In the last few years, we have seen a rise in money. Technology and its advancements have brought about many more high net worth and ultra-high net worth individuals. Data researched by Trading Platforms UK indicates that 70% of the top ten wealthiest people amassed their wealth from the technology industry as of March 1, 2021. The top ten wealthy individuals control a fortune of $1.14 trillion in total, with tech players accounting for $855.9 billion.
In the world of wealth planning and future-proofing wealth, the current cohort of wealthiest is most likely in the first generation of wealth. However, we all have seen and heard the statistic and old age cliche’s “shirtsleeves to shirtsleeves in three generations”. This adage, which describes the inability of grandchildren to manage the wealth passed down to them from their grandparents and parents, has hung over the world’s highest net-worth families for decades, threatening the continuation of family legacies. According to the Family Business Institute, only about 30% of family businesses survive into the second generation, 12% are viable into the third generation, and only about 3% of all family businesses operate into the fourth generation or beyond. Many may think they are immune to this because the companies become so big that it feels impossible to fail. However, we all know that nothing is impossible. The Titanic was touted as a ship that could never sink, yet unfortunately, its fate proved otherwise. When speaking to family offices and family wealth, it’s crucial to start future-proofing the business and to create multi-generational wealth that goes past just three generations.
How to create multi-generational wealth:
Creating multi-generational wealth seems like a mammoth undertaking, but can be easily achieved by any family and holder of wealth to accomplish. As any family governance advisor knows, the beginning of future-proofing any wealth held in the family starts with family governance, which in itself sounds like a tedious and complex task. However, it becomes easy if it is done with a focus on making it an everyday part of living instead of a task to be done once and forgotten about. As part of governance building, there are five pillars of wealth, often referred to as the “Five Capitals of Family Wealth”, developed by Jay Hughes. After many years of working with wealth and families, he developed these observations, and I would like to expand on each idea and encourage you to adopt it in your journey.
Understanding and preserving the human capital
Human capital is all the people who make up your family group. Take time to identify who constitutes your human capital and make sure you include them in your plans and considerations. The growth and maintenance of human capital are centred around being healthy – physically, mentally and emotionally. It is taken for granted until something goes wrong and a family member loses their health. The fact is you cannot have a well-functioning family if you don’t have healthy human beings, who have good relationships with each other. Investing in this also helps identify conflicts and weaknesses that may need to be addressed and resolved before they cause damage to the family and the wealth of the family. A simple example is if the family head is physically or mentally ill, they may make decisions that impact the family and the wealth and so on.
Knowing and appreciating intellectual capital
Often taken for granted, intellectual capital refers to the unique knowledge every family member has. It is not referencing just the school-based knowledge but also experiential knowledge that can benefit other family members. All experience is vital and teaches life lessons. So this includes both positive experiences like tips on travelling to other countries and continents and difficult experiences like surviving a divorce or a period of addiction. Intentionally archiving this knowledge in some fashion will create a rich treasure trove of insights and resources for both current and future family members. It’s important to note that healthy intellectual capital is based on seeing and respecting the uniqueness of each individual family member.
Cultivating and expanding social capital
Knowing how the family connects to the larger world is what social capital is about. Asking and answering questions like “When the family name comes up, what do members of the community say?” and “When the name of a family business is spoken, what are the responses?” You may find that social capital is often built around philanthropy and support for important causes; however, it doesn’t have to be. It can be cultivated in other ways, and it can be as simple as generously hosting gatherings at the family home for the neighbours and for the community they live in or around.
Aligning with spiritual capital
It’s essential to understand this capital. Spiritual capital defines what it means to be a member of the family. It addresses the question “What does the family stand for?” How you answer this depends on the family and its various members and sometimes what the majority aligns with. It can be based on a religious tradition or on a set of timeless virtues. Virtues and values the family aligns with most times include compassion, love, connection, personal growth and respect, to name a few. As a way of defining their spiritual capital, a family can create a statement about how they will be with each other, their extended family, their friends and their community.
Bringing it all together is the financial capital
This is intentionally listed last. The financial capital or wealth resources of a family should be preserved and deployed to support the other four capitals. If the family is healthy in each of the other four capitals, they will be (and have a plan to develop future) great owners of financial wealth. If all the other capitals are addressed during the governance creation process, skills like how to hire an advisor, how to be strategic in wealth planning, how to talk about financial assets and how to avoid entitlement will be part of the family intellectual capital and culture.
Creating multi-generational wealth starts with a meeting.
A family gathering where governance is the intention and the outline of each meeting encourages everyone to build their agendas around The Five Capitals. When and how to start depends on the family and the advisor they collaborate within this journey. Depending on where the family is, the amount of time given to each capital varies, but they should all be touched upon in the process. This becomes the framework for an impactful discussion around how to create multi-generational wealth.