How to keep a family fortune

While family wealth usually evaporates in just a few generations, some families manage to stay rich. An economist found out how.

Three Generations

Three generations. That’s usually all it takes to squander a family fortune. Families that hold on to their money are an exception.

Families like the Rockefellers and the Rothschild’s have been wealthy for over a hundred years. Is there a secret to their success?

Turns out there is, discovers economist Maarten de Groot in a recent study, in which he questioned hundreds of wealthy families around the world.

What those persistently rich families have in common is that they focus on the family, not on the money.

The universal poverty pattern

Maintaining wealth is more uncommon than you would think. Only three out of ten families can hold on to their money for more than three generations.

The pattern usually goes something like this. The patriarch (it was always a man) does something clever and becomes rich. His children freeze, afraid to squander the family fortune.

The third generation does not experience any of the sacrifices that went into creating their wealth. They take it for granted and seriously start spending. End-result: no more prosperity.

Interestingly, this pattern recurs across cultures. It is so universal that it does not matter whether you look at rich countries or poor ones, or countries with high taxes or low ones. The path to pennilessness is always the same.

Learning from old money

When we think of rich people, we tend to think of types like Bill Gates or Zuckerberg. But these newly rich make up a fraction of wealthy people in general.

Lots of money is in the hands of older family businesses.

And when we understand how these families are able to hold on to their wealth, we may learn something that can also be useful to the bakery at the corner.

Family ties trump intelligent investing

Is sensible investing and taking the right business decisions the key to preserving family wealth? Turns out the jury is still out on that one. Research is inconclusive.

Maybe it matters less than one would think.

What we do know, is that the superrich tend to value warm family relations above all else. Prosperous clans distinguish themselves by their tight bonds.

When they need to make decisions together, they have clear procedures on how to reach conclusions that everybody can get behind.

As a family, they also have common goals that all family members subscribe to.

If that sounds claustrophobic — — well, it’s the price you pay to stay super rich.

Staying in touch across continents

It is no news that the wealthy travel a lot. They end up living across several different continents sometimes.

Yet they are also affluent enough to attend regular large family gatherings. Many families spread family bulletins, allowing even the remotest members to keep up with the latest.

When you have a hundred to three hundred family members living across several continents, it takes an extra effort to keep in touch. But families that are able to sustain their wealth across many generations always do.

Common goals of the superrich

These clans also contemplate their goals together and decide what happens with their money as a group. They ask themselves: What do we want to achieve with our family capital?

If some members want a role in the family business, they are often trained by other family members, further fastening the familial bond.

Philanthropy aplenty

All successful families practice philanthropy. It’s an easy way to connect the younger members and allows them to experiment with capital in a risk-free context.

Philanthropy gets them talking to the others about what they feel is important. They get to select charities, formulate a strategy and make decisions together.

It’s a kind of dry swimming. They get to practice business without jeopardizing the family assets.

Also, philanthropy connects more remote family members like cousins, and that’s a pretty rare thing to see in families.

Initiation rites

Rituals to involve the younger generation are a common thread. It is quite normal, for example, that an 18-year-old is given a donation they can use to start investing or give to charity.

Sometimes there will be family-wide meetings where young people can share what they struggle with. These can be issues like choosing education, but also more global concerns like the climate crisis.

These kinds of rituals are important social glue. They connect the younger generation with the older one and with the general goals of the family.

Uncommon rebellion

Of course, there are always black sheep that reject the family culture, who find those bonds oppressive. But these are exceptions.

Most children feel connected to the family and with the goal of keeping the family legacy intact. They often feel the ancestors are inspiring figures and are eager to continue to build the family name.

Family charter

Many families also have a family charter, a kind of constitution that guides the family finances into the future.

In such a charter the family business is defined and the relationships of the family members to the families wealth and business is made clear.

Questions that are discussed in the family charter, are things like:

How do we reach decisions?

What is the role of partners and other in-laws?

Do we also use their talents in keeping up the legacy, or do we stick to the ones that have the blood bond?

These questions are often discussed in family-wide conversations in which the voice of the patriarch is important but not set in stone.

The “Godfather model” is less of a reality in these families than you would think. Consensus seeking is the norm, rather than the exception.

What is the takeaway?

Involve the younger generation and have clear procedures for reaching decisions on how to reach common goals.

Use philanthropy as a kind of dry swimming to allow the younger generation to network and experiment while bonding with each other.

Focus on family first.