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How to manage family wealth for the next generation

Johan Lambrecht and diane arijs are respectively director and scientific researcher of the Research Centre for Entrepreneurship, EHSAL-KU Brussel in Brussels.

"Any fool can make a fortune. It takes a man of brains to hold on to it after it is made."

Cornelius Vanderbilt, also known as the Commodore, spoke these prophetic words to his son William, shortly before he died in 1877. The Commodore had made a fortune with transport by ships and later by train (the New York Grand Central Station was his family business). At his death, he was the richest man in the US. In the six years since his father's death, William had doubled his inheritance and was the richest man in the world. However, within 30 years of the death of Commodore Vanderbilt, no member of his family was among the richest people in the US and 48 years after his death, one of his direct descendants died penniless. When 120 of the Commodore's descendants gathered at Vanderbilt University in 1973 for the first family reunion, there was not a millionaire among them.

John Sedgwick, who studied very rich heirs, compared handling wealth with handling a magic sword. It gives the holder rare powers, but only the mightiest warriors can keep from being themselves nicked by the blade. From studies by Roy Williams and Vic Preisser of 3,250 wealthy families, it has been noted that 70% of all transitions of fortunes fail. What is meant by family wealth? How can the failure of the transitions of fortunes be explained and avoided? We answer these questions on the basis of a literature study, a written survey among 870 young heirs (29.4% of them consider their family to be wealthy or very wealthy and nearly 25% have a family business at home) and 10 case studies of wealthy families in business in Belgium. This research was carried out on behalf of the Institute for the Family Business in Belgium.

Family wealth and affluenza
Young wealthy heirs equate wealth above all with having lots of money and many material possessions (financial capital). They also associate to a lesser extent family wealth with family values (spiritual capital), self-confidence and perseverance (human capital), good family bonds (family capital), formal consultation regarding family wealth (structural capital), social responsibility (social capital) and having considerable intellectual knowledge (intellectual capital). Young wealthy inheritors who wish to continue the family business were also asked how they think that their family defines wealth. They listed 'family values' and 'responsibility for maintaining the wealth' in the top five definitions of wealth for their family. These definitions do not occur in their own top five.

For some inheritors, family wealth is a tainted gift. They suffer then from 'affluenza' or negative feelings pursuant to their abundant wealth: low self-esteem, lack of a goal, lack of motivation, no self-discipline and feelings of guilt. Our results do not immediately confirm the negative feelings that the literature says young wealthy inheritors may have as a result of wealth. Approximately 37% of the young wealthy heirs feel pride with respect to their financial situation at home. In the wealthy people with a family business at home, the pride is present even more (44.1% versus 32.9% if wealthy without a business at home). Nonetheless, the young wealthy heirs suffer from a light form of affluenza. For example, wealthy respondents with a family business at home significantly more frequently list 'wanting to prove themselves' as the motivation for holiday or weekend work (32.4% versus 29% if not wealthy with a family business at home, 22.4% if wealthy without a family business at home and 17% if not wealthy without a family business at home). Young wealthy heirs give significantly more money to charity because otherwise they would feel guilty (31.3% if wealthy with a family business at home, 11.1% if not wealthy with a family business at home, 31.3% if wealthy without a family business at home and 18.4% if not wealthy without a family business at home).
 
Avoiding affluenza
Good parenting can avoid affluenza. First, this means that wealthy parents do not set unrealistically high expectations for their children. Wealthy heirs do not feel, any more than non-wealthy ones, that their parents expect no less than perfection for them. Nor do young wealthy heirs feel unable to live up to the expectations of their parents, any more than non-wealthy heirs. However, the children of wealthy parents with a family business at home perceive a certain indirect pressure. Approximately 31% of them responded that it is expected they follow in the footsteps of their parents (versus 17.4% of those not wealthy with a family business at home, 11.3% if wealthy but without a family business at home and 4.4% if not wealthy without a family business at home). "I must uphold the honour of an important family name" is also heard more frequently coming from young wealthy heirs with a family business at home (34.9% versus 13% of those not wealthy with a family business at home, 19.1% if wealthy without a family business at home and 7.8% if not wealthy without a family business at home).

A second building block for good parenting is passing on values to young heirs. Frequently heard values are: working for money, unpretentiousness, sense of reality and respect. Thanks to the exemplary behaviour of the parents, these values penetrate the skin of the inheritors. The testators use the following instruments for giving children a good sense of value with regard to money: not spoiling them, informing them of the cost price, giving the children a monthly or annual budget commencing at secondary school age, teaching them to save, teaching the children that one must work for money and encouraging them to set something aside themselves, and requiring them to have a holiday job.

