Most families fail to pass on their wealth to their grandchildren – my latest research from Cambridge University shows that there is a 91 per cent failure rate of wealth successfully transferring to the third generation. As the saying goes, ‘shirtsleeves to shirtsleeves in three generations’.
The reason for this failure rate is not that wealthy families don’t have the best legal advice or tax planning. It is that they ignore the huge strains that wealth – like poverty – places on personal relationships.
I have worked with over 30 billionaire families over the past decade, helping them to understand how to get the best from the human capital within their families, complementing their natural ability to get the best from the financial capital within their business.
What exactly is Human Capital? It is the value of a family’s combined skills and the quality of their interactions. It is the cornerstone of a family’s ability to transition wealth, because it comprises next generation education, effective internal governance, intensive scenario planning, addressing parental concerns, managing conflict and the crucial ongoing dialogue about roles, responsibilities and competencies of family members.
Human Capital is, without doubt, the most difficult and important aspect of a family’s ability to pass wealth on successfully.
Every family approaching a transition faces a field of hidden ‘land mines’.
From a Financial Capital perspective, the route is generally clear in terms of portfolio structuring, asset allocation, tax mitigation and estate planning. These paths are clearly marked out, having been walked before by many successful families.
“Human Capital is, without doubt, the most difficult and important aspect of a family’s ability to pass wealth on successfully.”
However, from a Human Capital perspective, a family must diffuse the potential explosive aspects of siblings agreeing on how to reach decisions together, managing tensions relating to spouses and defining the precise input and reward each family member will have in relation to their contribution to the successful stewarding of the family’s wealth. These issues are so difficult they are often simply avoided.
The challenges of human dynamics are incredibly complex. And yet, the solution is extremely simple.
The solution to these ‘land mines’ is to undertake a scenario planning exercise where an agreement across the next generation is reached, with parental approval, on how – and why – they intend to work together. Before I explain this planning exercise, it is important to understand why families have such complex dynamics.
There are three reasons why families experience challenges in transitioning wealth from a Human Capital perspective. First, we are all delusional – our brains naturally distort, delete and generalise in an attempt to make sense of the world, as we process billions of pieces of information every second.
The result is we all form a model of the world – particularly a model of our own family – that is unique and which we think is ‘the truth’.
The second factor affecting family harmony is that we are all self- righteous. There is a structure in psychology called the Reticular Activating System, which I translate as ‘The eyes only see and the ears only hear what the brain tells them’. In short, we all pick opinions about other family members, we then find data to support this belief and this becomes our reality. It makes us self-righteous and locked in our opinions about other family members.
“We all pick opinions about other family members, we then find data to support this belief and this becomes our reality.”
The third factor is that all families relate to each other through Reactive Patterns – unconscious, automatic, reactive responses over which we have little or no control. Can this really be true? Well, according to MIT Neuroscientist John Gabrieli, human beings are conscious of only 5 per cent of our cognitive activity. 95 per cent of our actions are unconscious. And in families, these unconscious patterns have been built up longer than any other kind of relationship (typically over the course of multiple generations).
In order to resolve family conflicts and create new levels of harmony and trust within families, it is vital to work with these three areas to shift the family dynamics positively. I have worked on numerous high-profile conflicts in the last decade, nearly all of which were deemed to be ‘impossible’ to resolve, yet by understanding the underlying causes outlined above, enabling a peaceful resolution has been possible, sometimes in the most difficult cases.
All this is significant for successful family wealth transition, because the kinds of individuals who create great wealth in their own lifetimes are especially likely to form a firm view of their world and impose it on others.
This helps them to make great intuitive leaps, to display originality of mind, to develop amazing ideas and to build successful businesses but it equally hinders their ability to transmit the fruits of their achievement to the next generation. The most important realisation for strong family leaders is the awareness that our strengths also contain our weaknesses. And with many first generation wealth creators, it is precisely those strengths that create success in the outside world, which create weakness within the internal family sphere.
“The most important realisation for strong family leaders is the awareness that our strengths also contain our weaknesses.”
