Finding unison 'in wealth

Successful families across Europe, Asia and the US now view the meaning and purpose of their wealth in a very different way than their predecessors, and three main phases in the cycle of wealth have been identified via research.

First, families actively engage in business, with members across the generations commonly playing a
variety of parts. Next, families who have sold their businesses are now focused
on investing and managing their wealth.

The third phase includes families who have experienced the challenges of maintaining unity, which can present particular difficulties for preserving and handing on wealth, as well as difficult choices about how best to motivate children to engage in their own
wealth creation.

Many families in the latter phase have moved on to restarting business activities or launching philanthropic foundations and other charitable initiatives. They have found that these developments present the family with new ways to come together and find shared interests and meaning in their wealth.

As the cycle metaphor suggests,
this can see the family move round
again to active business management. This is perhaps the most notable conclusion in the research: the
over-riding characteristic of
wealth-owning families today is a growing recognition of the importance of purpose when it comes to the creation, control and distribution of wealth. Put simply by one interviewee: “Wealth matters because of what you can do with it.”

Asia lessons

The majority of respondents in Asia were in the active business phase, as described. Many were still managed by the first generation, and were therefore considering issues related to the succession of leadership to the generations below. There was much discussion about the best approach and, in particular, how closely younger generations should be bound to the family. In the final analysis, the solution must be adapted to fit the circumstances of each family.

An interesting dynamic emerged with regard to the traditional perspectives of Asian families, and how these are adapting and being challenged by the evolving needs of families and their businesses.

Many family leaders expect their children and grandchildren to succeed them in the business but find that aspirations are changing as exposure
to other cultures broadens the horizons of younger generations. One family member in the second generation warned: “Don’t try to mould your children. You don’t want to deprive
them of their own way to create, control and invest. You can’t impose that they come back to the family business.”

This situation can be particularly serious when younger generations have had the opportunity to leave home and benefit from education. Asian enthusiasm for US and European institutions is now a well-known phenomenon, whether that be in academic or business schooling, and when children return to the family they are naturally keen to put their learning into practice, introducing ideas that can be in opposition to the established way of operating. Families will benefit as they develop strategies to successfully absorb this information into their wider business.

Another strong message from Asian families was the importance of external professional support in assisting with succession planning. One family
business leader drew on his experience to advise that: “You have to accept that
a business family is bigger than the family business… You cannot hope to make good business decisions with just one discipline: you need lawyers, accountants, psychologists and historians.
A business has to be multidisciplined
and that means accepting outside
help sometimes.”

In our view, the advisory market represented by Asian families has yet to be fully developed, and this is a significant opportunity for the global industry.

European view

The central theme in Europe concerned operating as a financial family. Many wealthy European families are, of course, active business owners, but the transition to wealth management is increasingly common on the continent. There
are a number of significant challenges
to this conversion, one that is frequently transformative for the family, for better or worse. The majority of respondents were at best ambivalent about
the change.

“We thought business would be a heavy burden for the next generation and that finance would be easier.
Once we sold, we didn’t have the same strategic goals anymore,” said one family member. Another added: “I do pine for a business that makes stuff. If you are a financial family, you can just clip a coupon – and the question is whether that is enough for you?”

Once the decision has been taken to move on from common ownership of a business, it is easy for a family to lose sight of both the purpose of their wealth and their unity as a family. The focus must therefore turn to leadership and communication to prevent family members, and the wealth of the family, gradually drifting away. Again, this is a point in the family’s progression where external advice
can be valuable.

European members of financial families suggested that managing one is very different from overseeing a family business. They recommended taking time to reflect on one’s skills and recognise one’s limitations.

Armed with this self-knowledge, they are then better equipped to identify which other family members can play roles in leading the group and where they need external support. “If you want to preserve wealth, you have to find the best
steward for the wealth. Today you have good access to knowledge, professionals and infrastructure to help your family
to think through this issue.”

