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Updated: October 26, 2010 14:13 IST

Wealth preservation across generations

D. Murali
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Title: Family Legacy and Leadership, Preserving True Family Wealth in Challenging Times. Author: Mark Haynes Daniell and Sara S. Hamilton, Founder and CEO Family Office Exchange.
Special Arrangement Title: Family Legacy and Leadership, Preserving True Family Wealth in Challenging Times. Author: Mark Haynes Daniell and Sara S. Hamilton, Founder and CEO Family Office Exchange.

Tribes that survive the longest ensure their preservation by practising ‘seventh-generation thinking,’ informs a thought of James E. Hughes Jr. cited in ‘Family Legacy and Leadership: Preserving true family wealth in challenging times’ by Mark Haynes Daniell and Sara S. Hamilton (www.wiley.com). Reaching the fourth generation may be a matter of luck, but if a family successfully reaches its fifth generation, as a family of affinity, it constitutes a system with real possibilities for long-term success, adds Hughes.

Tribal decision-making

Hughes paraphrases the exhortation of the senior Iroquois elder at the beginning of each meeting of the tribe convened in solemn council, thus: “As we begin our sacred work of tribal decision-making, let us hope that our decisions today as well as the care, deliberation, and wisdom we use in making those decisions, will be honoured by and truly beneficial to the members of our tribe seven generations from today, as we today honour the decisions made by our ancestors seven generations ago.”

Building a family for long-term success requires vision far beyond any individual’s lifetime and far beyond the imagination of any one person, reminds Hughes. Fostering a beginner’s mind in combination with seventh-generation thinking affords a family a process and practice that lets its talents and gifts emerge through the increased self-awareness and happiness of its members, he notes.

What is family legacy?

The opening chapter of the book instructs that true family wealth encompasses financial resources, and also family capital manifesting itself in many complementary forms such as family harmony, physical wellbeing, and a broader sense of legacy and reputation, integrity.

Family legacy, as the authors describe, is more than a mere grant or inheritance of name, money, or personal property handed down through the family; and far more than a static family tree of past births, deaths, and marriages. It is, “the sum of valued accomplishments, traditions, assets, histories, experiences, lives, places, and memories that flow from the past through the present and into the future.”

Building great legacies

With far too many families following the well-worn trail of ‘rags to riches to rags in three generations,’ the odds weigh against a successful legacy outcome over the long term, the authors caution. They observe, however, that successful wealthy families and their broader legacies are often built, preserved, or evolve through the efforts of a small subset of their members who provide the exceptional energy, insight, leadership, and entrepreneurial spirit to enhance and maintain that legacy.

Great legacies are no accident of history; nor is mere hope a strategy or a likely pathway to an enduring legacy, one learns. “Ambition, insight, unrelenting effort, tough choices, courage, and personal leadership are all required for a family to reach its full legacy potential,” the authors outline. They find that ambitious families improve their odds of success by developing knowledgeable and capable leaders who understand the importance of a multi-generational legacy strategy.

Proprietor vs steward

A chapter on ‘defining a clear philosophy of family wealth’ begins by distinguishing between proprietor and steward of wealth, the two very different attitudes that family members develop towards inherited wealth.

Those who view themselves as personal proprietors of the wealth view their inheritance as something passed on to them for their personal use; they do not feel obliged to preserve the fortune for future generations or may not believe that a future enterprise is viable for their family. “They are comfortable with the fact that the financial legacy may end with their generation, and they may spend down the assets. They see themselves as capable of making this decision without regret or concerns for future generations.”

In contrast are the stewards, who are owners with a feeling of great responsibility to preserve the wealth during, and even after, their lifetimes. They often have ‘a broader definition of what they are passing on and a different attitude toward legacy, responsibility, risk, spending disciplines, and education of the next generation.’

Conversation about wealth philosophies

Lest you conclude that one is better than the other, the authors counsel that proprietors and stewards of family wealth can coexist as long as they respect each other’s beliefs and agree on the decisions and actions they need to take that can be mutually beneficial, because there is no way to force all family members to adhere to one philosophy. Which explains why it is essential for families to have a conversation about their philosophies of wealth as they begin to think about legacy and leadership of the family, as Daniell and Hamilton insist.

A balanced approach, for instance, can identify certain assets to be personal or ‘proprietary,’ and certain other assets as ‘heirloom’ or ‘legacy’ assets for future generations, with different investment strategies and distribution policies for the different buckets of money.

Discipline in withdrawal

An important instruction in the chapter is on the need for discipline in withdrawal, since families cannot retain their wealth over multiple generations when their members spend more than they contribute to the pool of family assets. Even large family fortunes can disappear if unsustainable distribution and spending patterns become the norm across generations, the authors warn.

Drawing data from J. P. Morgan research, they mention that a simple rule of thumb for sustainable distribution in the past was in the range of 2 to 4 per cent of family assets, with the likely return of most ‘average risk’ portfolios in the range of 6 to 8 per cent per annum over a decade.

Their reasoning is as follows: “Taking a conservative 7 per cent average investment return, a typical portfolio might show that wealth management fees require 1 per cent of assets per year, tax and transfer costs absorb another 1 per cent of assets (when averaged over a generation), and inflation accounts for a 3 per cent reduction on average, leaving only 2 per cent for distribution to retain the purchasing power of the wealth.”

Old and new economics

Of value is the caveat that the above calculation reflects the economics of the past half century, rather than the most recent decade. In the past, as the authors reminisce, a relatively safe income could be had from fixed income, and reliable gains were generated by core equity, equity-related, and real estate investments. “These provided solid returns above inflation, with income also generated for spending or retention in a future distribution reserve to be released in leaner times. They served to both preserve and enhance capital value.”

The scene has changed in the years after the millennium, with many sources of income, capital value appreciation, and risk returns having dropped in reliability and return; in a time of sharply declining value, making significant distributions is a fading fancy and ‘a lively topic of discussion for many wealthy families, their investment managers, and their trustees,’ report Daniell and Hamilton.

Recommended ‘family’ read.

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