The approach to supporting so-called ‘difficult’ patriarchs is to boldly and bravely undertake a rigorous and compassionate examination to assess whether they might be at the cause of whatever discord they are experiencing in their family. The process must be undertaken by an experienced professional who can identify where a family leader’s ‘Habitual Frame of Reference’ forms the basis of difficult family relationships.
There is a specific approach which the whole family can adopt, which is liberating, empowering and comforting to all family members.
Families must begin by deciding whether they want to transition wealth between the generations at all. Some may look at the potential stresses and pitfalls and decide otherwise. My personal feeling is that great wealth is like poverty – it tests you and lets you see what you can become as an individual. What it offers to those who possess it, is an accelerated approach to evolution or devolution, depending on their strength of mind, character and outlook on life. Wealth can, if used properly, be a passport to enormous joy and happiness, fulfilment and growth, for oneself and for others.
Next, you need to undertake a rigorous and empowering programme of training for potential heirs. We undertook a study at Harvard called, ‘Project Zero’ in which two groups of students were involved. The first group was simply ignored. The second group were told that they were being observed – but nothing else. The results were overwhelming in favour of the second group, who scored significantly higher results that the first group. There is an essential lesson here for families.
But of course educating an heir to receive wealth and power is more complicated than that. All too often, money smoothes the path of wealthy children to such an extent that they are unequipped for the world when asked to face it without their parents. A seed thrives on its need to push through the soil in which it is planted and children are no different.
Similarly, it is vital for third parties to provide ‘resistance’ to heirs in order for them to grow, develop and thrive of their own accord. I have developed a ten-stage process to educate heirs in order to develop their presence and focus, improve their ability to influence, understand the key dynamics of strategic investment management, address parental concerns and gain clarity on their competencies, role and responsibility in relation to the family wealth.
“It is vital for third parties to provide ‘resistance’ to heirs in order for them to grow, develop and thrive of their own accord.”
A failure to properly educate an heir in this way can have one of two outcomes. Either they can suffer from ‘affluenza’, where wealth does not represent something that must be respected, stewarded and protected but instead is as freely available as water from a tap. This obligation-free lifestyle has a tendency to self-destruct.
On the other hand, heirs can go to the opposite extreme, with a version of survivors guilt; ‘Why do I have this money, why not others more worthy than me?’ or simply, ‘It’s not my money, I haven’t earned it’, which can be equally paralysing in terms of their ability to effectively manage the wealth they inherit.
Of course, families also need to create effective structures – a governance system through which they can communicate and build trust, a Family Council through which decisions can be reached together and a Shareholders’ Assembly through which a family’s ownership of a business can be effectively controlled. Without ‘Fair Process’, however, such structures cannot be effective and this is where the role of a trusted adviser is critical to success.
“On the other hand, heirs can go to the opposite extreme, with a version of survivors guilt; ‘Why do I have this money, why not others more worthy than me?’ or simply, ‘It’s not my money, I haven’t earned it’”
Behind these structures, a family is best supported by aligning across generations around a ‘Family Wealth Mission’ which comprises the purpose of the wealth, the family’s collective legacy, a values system across generations and clarity around the specific timing and structure of an effective transition. Like every successful business, every successful family must have a narrative in which they all play a part.
I seek to bring an innovative and empowering way of problem-solving to families with unconventional lives. Although I teach PhD Psychologists at Cambridge University, perhaps my real training is the fact that I have worked with 21 athletes who broke world records over a four year period, I have lived in remote parts of Tibet, I have spent at least six months of my life meditating in silence, I have coached some of the world’s most successful billionaires to make even more money and I have worked in prisons and schools systems in the most deprived areas of modern society.
From all of these experiences, I have taken away the same basic lesson, which is that we are all – from the richest billionaire to the poorest slum dweller – prisoners ultimately not of economics but of our own patterns of thinking. Our limits are only ever set by our mind. And in that sense, wealthy families are just like other families, only more so, they navigate a complex mine field towards transition to the next generation – while blindfolded.
Only when they understand this essential truth – that the acts of families are the real measure of success – can a family leverage their strengths and transcend the limitations placed on them by their human capital resources.