The investment landscape and how families have approached wealth has evolved significantly over the last decades, led by shifts in wealth distribution, longevity and the need for multi-generational planning. We’ve also witnessed a number of prejudices and biases towards wealth reinforced by the idea that wealth protection can only be achieved through control.
When advising families on succession planning, many times it becomes about showcasing to parents that their children are ready, knowledgeable and can be trusted with the reins. I have been often left wondering why is it that one of the biggest challenges in succession planning is about building trust between two generations.
Then I came across an article by Dr. James Grubman and Dennis Jaffe entitled “Wealth 3.0” and all the dots were finally connected. Not only did I understand why control and fear are the starting points to think through intergenerational planning, it finally confirmed an instinct that I’ve had for years now: that we need to change our narrative around wealth.(1)
Below you can find a summary of this revolutionary article and why it is urgent to shift how we address the context and planning for wealth holders.
Wealth 1.0: Focus on financial wealth and nothing more Before 1980, the wealth management industry landscape consisted of stocks and bonds, where advisors were stockbrokers or perhaps private bankers. There was no proper research around the psychology of wealth and the focus was to protect wealth and nothing more. This time is referred to as “Wealth 1.0”.
Wealth 2.0: Focus on protecting multi-generational wealth and looking beyond just financial capital In the late 1970s, ’80s and ’90s, new regulations emerge and investment vehicles are expanded which bring us to the era of “wealth 2.0”. The wealthy start voicing the challenges of inherited wealth which leads to authors and researchers writing about it. New concepts take shape, such as:
the non-financial capitals of the family,
the importance of purpose and values in financial planning and,
the advocacy for communication and collaboration among family members.
This new psychological approach of the complexities of multi-generational wealth provided a whole new set of tools for the wealthy to understand and plan for their needs and circumstances. It became the standard approach to protecting wealth for the long term..
Challenges of Wealth 2.0 However, there were less positive aspects brought by “Wealth 2.0”. It is around this time that the world renowned adage of “shirtsleeves to shirtsleeves in 3 generations” starts taking hold. Research (which the authors of the paper call “anecdotal”) in the ‘80s lead to the legendary statistics asserting that “family businesses struggle to survive past the third generation and that 70% of wealth transfers fail unless families focus on building trust, communication and preparation of heirs”.
These studies and “statistics” have shrouded the planning advice wealth families receive in fear.
They highlight a never-ending threat and assert that wealth holders should expect to lose everything 3 generations down the line. Consequently, financial and succession planning are led by anxiety, suspicion, mistrust and control. The family is frightened into creating restrictive and fear-based plans across generations, which of course, then creates a self-fulfilling prophecy in subsequent generations.
Now, for a twist of events: these studies and statistics have now been dismissed. They were deficient in their research, with more extrapolation than consistent data. In fact, a more accurate and recent study shows that “Individual businesses rise and fall like any other, but the founding business family often endures successfully across multiple generations as it diversifies into other industries and spawns new ventures”. The focus should on the family, not the business.
Wealth 3.0: Focus on preparing wealth holders through clear values, purpose and education What then, does “Wealth 3.0” bring to the table? It’s a call to action to stop confusing fears with outcomes. It encourages families to be clear about their values and their purpose, to communicate and to collaborate in order to build trust, and because it’s the right thing to do. It shifts the focus from opacity, privacy and control into openness, transparency and accountability.
The wealth management landscape needs a revolution. The new mindset asserted by “Wealth 3.0” has the power to change past narratives around wealth.
It gives them the tools to become a force for good and an example rather than a group intent on fending off an inevitable curse. It takes away the need to implement control-based structures to prevent the next generation from “ruining it” and instead, educates them, involves them and prepares them for the future. “Wealth 3.0” takes away the shackles and sets the family up for success.
For further information about any of the insights shared above or to find out more about Bedrock’s Family Strategy and Governance services, please do reach out info@bedrockgroup.ch
Author: Maria Villax, Head of Family Strategy and Governance at Bedrock
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