How Family Shapes Our Financial Futures
The Hard Problem of Intergenerational Wealth
It doesn't take our 100+ years of collective wealth management experience to know that intergenerational wealth is a hard problem. It doesn't take the sensational TV drama Succession to see families have trouble bridging the gap between their objective realities and their subjective experiences. Many families find themselves caught in a delicate dance of financial planning, personal dynamics, and long-term vision.
With so much written and said about money, you could be forgiven for thinking this is a topic that should have been somewhat solved centuries ago. Or at least have some widely accepted wisdom. While there is plenty to learn, why does it seem like everything written about what to do feels like it's written by someone else? How come it never quite fits my family? Where's the unifying theory, the 8-step guide, the Accenture-inspired framework, that neatly packages this up?
We're sorry to report there is no neat solution. No perfect pattern, just a hard problem. When you try to untie it, you quickly find the knot of money, relationships, and family is made of sand. And we're sorry if this is disappointing news but there is a beautiful thing about leaning into hard problems; it's where progress starts. Progress begins where problems are understood.
In our planned series of articles on families and money, we will equip you to better understand the problem and, in doing so, hopefully let money play a more productive role in your family.
Defining Terms
To ground what can be an ambiguous topic, let's start with a definition and an assumption about intergenerational wealth.
Firstly, by intergenerational wealth we mean wealth that is accumulated by families that is unlikely to be consumed by the oldest generation. That can range from industrial empires worth hundreds of millions to a simple unencumbered house. This intergenerational wealth transfer tends to become a bigger issue as the financial windfall becomes more impactful to the next generation.
Secondly, we assume that families want their wealth to benefit future generations. And we mean benefit holistically, not just in terms of a material standard of living. To illustrate, we don't think people would say a successful intergenerational wealth transition could be solely measured by wealth continuously compounding so that grandkids or great-grandkids are all flying first class. We do think people want to see wealth allow them opportunities, to live more generously, and pursue meaningful work.
While these assumptions are intuitive enough, here we hit the first part of the problem – what is wealth? Is it just money? We don't think so, and we're not alone.
A Wider View of Family Wealth
According to Dennis T. Jaffe, Ph.D., a pioneer in family legacy planning, wealth should not be measured solely in monetary terms. Instead, he proposes a broader framework consisting of six interconnected dimensions of wealth, providing families with a roadmap for effective legacy transfer:
1. Spiritual Capital encompasses a family's core values, mission, and shared purpose, guiding their approach to wealth and relationships. Families with a strong sense of spiritual capital are often better equipped to navigate challenges and maintain cohesion across generations.
If you are wondering what your family's money values are, simply reflect on your existing behaviours.
2. Financial Capital: While often the focal point of wealth discussions, Jaffe encourages a deeper understanding of financial capital. This includes not only monetary assets and investments but also how families manage and utilize these resources. Wealth should be a tool for achieving broader family goals, not just an end in itself.
3. Human Capital: focuses on the development of each heir's character, skills, and identity to manage wealth responsibly and find meaningful work. Jaffe emphasizes that wealth should not merely be handed down; it should be accompanied by the tools needed for heirs to manage and grow that wealth responsibly. Investing in human capital means fostering education, emotional intelligence, and resilience within the family.
4. Family Capital: Strong, positive relationships among family members are crucial for sustaining wealth across generations. Families that prioritize communication, conflict resolution, and shared experiences create a supportive environment for wealth to flourish. Family capital serves as the foundation upon which financial and other forms of capital can be built.
5. Structural Capital: As financial means grow, families may require more formal governance and decision-making frameworks to manage their wealth. For ultra-high-net-worth families, establishing structures such as family constitutions and councils can provide clarity and accountability. The Lorica team has helped clients draft these documents which can include policies for supporting parental leave and child-care within the family unit.
6. Societal Capital encompasses the family's engagement with the community and the world at large. Jaffe points out that philanthropy and social responsibility are integral to wealth. Families that actively contribute to societal well-being—whether through volunteering or financial support—enhance their legacy and cultivate a sense of purpose and fulfillment among their members.
By embracing Jaffe's insights, families can embark on a journey of wealth transfer that creates a thoughtful and impactful legacy.
Looking Ahead
The journey of intergenerational wealth is an evolution. It requires continuous reflection, open communication, and a holistic approach that goes far beyond financial spreadsheets. By understanding wealth as more than just money—as a combination of financial resources, family relationships, personal development, and shared values—families can create a legacy that truly matters.
In the coming series of articles, we'll dive deeper into these dimensions, providing practical insights and strategies to help families navigate this intricate landscape.
Our goal is not to offer a one-size-fits-all solution, but to equip you with the tools and perspectives needed to write your family's unique wealth story. And you can start writing it now by answering the question... What do you want to leave your kids in non-financial terms? Something to ponder over the summer break.
Authors: Rick Walker and Brendon Vade