STRATEGIES FOR FAMILIES WORTH $5 MILLION TO $500 MILLION
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It seems the brothers are great with money, but even better at backstabbing each other with secret recording devices.
Table of Contents
- Protect Your Family’s Wealth for Generations
- Protecting Your Family’s Wealth with a Family Constitution
- Children Born into Ultra-High Net Worth Status
- Protect Your Family’s Wealth for Generations
- How to Begin the Family Constitution Process
- What to Include in a Family Constitution
- Family Values
- Family Vision
- Mission Statement
- Define Responses to Waywardness
- Conflict Resolution
- Family Story
- Keep It Flexible
One Barclay brother, David, believed his brother Frederick was trying to go behind his back and sell the Ritz so Frederick’s daughter would benefit. So one of David’s sons installed a secret audio recording system in the conservatory at the Ritz where Frederick held many of his private conversations.
David’s clan was able to listen to 94 hours of over 1000 conversations between Frederick, his daughter, their lawyer, and many others, including prospective hotel buyers.
But Frederick started to suspect something was up because David always seemed to be one step ahead of him. So he installed a secret video camera, and caught David’s son planting another listening device.
The brothers bought the Ritz for $92 million back in 1995. David’s sons were able to beat Frederick to the punch, and sold it to a Qatari businessman for about $1 billion. Frederick retaliated by posting on social media the video footage of his nephew planting the recording device. It will surely all end up in a big court showdown.
What is the lesson here for high net worth and ultra-high net worth families, especially in the era of the coronavirus?
Your family’s wealth is never invulnerable, and the biggest threat to losing it isn’t something outside of your control like a virus. The most likely threat comes from within – your own family’s ability to communicate with and trust each other.
No matter how much money your portfolio makes or loses, nothing can stand up to inter-family squabbling and bickering. Not even if Pillar Wealth Management were managing your finances.
Protect Your Family’s Wealth for Generations
What can affluent families do to protect their wealth from their own family’s behavior?
You can create and commit to following a family constitution.
Protecting Your Family’s Wealth with a Family Constitution
A well-known study from the Family Office Exchange asked first-generation wealth creators what they felt was the greatest threat against their newfound family wealth. The top three fears:
- Bad investments
- Bad economy
- Unfavorable politics
Only 7% named their own family’s ability to function, communicate, and trust each other as the biggest threat. And yet, family breakdown is in fact at the top of the list. In another article on the Barclay brothers, a family business consultant calls their now-public spat a “classic example of how family enterprises self-destruct,” and that 60% of the time this failure is caused by a breakdown in trust and communication.
Had the Barclays created and committed to following a family constitution years before, when still younger and on good terms, that document could have provided them and their children a blueprint for how to handle this situation, before it escalated to such an embarrassing and costly point of no return.
A family constitution works – when followed – just like a government’s constitution. It balances family rights against individual rights. It sets up processes for resolving conflict. It establishes how authority is defined and exercised. It expresses the reputation the family seeks to win for itself, and how that will be achieved.
In today’s instant-media saturated world, it doesn’t take long for the drama of an ultra-high net worth family to spread all over the world. The Barclay reputation is destroyed, probably for the rest of their lives and beyond.
How many of their affluent customers and associates will now be wary about having their own conversations recorded? If the owners will do it to each other, their own family, what’s to stop them from doing it to others?
Children Born into Ultra-High Net Worth Status
The Barclays, like many ultra-high net worth families and contrary to popular beliefs about the affluent, did not inherit their wealth. They grew up as kids right next to a railroad track, got their first jobs at age 16, and began growing and building their wealth from there.
But they eventually faced what every affluent family faces – the challenge of passing on to their children the character qualities that produced that wealth. The commitments, the risk-taking, the creativity, the refusal to quit, the resilience – these sorts of qualities can be found in almost every first-generation ultra-high net worth family.
But the second generation has a harder time developing these same traits. Sometimes, this leads to financial recklessness, personal recklessness, or both. At the very least, parents like the Barclays no doubt wrestled with how to develop enough ambition within their children to extend their wealth to future generations.
As we say in The Art of Protecting Ultra-High Net Worth Portfolios and Estates; Strategies For Families Worth $25 Million to $500 Million, good stewards of great wealth think generationally.
Wise parents will find a way to create incentives, facilitate experiences, and transfer knowledge to their offspring in the hopes that they will develop their own aspirations and motivations for sustaining the family’s success.
Whatever you might think of the Kardashian daughters, you do have to give credit to their matriarch for instilling personal drives for success in so many of them. They do not just sit around spending money. They start businesses and create their own streams of income and enduring fan bases. You do not see that in many other children of wealth.
A family constitution is your opportunity to communicate expectations for future generations. You can create and agree to how your family will relate to each other and to the outside world. You want your children to sustain and expand upon what you have created. You want them to respect what it took to produce it.
