Will Your Family Wealth Survive “Three Generations”?

We’ve heard of the expressions “from shirtsleeves to shirtsleeves in three generations,” in the United States, and “from rice paddies to rice paddies” in Asia. Does anyone know the Nigerian term? These expressions are so common regardless of culture or country. According to a study, “wealthy families across countries lose about 70% of their wealth by the second generation, and a stunning 90% by the third”.

Parents are driven by a natural instinct to love, nurture, and provide for their offspring. We all want to see our children happy and our greatest desire is to give them everything we ever had, or never had, and more. This desire can push us to spoil them. The danger is that whilst we are deriving pleasure from overindulging them, we may actually be interfering with their development and diminishing their own sense of accomplishment and fulfillment.

We all work so hard to create wealth not only for ourselves, but to pass a legacy to our children and future generations. For some reason, this has not been the reality for the majority of families. The reality looks more like this; the first generation works very hard, sacrifices so much, and sets aside savings and investments over three to four decades or more. Often, people who have had to build wealth from scratch are extremely frugal and disciplined when it comes to accumulating and preserving wealth.

There are clear reasons why it can be a challenge to transmit lasting wealth to future generations particularly in the accumulation and preservation phases. In many families, the second generation tends to lack some of that initial drive and discipline that it took to build the wealth; perhaps at the back of their mind is the knowledge that there is always money to fall back on when the going gets rough. Often, they will spend more than their inheritance’s investment returns.

The third generation can be almost totally oblivious to the need to accumulate wealth and is deep in the spending phase. Because they haven’t experienced what it took to build it, and did not have to work for it, they sometimes fail to appreciate what it takes to truly build family wealth that lasts; they are just so far removed from how it was made and how frugally the founder lived. As a result, they may literally consume the capital away and sadly many will end up penniless having decimated a family fortune built over decades.

Lack of motivation and drive

In general, it is human nature to take the path of least resistance to achieve goals. Easy money can slowly make children lack the necessary motivation and drive that most people need to achieve goals. When children are deprived of the opportunity to be self reliant, they develop a sense of entitlement that shields them from the need for sheer hard work and motivation. Sadly, they may never reach their full potential, if they constantly have their parents’ largesse at their disposal. A loss of personal self-sufficiency comes from never having to take care of your own basic needs.

It is a case of “easy come, easy go.” It is psychologically a lot easier to spend money that you have not had to work hard for. This makes too many children of wealth more vulnerable to a dangerous sense of entitlement that sadly, is hard to recover from.

A large number of descendants

From generation to generation, naturally the wealth is divided between more and more people; among children, grandchildren and great grandchildren.

Here are some things to consider that can help families break the cycle of “new wealth to no wealth” in three generations. It’s about planning, education and communication.

Financial education is important

Financial education is an important aspect of wealth preservation. Sadly this is completely ignored in the school curriculum. Research shows that when heirs receive significant amounts of money without any prior instruction of how to handle it, “they typically have a strong inclination toward spending the money on possessions, pleasures, or other purposes without lasting significance”.

A significant percentage of wealth transfer failures are caused by inadequately- prepared heirs. Prepare your heirs to receive wealth. Teach your children about money early; earning, saving, investing, borrowing, giving. Ideally financial advisors should be seriously engaging the next generation in matters of wealth management and educating them in the basic economic concepts. Teach them the responsibility for building wealth that truly endures, through next gen seminars tailored for heirs.

Succession Planning

Planning for the transfer of wealth from one generation to another is essential in order to have any chance at successful transmission. Trusts are effective vehicles for protecting and holding assets on behalf of beneficiaries. They are usually tax efficient and also a good defence against family spendthrifts who are capable of wiping out a family fortune in the twinkling of an eye.

It is an important civic duty to pay your taxes. It is also important to have knowledgeable advisors to ensure legally, that your assets will not be depleted by poor tax planning.

How are your children spending the long vacation? It is always nice to catch up as a family, spending weeks of quality time together. However, the long school vacation presents an enormous opportunity for children to learn to earn. One of the most powerful ways to teach children the value of money is to let them work for it. Full or part time vacation jobs, internships, volunteering for a few weeks in the holidays, are effective ways to build responsibility, a good work ethic, accountability and it helps them foster a respect for money as they earn it.

Hands on work experience in the family business has been successfully practiced by Lebanese and Asian families in preparing the next generation. Children are brought into the business from tender ages, working during holidays through which they develop a deep sense of the business and gain the respect of colleagues.

Nigerian families, on the other hand, often impose their offspring on the business at senior levels even where they may be ill–equipped for a role. Exceptional educational credentials, even from the world’s greatest establishments, are not all that it takes to step into a patriarch’s large shoes. Many businesses have fallen by the wayside as a result of this phenomenon of imposing “oga’s” or “madam’s” child on a thriving business without adequate preparation.

Often wealth managers focus solely on the patriarch or matriarch, ignoring the next generation almost entirely. This does not help the smooth transmission of wealth. Communication is key. Involve the next generation through family meetings and discussions; one must be proactive about engaging them as opposed to hiding things away from them until they inherit. With careful planning and communication, families have a better chance at ensuring the sustainability of their wealth across future generations.

Be proactive about making the time to educate, nurture and collaborate with your future heirs. This can mean the difference between the successful transmission of your wealth and the loss of your family legacy.