Singapore Tatler June 2021

The Rise and Fall of Family Wealth: How to Achieve Financial Longevity

Here's how you can beat the “third-generation curse” and preserve your legacy


Beating the “third-generation curse” is no easy feat. According to a 25-year study conducted by wealth consultancy, The Williams Group, 70 per cent of multi-generational wealth transfers fail due to the involuntary loss of control of assets. A majority of these failures were attributed to inadequate preparation of heirs, lack of family mission, and the breakdown of family communication and trust.


Today’s problem with succession planning is that many tend to forget that an ongong family business isn’t just about balance sheets but also about the dynamics between the respect, traditions and original vision of the company, with the need for constant innovation and evolution of talent, skills and thus, wealth.

Here, we delve into the various ways a family can prevent or overcome the repercussions of “sudden wealth syndrome” and sustain their legacy with a shared identity across the generations.


Preserve wealth through passing down wisdom

When we speak about education, we’re talking beyond—and way before—attending the finest universities. Founders built companies with their own blood, sweat and tears, and more importantly, with a strong vision and wealth of experience that no school could ever teach. This is why education at home is crucial to instil core values and life lessons in the next generation from a very young age. Open communication is key—ask and answer questions like “What is our wealth for?”, “What is our family’s purpose?”, “What is our true value?” and give them the tools and opportunities to nurture paths of their own towards these shared goals and values.


Without this, heirs who have always had wealth in their lives can be left lost and anxious (or ignorant) about what they’d do or who they would be without it. Similarly, if heirs are unclear about what wealth means to them or the family, they can be left with chaotic goals and an irresponsible work ethic from the lack of wisdom and leadership.


Focus on building success vs grooming successors

Parents can make the mistake of grooming successors rather than successful children. Give the kids a chance to grow into their own. We should encourage younger generations to work and learn outside of the “safety” of the family business to develop unique capabilities, an entrepreneurial spirit and credibility independently, which will, in turn, motivate them to bring these skills and knowledge back to the business when the time comes. You want the next generation to feel like they can thrive in the company, rather than be trapped by it. And as a parent in a family business, you are automatically a mentor, and your role is to set a strong example not just by how the company and finances should be run, but also how the employees are being treated, and what opportunities are given to the next generation to learn, grow and flourish in.


Bank on external wealth management systems

Another crucial lesson to teach the next generation is financial management. It’s important to first, maintain an open line of dialogue about budgets, expenses, prenuptial agreements, asset separation and more. This is so that everyone is aware of the wealth management systems in place, and how to best support and protect the family wealth and inheritance responsibly. But what’s even more vital is that family businesses should invest in sophisticated wealth solutions with the help of external professionals that can not only manage but grow existing wealth, while also covering risk management, taxes, retirement planning and trust fund security.


Distinguish ownership from management succession

Founders need to come to terms with the fact that the next generation may succeed as owners, but not as active leaders or managers within the company. Managerial positions don’t have to be passed on to children or grandchildren, and the current generation in charge can future-proof the business by securing the right balance of family and non-family employees. Consider bringing in professional directors to help run the day-to-day business. Many successful multi-generational companies are run by non-family executives while the family members sit on the board and focus on diversifying and managing their wealth.


Identify the three key groups within the family

First, find the wealth generators. At least one member has to fulfil the role of producing and regenerating wealth, developing and implementing a strategy for the growth of family assets. Wealth producers do not have to be involved in the daily operations of the business—they’re there to drive innovation and evolution to help the company face and succeed against economic and business challenges. Secondly, gather the ones with good diplomacy and political skills—those are your family leaders who maintain peace and unity across the generations. These are also the family’s voices of reason who keep the founders’ core values and vision at heart. Last but certainly not least are the business owners. These might not be necessarily involved with the business but own shares of the company, or companies, and understand that fair might not mean equal—and they need to be OK with it. By taking up seats at the table, they have to accept the risks, decisions and sacrifices that need to be made by the active family members and non-family directors.


Control extravagances to prevent overconsumption of assets

One of the key differences between the founder and inheritors is that the latter—in some cases—might not understand the concepts of delayed gratification or thriftiness. This is due to the “sudden wealth syndrome” of being born into money, as well as the lack of financial education or proper guidance. Not knowing how to manage money leads the younger generation to make bad decisions and squander their funds, be it through overspending and impulsive extravagances, which can result in a significant decrease in wealth or worse, debt. Take the late King of Pop, Michael Jackson’s US$400 million debt, for example, thanks to his lavish home and private amusement park. Many are living a billionaire’s lifestyle on a millionaire’s wealth status—or champagne life on a beer budget, as the saying goes—which is highly unsustainable. Great wealth is a privilege, and an informed sense of duty should be instilled in the heir from a young age to feel the responsibility of safeguarding the family wealth, and the need to treat the business with respect.


Take a more lateral approach to leadership

With family-led businesses, most decisions are made vertically, from top to bottom. Parents or grandparents call the shots independently, and the heirs take a long time to learn or fully understand how things work—usually only when it’s too late after someone passes away. Horizontal, or lateral corporate structures can benefit all generations to understand and participate in the guidance of family wealth. The younger ones can find innovative ways to drive the company forward, working hand in hand with older generations who can provide a strong foundation for things to grow from.


Diversify your goals and asset portfolio

It’s almost always that the family consumes assets faster than it generates income. Consumption increases as the family grows, and so do expectations, while the focus on business and wealth-generating goals tend to get diluted from being spread across expanding heirs. Such extensions to the family can also result in the division or draining of financial assets due to family conflicts, possible court proceedings or divorce. To tackle this from the start, there needs to be a sustainable financial plan set in stone: From trust funds and secure wills to the reinvestment of extra capital generated by the business into the growth of other operating businesses managed by the family, matched with a diversified portfolio of liquid financial assets for wealth preservation. The family mentality should focus on how to grow overall wealth over time to meet the needs of the family from generation to generation, not just how the family business grows over time.