There is an old saying, “shirtsleeves to shirtsleeves in three generations,” which means that the older generation started out doing manual labor, worked hard, and amassed wealth—and by the time their great-grandchildren are in charge, the family is back where they started, with the wealth all gone.
STRATEGIES FOR FAMILIES WORTH $5 MILLION TO $500 MILLION
7 Secrets To High Net Worth Investment Management, Estate, Tax and Financial Planning
The insights you’ll discover from our published book will help you integrate a variety of wealth management tools with financial planning, providing guidance for your future security alongside complex financial strategies, so your human and financial capital will both flourish.
Clients frequently share with us how the knowledge gained from this book helped provide them tremendous clarity, shattering industry-pitched ideologies, while offering insight and direction in making such important financial decisions.
Some version of this saying has long been known in many cultures around the world, attesting to the fact that it captures something essential about human nature. One generation rises from the fields or from the factories and finds the success that was unprecedented in the family. The next generation lives well, but learns little and ultimately
loses its grip on that wealth—and the third generation finds itself back where the family began. The old saying has proved itself true innumerable times.
Failure to properly train the younger generations isn’t the only cause of shirtsleeves-to-shirtsleeves outcomes. Another challenge ultra-high net worth families face is that portfolio growth is linear, but family growth is exponential with each new generation.
So if the first generation consists of two family members living on $6 million per year from investments worth $200 million (in other words, living off of about 3 percent of their portfolio), and the family wishes to keep up
with inflation (which we will assume runs 3 percent), their portfolio will need to earn 6 percent to keep up with inflation while still providing the same level of lifestyle. that sounds like a modest goal. But remember, as more generations come along, the family will have more and more people to support that same lifestyle.
By the fifth generation, there will likely be at least thirty- two family members, and while the total amount of money being distributed annually will increase if the portfolio is keeping up with inflation, the income per family member will be decreasing, from
$3 million during the first generation to $2.355 million by the fifth generation. By the tenth generation, when there could easily be a thousand or more family members, the 3 percent distribution would be down to $980,000 per family member.
this means if you want comparable benefits for your family’s future generations, then, after taking into consideration inflation, taxes, and fees, portfolio distributions may very well need to be 1 percent or less! You can improve on this if inflation remains low, if you take on more risk and achieve higher returns, or if you pay fewer fees and taxes.
However, controlling inflation is not possible—so instead, you can implement effective after-tax strategies. By doing so, fees and taxes might be lowered to 1.5 percent.
Do you know what your taxes and fees plus inflation cost you as a percentage of your portfolio annually? We’ve often seen new clients who were losing 2.5 percent or more annually in fees and taxes. In such a case, your portfolio would have to grow by 5.5 percent annually just to offset inflation (assume 3 percent), fees, and taxes. Compare this to a fee- and tax-efficient portfolio of 1.5 percent, which would keep up with inflation at 4.5 percent.
So if you wish to base your lifestyle on 1 to 3 percent income from your investments in hopes of allowing your wealth to match your family growth, then the inefficient path necessitates a return of 6.5 to 8.5 percent while the efficient path requires 5.5 to 7.5 percent.
there is a measurable difference in the level of risk and volatility (losses) one might experience between the two, and no one we know wishes for more risk unnecessarily. Forewarned means forearmed. You can use this knowledge to work with your wealth advisors to safeguard your family’s future—so that you won’t end up being one of those shirtsleeves-to-shirtsleeves stories!
You’ll need to use soft skills—“people skills.” If you lack hard skills, your wealth managers should have the expertise you need, but you can’t hire someone to handle your family relationships for you!
Soft skills are harder to observe and quantify than hard skills. they have to do with how people relate to each other: communicating, listening, giving feedback, cooperating, solving problems, contributing ideas, and resolving conflict.
Part of protecting your family’s wealth for future generations will require that you regularly practice many soft skills: setting an example; team- building; facilitating dialogue and managing conflict; delegating; coaching, mentoring, and motivating; encouraging innovation and independence; problem-solving and decision making.
You always want to pass these skills along to the younger generations. Young people learn people skills at school and with their friends, but the primary place where they’ll integrate these skills into their characters is in the home. And the most effective teacher is always your own example!
We all have our individual unique portfolios of people skills; some behaviors may be effective, while others cause problems. None of us are perfect! All families have their share of dysfunction. this means we can expect that conflicts will arrive—and we should prepare for them.
To do this, you’ll need policies in place to resolve differences and handle difficult issues, before the conflicts occur. The intention of all these policies should always be to support the well-being of your family as the first and foremost priority.
Your family can create committees with the power to resolve such matters—sort of a family board of directors. This committee would decide the course of action and determine whether a family member’s actions were irresponsible or detrimental. It could vest someone else in the family with the power to take care of it.
Here’s where soft skills and hard skills intersect. With a clear understanding of what is important about money to your family, an investment strategy can be shaped that is prudent and tax efficient. this strategy needs to be coherent, integrating all aspects of your wealth management, so that all the advisors involved can make proper recommendations that will meet the needs of the family.
We’ll talk about this more in chapter 5. Hard skills and soft skills need to work together and compliment each other, each in their proper place.
this doesn’t mean, though, that emotion should ever be allowed to rule your investment strategies. Know what your “soft goals” are (the dreams you have for yourself and your family), but then step back and let hard skills do their job without interference from emotions. Emotion by its nature tends to make awful investment decisions. It can lead to investment strategies that are actually contrary to the family’s best interests.
For example, humans have a tendency to fear and resist change—and to hold on to things simply because they’re familiar. Investors sometimes hold on to the stock as if it were a comfortable pair of old jeans.
They have a sentimental attachment to it that may blind them to its actual merit. Sometimes they feel loyal to the memory of a parent who told them, “Never sell that holding! It will always see you through.” Research has also shown that people feel more emotion at the prospect of losing money than they do at the prospect of making money.
this means that they tend to hold on tight to their assets, even though a certain degree of healthy risk could lead to high financial returns.
Any time emotions control investment, the long-term outcome is often out of line with the individual’s true goals. It limits possibilities; you could lose out on a better investment or pass up a chance to live a happier, fuller life. Emotions can blind you to the reality of the situation. they can come between you and a clear understanding of the real meaning of money.