By Stuart Pinnington, Global Head of Asset Owners
According to a well-cited study, 70% of wealthy families lose their fortune by the second generation, and 90% lose it by the third. Real evidence of the old “shirtsleeves to shirtsleeves in three generations” adage. But it doesn’t have to be this way – not with the right structures in place.
So how does one put those necessary structures in place to build a lasting legacy? In short, by engaging in detailed discussions, welcoming input from the younger generations, taking steps to professionalise the family’s wealth management efforts and harnessing vehicles that can help to protect capital.
Talking about money can feel uncomfortable, but…
Communication is the vital starting point. Although talking openly about money and assets can feel uncomfortable – whether because of cultural privacy norms, a lack of financial knowledge, or the possibility of highlighting internal family inequalities or disputes – financial conversations are essential if a family wants to avoid losing its wealth within a few generations.
The key is to start early and talk often. By regularly discussing financial values, goals, and even past mistakes, families can create a strong financial culture, empowering younger generations to be thoughtful stewards of the family’s resources.
Naturally, education is an important part of the process here. Teaching younger generations about investing, portfolio management, risk management and other fundamental financial concepts is crucial. Without proper education, younger generations can end up struggling on the technical side and may lack the confidence to invest inherited capital for future growth. They may also fail to appreciate the value of the wealth they inherit and make decisions that inadvertently erode the family’s assets.
Gen X, Millennial, Gen Z – create a legacy that speaks to them all
Each generation has slightly different views on money and wealth management. Generation X, for example, tend to be pragmatic and cautious in their financial approach, prioritising stability and value over flashy displays of wealth. This generation – which is poised to capture the lion’s share of the ‘Great Wealth Transfer’ over the coming decades – also tends to favour traditional asset classes such as stocks, bonds, and property. Millennials, on the other hand, often prioritise spending on experiences (such as travel, dining out and live events) over material possessions. They’re also more comfortable with innovative asset classes such as impact investments, crypto, and early-stage technology stocks, often using innovative FinTech solutions to deploy their capital.
The key here is to embrace each generation’s values and build a framework for wealth transfer that acknowledges these generational nuances. Engage in open discussions that aim to bridge different perspectives and financial philosophies. It’s important to find a balance between maintaining a legacy and adapting to the priorities of future generations. This will ensure that wealth is not merely passed down but actively grown in line with the evolving aspirations of each successive generation.
Take family wealth management to a more professional level with a family office
Families may also want to consider establishing, or partnering with, a family office. Whether it’s a single-family office (SFO) or a multi-family office (MFO), these structures aim to provide a dedicated governance framework for managing wealth with intention and discipline across generations.
Back to basics: What is a family office?
Family offices have been around for a long time – the concept as we know it emerged in the 19th century when industrial titans such as the Morgans and the Rockefellers developed sophisticated wealth management operations to manage their vast fortunes. They’ve evolved significantly since then, now offering a broad range of financial services including investment management, tax planning, estate planning, succession planning, philanthropy, business management, and concierge services. Harnessing the power of technology, they’re able to help families manage their wealth more effectively and ensure that capital is preserved for future generations.
What’s more, family offices are no longer the reserve of the ultra-wealthy. Many families are using MFOs to access institutional tools and talent once reserved for billionaires.
One specific area of wealth management in which family offices can really add value is governance. Here, they can help to establish an agreed family constitution that defines how decisions are made, who is involved, and how conflict is resolved. More than just a legal document, this decision-making framework promotes transparency and can serve as a practical conflict resolution tool, reducing friction and unifying generations when handled with care. It can also be particularly beneficial for younger generations by providing a structured pathway for their future involvement in family wealth management.
Two things to keep in mind when ensuring the effectiveness of a family office: talent and operational efficiency. Attracting and retaining skilled professionals who understand the complexities of wealth management and family dynamics is essential for the long-term success of these offices. Meanwhile, middle office services play a crucial role in ensuring operational efficiency and risk management within family offices. These services support the front office by handling trade settlements, portfolio accounting and regulatory reporting, thereby enhancing overall performance.
Beyond the family office: other structures to consider
There are, of course, many other vehicles and structures that can play a valuable role. Private funds, for example, are quietly revolutionising succession planning. Offering flexibility and tax efficiency while keeping capital within the family’s control, they’re increasingly being used by affluent families as a wealth management tool.
Private funds allow investors to deploy capital into private assets such as family businesses, private equity and credit and while providing flexibility, transparency and tax neutrality within a compliant legal framework.
Other worthy tools and strategies include trust structures, family limited partnerships, and staggered inheritances.
Don’t delay, plan for wealth preservation today
It can be easy to dismiss intergenerational wealth erosion as a money issue. Ultimately, long-term wealth preservation requires communication, education and adaptability as well as tools and structures designed to protect and grow capital. Families that succeed in maintaining their wealth beyond the third generation typically understand the importance of these elements and proactively address them.
In a nutshell:
- Don’t be afraid to talk financials, bring the younger generations into the loop and educate them on effective asset management
- Embrace the views and values of different generations, shaping a legacy that resonates long into the future
- Consider setting up or partnering with a family office to professionalise wealth management efforts
- Also look to other vehicles such as private funds and staggered inheritances
How we can help
At IQ-EQ, we specialise in helping families develop family offices that reflect their unique financial goals and values. Whether you’re looking to establish a single-family, multi-family or virtual family office, we can support you.
Our expertise lies in asset holding structures, asset protection, tax services, multi-asset class administration and reporting, governance, risk management, regulatory compliance, ESG considerations and specialist luxury asset services.
With over 30 years of experience supporting family offices, we can recommend the best structure for your needs and provide full support for future generations. To find out more about our comprehensive family office services, get in touch today.
