How to build generational wealth

I had an interesting chat with some colleagues a while ago on the subject of generational wealth. Someone intimated that their money was theirs to eat. Their only responsibility to their children was a good education. They argued that leaving too much wealth to their children would spoil them and make them lazy. He went on to cite several examples of seemingly rich kids who were doing drugs and were completely useless to society. The majority of people seemed to agree with this point of view.

My argument, however, suggested that just because we grew up in poverty doesn’t mean we shouldn’t bequeath our children with any material wealth. I pointed out examples of the rich families in our country like the Mukwano’s, the Madhvani’s, and the Mulwana’s. These families had visionary patriarchs who started these business empires years ago and successfully groomed their successors who still carry on the businesses today for the benefit of family members. Why can’t we do the same? I pointed out that being educated and a bit exposed we should think a bit different. Our primary concern should not be just mere gratification of our immediate desires but we also have to look at posterity and changing the trajectory of our families. This of course means taking a long term view in our investing approach.

Another member chimed in and intimated that we need to build the characters and work ethic of these children, otherwise they would quickly sell off the properties as soon as they could. She added that children should be exposed to domestic work early on. The kids should be taught the value of work and should learn that service to community is essential to a meaningful life. Merely giving children properties without giving them purpose in life is what often leads to rich junkies selling off property to buy their next fix.

I mentioned that to achieve generational wealth we need to consider two aspects. The first is education and the next is material wealth. We need to appreciate that the foundation to wealth is knowledge. You can’t really build generational wealth without educating your children and grand children. An uneducated family will prey on each other and go down in ruin. Education has two components. You need to educate the mind and the heart. Educating the mind gives you specialty skills and knowledge which can be used to create more wealth. Educating the heart involves building character like integrity, hard work, empathy, delayed gratification, persistence, humility, kindness, etc. These traits will be critical to ensure harmony and progression in the family unit for generations to come.

The next part of building generational wealth is the acquisition and preservation of wealth. Typically the acquisition of wealth in a family starts with one person who has the vision and force of nature to change his or her family fortunes. Typically this person works hard, saves and acquires properties including businesses during their lifetime. They then actively involve the family in the business and pass these assets onto the children upon death. The children, if well educated in both mind and heart, then carry on this enterprise and the cycle repeats itself to their grandchildren. A practical way to ensure that your great grand children will receive a quality education is to set up a family education fund which family members regularly contribute to. You can bequeath a portion of your estate to this fund and it goes primarily to education of children and grand children.

The key to wealth preservation lies in compounding and diversification of the family estate. So imagine that you acquire a piece of land in Nakwero for ugx 100m and you then bequeath it to your children who in turn bequeath it to their children and so forth. You have made sure that the children receive a quality education and therefore don’t need to sell off the land for money. This tiny piece of land will be worth billions in 100 years assuming a modest growth rate! Now imagine if you have several assets and you treat them like this!

The next part is diversification. If you look at the Madhvani empire you’ll realize they have interests in different industries including sugar production, real estate, tourism, alcohol, steel production, construction, etc. Diversification has the effect of reducing risk while protecting returns. Diversification also ensures that your family estate can survive even when one of industries collapses.

As the family estate grows it is prudent to invest in professional management of the estate. Large successful families have a so called family office which advises them on prudent investment. This family office can hold off errant family members who wish to waste family resources on dubious deals. Typically you also need to onboard a financial advisor, lawyer and counsellor. The financial advisor handles the investment aspects. The lawyers handles all the legal stuff including wills, trusts, contracts, insurance, etc. The lawyer also advises on the best legal form of the family estate. The counselor handles emotional stuff like family conflicts which are bound to occur whenever family members work together.

As the family grows it is essential to build a merit based system for taking on key roles within the family estate. Not every family member needs to be directly involved in the business. Some family members can simply be beneficiaries. All these modalities need to spelled out and where possible agreed upon in an annual family conference or retreat.

The family conference does two things. It brings people together and creates a family culture which binds people together. It also acts as a way to disseminate information amongst the family and resolve any conflicts before they escalate. The family can also elect to have an executive board with wide representation to run the family estate and distribute benefits to members.

Typically wealthy families also set up charitable foundations to give back to society. The foundation is also an avenue for some of the family members who are not interested in business to be of service to humanity and find meaning and purpose in life.

So you can see how successful families build generational wealth. They educate their children and grandchildren even though they themselves often did not receive a formal education. They build and preserve wealth across generations. They build charity foundations to share their wealth. They create a legal structure to protect their assets and take on the advice of professionals. They have an annual retreat to have fun and continue the legacy of their founding fathers. Wealthy families are often built starting with one or two visionary and insightful family members who sacrifice and work hard for the benefit of generations to come. I hope that you are one of these people!