2 Crucial Tips for Preserving Multigenerational Wealth

Families Lose Their Multigenerational Wealth at These Critical Tipping Points. Recognize Them?

Families that have worked extremely hard to build wealth find it even more challenging to preserve multigenerational wealth. Often, the concern is that a wealthy family could go from “shirtsleeves to shirtless in three generations.” The first generation creates the wealth, the second generation consumes the wealth, and the third generation starts all over again.

With the wealth transfer coming, how future generations handle family wealth could make or break the family’s legacy. According to a survey by RBC Wealth Management, which surveyed over 100 ‘Next Gens’ of ultra-high net worth families from the US, the UK, and Canada, 54% of Next Gens are worried they will lose their family’s wealth, and 44% are afraid their children will lose the family’s wealth.

While there are many tax, legal and investment strategies that can be used in multigenerational wealth management, there are two critical factors that will have a greater influence on wealth preservation than anything else: recognizing tipping points and viewing family wealth as an enterprise.

Surprisingly, neither of these are technical strategies, per se. They are both about mindset and taking a new perspective.

Recognize Tipping Points to Break Old Wealth Management Habits

A key step in preserving multigenerational wealth is recognizing tipping points. A tipping point occurs when the strategies that led to success in the past are no longer effective. Recognizing tipping points requires a new mindset and strategic vision for achieving one’s goals in the future.

Here are some critical tipping points families should be aware of:

• A first-generation wealth creator has accrued a significant amount of wealth outside of the business. Now, the wealth creator is responsible for running a business and overseeing significant personal wealth. This dual responsibility has become a burden.
• There is a transition in leadership between the first and second generations 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 family wealth has become so complex and ungainly that family leaders no longer have control over their entire holdings and feel out of control.

Wealthy families must recognize these critical tipping points as there is significant risk in these situations. Their past strategies for managing multigenerational wealth may not work as well in the future and their wealth could shrink despite their best efforts

Think of Multigenerational Wealth as a Family Enterprise

Families who recognize tipping points like these in their business should accept the importance of a mindset change. Rather than viewing their business and personal wealth in isolation, families should view their wealth holistically as a family enterprise. This concept can seem strange at first, maybe a bit too formal, but it is essential.

Many multigenerational families realize wealth from a business, often a family business. To them, the family enterprise is just the family business. It is not the wealth and values they wish to preserve for generations. This is where a shift in mindset needs to take place.

Many 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. When it comes to running the family business, most families should recognize the following as essential steps:

• Have a core mission, vision, and value system the business is organized around and expected to follow.
• Have strategic leaders in critical positions, such as a CEO, CFO, COO, or other roles.
• Have independent advisory boards to help set strategic direction.
• Mentor young people so they mature in their roles and become future leaders.
• Report accurate information so that stakeholders can make informed decisions.
• Have a long-term strategy with milestones and regular meetings with stakeholders.
• Make course corrections when market changes require them.

Business owners would not think these situations are too formal or restrictive to running a great business. They are essential. But, when it comes to managing family wealth, which often has the same complexity as a traditional enterprise, these formal structures must be included.

If your family comes to one of the tipping points, it is best to think of the family’s wealth as an enterprise and put a plan in place to manage intergenerational wealth the way you would manage a successful business. This guiding principle could significantly increase the likelihood of preserving wealth for future generations.

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[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can listen to at your leisure, and each includes a comprehensive customer PowerPoint about the topic):

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This is an updated version of an article originally published in August 2018 and updated on April 22, 2021. This article was most recently updated by the Financial Poise Editors.] 

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