you didn’t know about it, the joy of having a property in France will be overshadowed by the tax and legal complications which have to be dealt with very quickly. The family members are completely dependent in these cases on whoever is advising the principal upon his or her death. The point of the family council is to counteract this sort of situation: 1) to have a level playing field for all family members and 2) to find out about and pool the unique abilities of all the family members. 3) to define the family values which create a basis for strategic work on improving your four abundances. It’s just a different way of looking at family capital values. You can’t work on them unless you work through the four abundances. These abundances are a way for family members to understand the route to increasing family abundance in a more holistic sense. I understand the four types of family capital, but how do I improve my cultural capital? It’s much easier to understand and work on them if you work through the four abundances than through these abstract ideas of capital. In the end, you’re working on the four capitals by way of the four abundances. This distinctive approach to wealth will set you apart and give you an edge others don’t have. That’s why we have the holistic assessment and the family council cards, as a tool to get you there in a doable, concrete way. We have a defined process that takes you through step-by-step, and the experience and know-how to guide you through.
Conclusion
I am a firm believer in helping families discover their family values which provide the family with both a base and a shelter from the turbulences that always occur when wealth passes on from one generation to the next. It is advisable to start the discovery of your family values as soon as possible. No children are too young or too inexperienced to have their say and to be part of that journey.
Contact The Cecily Group – Passing on your abundance to the next generation.