Protect Your Family’s Wealth for Generations
But as we say in our book, since your children were raised with money, it will be harder for them to fully appreciate the hard work and creativity it took to get where you are.
If your children lack those traits, then even if they don’t blow the family wealth themselves, they will struggle to pass anything of value on to their children. They will have a different emotional attitude toward money than you.
And that’s why, about 80% of the time, wealth fails to last through the third generation.
How to Begin the Family Constitution Process
Before beginning, you must communicate with your family the importance of creating a family constitution. Use the article you’re reading now as a jumping-off point. Get our free ebook on protecting wealth and have everyone read chapters 1-3.
Everyone involved has to buy in to the process before you begin. Otherwise, the document will have no teeth and no use, because even if it does manage to get created, no one will follow it. This is called a ‘constitution’ for a reason. It functions very much like a government’s constitution.
The family constitution guides your family in all sorts of matters. It sets the procedures that will protect your family’s wealth, reputation, businesses, and relationships.
It is not something to take lightly – for anyone in the family.
You will want to involve, at the very least, the patriarch, matriarch, and the children. In other situations, you may want to include other extended relatives, and if they’re old enough, the grandchildren.
Only after everyone has bought into the idea do you set a date to create the document. We would recommend setting aside a whole weekend. It may take longer. But you can get a lot accomplished in one weekend of focused commitment when buy-in has already been won.
What to Include in a Family Constitution
While each family constitution will look different, there are certain fundamentals that must be included for the document to function as intended.
Define your family values. These are the shared beliefs your family agrees are inviolable and that express who your family is. For instance, the Kardashians clearly believe that having a public media presence is an inherent part of being in their family. Everyone participates.
The Barclays would have done well to enshrine something about trust and communication into their family constitution. Who knows how far back in their debacle this thing started. But at some point, bad blood between offspring appears to have formed, and the brothers each sided with their kids, rather than opening up communication.
What does your family believe in? Don’t list out twenty things. Just a handful of core values will do. These are your most fundamentally cherished truths and beliefs.
Where do you see your family going ten, twenty, and fifty years from now? Again, you’re thinking generationally. For an idea of how this looks, think about wealthy families from yesteryear, like the Rockefellers, the Carnegies, and the Kennedys.
Look at what their current generations are doing with the position in society granted them by their predecessors.
Where will Paul Allen’s wealth be forty years from now? What about Bill Gates, Jeff Bezos, and the Koch brothers? What about yours?
You can see what these other ultra-high net worth families have done and are doing, and how that will shape their future generations.
Define your own family vision. How do you want to influence your community, nation, and world? Describe the reputation you want in terms of business and personal relationships.
Your family constitution will be built such that your future generations will be able to carry out that vision.
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Next, create a statement that sets forth how you will accomplish that vision. Ultimately, if your family buys into this, you will have done more to protect your wealth for generations regardless of how good or bad your portfolio does over the next few years, no matter what the coronavirus does to the economy.
As we say in our book, if relatives are at odds, and selfish interests interfere, it is very hard to stay on course with sound decisions about money.
Define Responses to Waywardness
It is very likely that you or a future generation will have at least one child who goes ‘astray’ from the family. Could be drugs. Could be financial recklessness. Could be straight up rebellion. Could be backstabbing disloyalty, such as we’ve seen with the Barclays’ children.
You can prepare a process in advance for how the rest of the family will respond to these sorts of scenarios. This is so helpful, because if someone does go off track, they will not experience hot-headed, emotional, vindictive responses from the rest of the family.
They will be put through a pre-determined process that was agreed upon as good, sensible, fair, and respectful.
This is what we do when this happens.
Work out a process for how to resolve conflict. Again, imagine if the Barclay twins had something like this. And keep in mind – they owned businesses together. They built and lived in a castle. Yes, a castle, on a small island. So even though they were brothers, their families and finances were inseparable. They should have had a process for conflict resolution.
Future generations need to know where their family came from, and how the wealth was earned. They need to be taught the character qualities, the challenges, the victories, the letdowns, and the breakthroughs that led to where things are today. This part should be expanded with each successive generation.
By knowing the family story, each generation will have a greater appreciation for the lifestyle they live, and why their family values, purpose, and mission are so important to carry on. (Frankly – every family should do this…no matter how much money they have).
Keep It Flexible
The U.S. Constitution has an amendment process, and other ways to adjust itself if something becomes outdated, or if new realities require something to be changed. Your family constitution needs this too. And just like the government’s founding document, it should be difficult to make changes. It should require super-majorities and clear procedures that can’t be enacted on someone’s phone while watching the game.
There is much more to creating a family constitution, as you can imagine.
Pillar Wealth Management has helped create constitutions for many other ultra-high net worth families. If you want guidance on creating your own family’s constitution, click the link below and talk with us about your situation.
Protect Your Family’s Wealth for Generations