When it comes to great wealth, seventy percent of families lose their fortune by the end of the second generation. And in 90 percent of families, the money has vanished by the end of the third generation.
This is a phenomenon that happens around the world. It is described in England as “clogs-to-clogs…in three generations.” In Italy the phrase goes like this: “from stall to stars to stall”, and in China, it is: “rice paddies to rice paddies in three generations.” It’s a disturbing phenomenon of profound impact and consequences to families with family businesses or with generated wealth.
What does this mean? A family may find that all it has built and entrusted to its future will evaporate within three generations. It’s easy to brush this warning off, and it is common to think that this happens to people “who aren’t as smart as me.” But look at a few of the names of families that have lost their fortune: Vanderbilt, Hutton, and Hartford. How can such a tragedy happen when the assets have been so well prepared to pass on?
In a nutshell, the problem is this: too much focus is placed on the assets and their preparation while too little emphasis is placed on the responsibility, leadership skills, and stewardship of those who are to inherit those assets.
For too long, family members have not been prepared to become stewards of their wealth to the same degree as the assets have been prepared.
Each generation has a unique view and interpretation of its partnership with money and the family. The first generation carries the vision, the passion and focus to build a new company. This generation tends to sacrifice their personal life for the business. They must do so in order to build a successful enterprise.
The second generation has a different perspective. They have grown up with explicit or implicit expectations placed upon them to build on the family fortune that often conflict with their own personal objectives. Understandably this can create great friction. Couple this with squabbling that happens between siblings over the purpose of the wealth and there lies a sure recipe for even bigger problems. Studies confirm that 70% of families lose their wealth by the end of the second generation.
For those families whose wealth makes it to the grandchildren, there is a new perspective. The third generation is farther removed from the creation of the wealth. They are accustomed to being wealthy. From their point of view, having wealth is a birthright. They have never seen or been exposed to the struggle or the reason of making money. They are free to dream and create. They have never had nor needed the tools to build a productive life. They are only familiar with spending money. Studies show that in 90% of families where wealth makes it to the 3rd generation, it is gone by the end of it. This is not due to a fault of this generation. They are merely responding to a lack of preparation.
In three generations a family’s past and all its treasures will be lost and forgotten. Memories will fade as new generations spend their precious time scrambling to build a-new.
A legacy family is the exception to the rule. This is a family where money not only makes it from one generation to the next but it is grown, developed and given deeper meaning. This type of family uses appropriate systems, tools and activities to stay connected through generations maintaining shared purpose, understanding, and trust.