Pocket money and financial advisers
A third element in good parenting pertains to financial upbringing through communication, learning to deal with pocket money and contacts with financial advisers. Young wealthy heirs with a family business at home significantly more frequently state that they more regularly speak about money and financial matters in the family (65.8% versus 54.1% if not wealthy with a family business at home, 59.4% if wealthy without a family business at home and 47.5% if not wealthy without a family business at home). Nonetheless, an open dialogue about one's own family wealth is much more difficult to achieve than such a dialogue about money matters in general. 'Only' 32.4% of young wealthy heirs with a family business at home and 36.5% of young wealthy heirs without a family business at home themselves participate in family dialogue about the family wealth. The taboo atmosphere that covers the topic of family wealth is also demonstrated in the fact that the majority of the young wealthy heirs are kept in the dark with respect to how their family wealth will be transferred. The stated reasons for refraining from discussing the family wealth with the young inheritors are: avoiding conflict, children are not lacking anything, the family wealth is something between the parents and this is not in the culture of the business family. If young wealthy heirs know something about the process of the transfer of wealth, they state "at death" and "step by step, for specified goals such as university and buying a house".

The concept of giving pocket money, the second tool in financial upbringing, is another weakness in the financial upbringing of wealthy people with a family business at home. For example, the young wealthy heirs with a family business at home more frequently state that their family immediately gives them everything they want. Young wealthy heirs with a family business at home also frequently make use of the solution: "I simply ask my parents for more money if my pocket money runs out too soon." Another weakness is that young wealthy heirs with a family business at home state less often that they have to get through longer and longer periods with their pocket money as they grow older.

Contact with a financial adviser, the third vehicle in financial upbringing, is scarce. Only 18% of the wealthy young heirs with a family business at home have these contacts. Nonetheless, 44% of the young wealthy heirs with a family business at home state that the legal-financial world is a puzzle to them.

Family as a manager of family wealth
Not only testators and inheritors but also the family as a whole must expend effort in order to maintain the family wealth for future generations. The basic premise of every family should be the preparation of its own mission statement. This must contain the objectives, the values, the unique history of the family and the system for the management of the family and the management of the family fortune. A family mission statement is unfamiliar territory for most wealthy families in business (only 7% have documented family values). The system for the management of the family and the management of the family fortune can consist of a formal consultation about the family wealth through the family meeting and/or the family council. The family charter and/or the family office are other tools. Wealthy families in business who have placed the family consultation about the family wealth in a formal guise refer to: avoiding irreparable conflicts and jointly seeking consensus in case of differences of opinion, involving all the family members, anticipating changes and problems, placing and keeping the family looking in the same direction, establishing openness, giving a head start to the younger generation in professional life, perpetuating family values, preparing for possible transfer of ownership of the family business and breaking through the status of taboo. The events that have triggered the formalisation of this consultation are: increase in the number of shareholders, presence of different family branches in the business, threat to the family values and the sense of the value of money due to excessive luxury, attending seminars, and exchanging information with other family businesses.

Seven recommendations
We have formulated seven recommendations for business families learning to manage the family wealth for subsequent generations. The business family must above all pay attention to the versatility of family wealth. This is the best guarantee for the retention of financial capital. Just as vital is the understanding of family values by the next generation. Second, the family's values should be written down, so that subsequent generations have a means of assessment. Third, the 'soul' of family wealth must be passed on. Displaying and explaining symbols (such as names, portraits of the founder, and the family residence) to the younger generations can contribute to this. Fourth, future inheritors should be informed at an early age about the financial situation at home. Otherwise they may battle with feelings of guilt when they become acquainted with the 'other world'. The family must involve the younger generation in discussions on family wealth. After being informed at an early age about the manner in which the wealth will be transferred, they will have an opportunity to prepare themselves mentally and financially-technically. Fifth, it is better that inheritors first comprehend the value of money and work before their inheritance is placed in their hands. A step-by-step transfer should be made contingent on the age at which the inheritors have demonstrated the necessary maturity or realised certain goals (such as university or the purchase of a home) is also to be recommended.
 
In the sixth instance, business families must view the management of the family wealth as a lifelong process. This process is best organised via the following channels: upbringing in which family values are central, and establishing exemplary behaviour with respect to family values, family meetings that break through the taboo atmosphere with respect to the family wealth, signing a family charter comprising the rights and obligations of the family members, and contacts between the next generation and financial advisers to teach them to understand the language of finance. Last, the transmitters must establish healthy expectations with respect to the younger generation. The chance of the family wealth being maintained is after all the greatest if the children's own wishes are respected.  

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