Nine out of ten families will lose their wealth in three generations
"From shirtsleeves to shirtsleeves in three generations" is sadly a reality for many families. Why is it so difficult to maintain wealth over multiple generations?
Setting aside political revolutions, economic crises and evolving tax regimes – all of which are significant factors in long-term wealth management – wealth loss is often a cumulative process.
Vision
Loss of Focus
Successful entrepreneurs typically spend a lifetime creating wealth. The second generation, influenced by their parents’ work ethic and dedication, often have a healthy understanding of what it takes to accumulate and maintain family wealth. However, the third generation is typically brought up with means, and may take continued success for granted. Focus can shift from wealth creation to simply wealth consumption.
Fostering a Culture of Stewardship
While a wealth “owner” may feel entitled to consume all assets during his or her lifetime, a “steward” aims to preserve and maintain family wealth for future generations.
Parkview helps clients implement and professionalize such an approach. Working with each individual family, we establish clear investment policies and spending rates to preserve wealth for the long run. Our independent counsel and objective analytical process provides clarity and helps to mitigate potential conflicts between family members.
Attitude
Family Growth and Diffusion
A commonly overlooked reality is that families tend to grow exponentially, while wealth grows arithmetically. With every inheritance, a large pool of wealth might be split into smaller and smaller portfolios. Individual family members may have different risk profiles and income needs, which also lends itself to separate management of sub-accounts. However, the splitting of assets may restrict access to dedicated professional management and the benefits of economies of scale.
These challenges are compounded by the spreading of assets and family members across regions and currencies, which can further erode fee controls, risk management processes, and access to investment opportunities.
Holistic and Perpetual Wealth Generation
Parkview helps families capitalize on the benefits of scale by taking responsibility for the myriad components of a family’s wealth. Our expertise across jurisdictions and currencies provides robust management, while our experience with families helps to navigate competing priorities. We help clients minimize costs, improve risk management functions and increase access to the alternative investment opportunities essential to wealth preservation.
Further, Parkview takes a holistic and personal approach to this process by educating and engaging younger family members in wealth creation and preservation. This aids in smoothing transitions between generations, and helps to encourage a lasting focus on the future. After all, regardless of its position on the family tree, each generation eventually becomes the first generation of wealth creators.
Structure
Weak Governance
As our clients often know, businesses can easily fail for lack of visionary leadership, operational robustness or risk management. The same holds true in the management of family assets.
Even significant wealth can be devastated in the absence of clearly-defined values, responsibilities and controls. Common risks include family conflicts, marital discord, the sudden loss of a key decision-maker or even the actions of predatory advisors in the family ecosystem.
Institutionalized Family Governance
A shared vision, respected values and specific goals are crucial for sustaining family wealth over generations. These principles and objectives are best supported by a strong governance structure which anticipates family growth, potential conflicts and the need for ongoing management. Parkview facilitates discussion and implementation of these highly personal and deeply necessary decisions, including the development of rules, operational structures and a robust ecosystem of trusted advisors.
This team is responsible for mitigating risk, avoiding unnecessary costs and developing and overseeing a prudent investment strategy for the whole family. It typically includes the following functions:
- Chief Investment Officer (the family’s chief economist and investment strategist)
- Chief Financial Officer (who acts as accountant and controller for family finances)
- Chief Direct Investment Officer (who facilitates access to vetted private placement opportunities)
- Taxation, Trust and Estate Lawyer (helping to manage the global complexity of family growth and income in multiple jurisdictions)
- Risk Manager (the individual responsible for anticipating and preparing for financial, market, familial, geo-political, and corporate risk factors, depending on the family’s specific requirements)