A second-generation family member said: “My father was always looking for best practice. Very early on, he decided our whole board should be made up of external professionals. They are all close to the family and we look after them.”

Some family members recommended employing specialist recruiters to find the right advisers. In the close environment of a family, advisers must fit in and support the family ethos wherever possible, and the personality and approach of the adviser is always a key factor.

An interesting finding from digital wealth surveys suggests that wealthier families (in this context, those with
at least US$10m) are more likely to put their trust in the advice of professionals than those with less wealth.

Leadership techniques are a very important issue for financial families,
and it seems that a mix of diplomacy and direction is the best way to provide guidance. Family leaders remarked on the need to understand what each member of the family sees as their own strengths, as well as being prepared to step back and relinquish control sometimes.

Indeed, some families argue in favour of bringing younger generations into management decisions and roles as early as possible, so that they are prepared for taking on more responsibility in advance of having to do so.

US perspective

The thoughts of one European family member lead to the third phase in the wealth cycle: “Being a successful financial family is about having the right state of mind. You have to decide what you care about as a family, and then you have to make it happen.”

A new trend among wealthy families, primarily in the US, is reassessing the potential of capital to bring positive changes to the social and economic problems around them.

While engaging wealthy families in philanthropy is far from a new development, the motivation of some families involved in the research was striking and suggests a new philosophy
of the meaning of wealth.

Put simply, families in this phase identified the potential for charitable and philanthropic activities to give a clear purpose to their money and that active use of wealth is more beneficial for the cohesion of the family – as well as for society – than passive investing or giving.

It is interesting to consider the factors that have driven this evolution in thinking, though essentially there are a mass of individual decisions behind it. One view was that wealthy families have wider responsibilities and should give back to the communities that have supported their growth and success.

A US family founder said: “Success
is about the joy of being able to contribute to society and finding a theme to support that is worthwhile.
In my view, active participation in society as a business owner should be about creating a better society.”

Wealth can also make families more visible within their communities, and this increased public scrutiny can play a part in influencing how they decide to use their money.

Aside from giving because they can and want to, families recognised practical advantages to the act of giving, such as social and impact investing, which provides returns while contributing to society and giving members of the family opportunities to learn business and investment management techniques in practice.

Following the financial crisis, many wealthy families have decided that their position allows them to take a leading role in supporting their communities as governments cut back social programmes, and banks are more reluctant to lend money to businesses.

Indeed, this appeals to the entrepreneurial nature of wealth creators, and to the wealth preservation mentality of multi-generational families. “As a wealth creator, you are the one who knows how to create jobs. Not governments. What better impact can you have than to give someone a job?”
 

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Moving the goalposts

Withers explored how successful international families have met and overcome the challenges of generational succession and how the approaches to these challenges can vary across the world.

Working with Scorpio Partnership, it sought the views and experiences of 16 members of multi-millionaire and billionaire families, including first-generation founders and sixth-generation family members. The project also drew on Scorpio’s database of more than 4,500 people to give a wider statistical context. 

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Parental concerns

Wealthy families across the world worry about whether their money will end up helping their children or will prove to
be a source of problems. A number of high-profile family leaders have announced that they intend to limit
their children’s inheritance (the musician Sting is a recent example), to avoid hindering their ambition and their interest in working towards their
own achievements.

Most are aiming to support their children on their own wealth journey, which will put them in the position of leading the family forwards in the future. One family member and parent said: “My wife and I both work and our children can see what that means, every day. We teach our children that they
have responsibility for themselves, for other people and for the community.”

My precious

One US wealth creator summarised the balance of pressures and aspirations discussed in this phase by saying: “Wealth is like the ring in The Lord of the Rings: it can make you a very ugly person.

“The most important things are how you make it and how you distribute it. If you can do that in a way that is socially acceptable and keeps your family happy, then you are winning.”

Sarah Cormack is a partner at Withers