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How to keep multigenerational wealth in the family

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There’s an old saying in wealth management: “Shirtsleeves to shirtsleeves in three generations.” It’s a way of pointing out that family wealth often fractures when passed down. The suggestion is that the first generation earns the wealth, the second generation enjoys it, and the third generation spends until there is nothing left.

Unfortunately, statistics bear out the adage. A landmark study of more than 3,000 wealthy families by Roy Williams and Vic Preisser found that the vast majority of estate transitions fail. In 90% of families, wealth disappears by the end of the third generation.

To help preserve their legacies, families increasingly turn to family offices tasked with maintaining multigenerational wealth. According to the UBS 2019 Global Family Office Report, there are 7,300 single family offices worldwide today — a number that has increased 38% since 2017. In the United States, UBS counts 3,100 family offices, up 41% from just two years ago.

Conversations are only productive if everyone feels able to engage and be heard.

Through our work with these family offices, we’ve developed insights on why wealth fractures and strategies for how to preserve it. And the biggest cause of wealth disappearance, we’ve found, isn’t poor financial management or investment performance. It’s a lack of family communication and heir preparation. According to Williams’ and Preisser’s study, 60% of unsuccessful transitions are due to a breakdown in communication within the family, with another 25% prompted by insufficient heir preparation.

With U.S. families set to pass $68 trillion to heirs and charity over the next 25 years, according to Cerulli Associates, this lack of communication and preparation takes on urgency. Especially when 61% of high-net-wealth parents say they’re not comfortable sharing financial information with their children.

We believe, first, that families need a formal communication plan.

Regular family meetings are critical. That doesn’t mean just gathering for a holiday, nor does it mean simply hearing reports from attorneys and advisors about estate planning. A family meeting should be a set time when members can discuss important topics and make shared decisions. It should follow an agenda, developed with input from key stakeholders within the family, and take place over at least a half-day, if not several days. A meeting is an opportunity not only to inform, but also to educate, engage, inspire and evolve. It offers the chance to teach younger members about family finances, discuss family values, share family stories, and so on. These meetings can be an occasion to demonstrate and develop effective family leadership and decision-making. A meeting should happen at least annually, and it should be facilitated by a non-family member.

But we also believe that for family meetings to be truly effective, family members need to appreciate and understand generational differences in perspective and communication style. This is one of the many reasons why a facilitator can help.

Conversations are only productive if everyone feels able to engage and be heard. It’s important for family members to ask productive questions rather than criticize. They must actively listen with patience and kindness and consider where each generation is coming from.

Generational perspectives are solidified by formative events and lead to distinct communication styles. Understanding these styles is critical for both families and facilitators as they provide a foundation for understanding and a channel with which to communicate.

Here are how the generations break down, at a broad level:

Traditionalists, born during the Great Depression and World War II, lived through tough times and saw sacrifice lead to success. These are likely the great-grandparents, people in their upper 70s and older. They are stable, detail-oriented, and hardworking. They value communication that is well-founded in research, with a clear, sober assessment and course of action. Many members of this generation are uncomfortable with taking on excessive risk or unclear outcomes.

Their children, the baby boomers, now in their late 50s, 60s, and early 70s, grew up feeling judged and deprived by their parents. They responded by driving movements toward individual freedom. They value relationship-based planning, and they’re more likely to advocate for their personal views.

Generation X, now in their 40s and early 50s, who grew up in a time of soaring divorce rates and the diminishment of American corporations, felt ignored by their hardworking parents. In response, they pivoted toward prioritizing a more balanced life. They are likely to be skeptical of generational planning, and they look toward nontraditional approaches.

And millennials, who grew up with digital technology, have a global worldview that thrives on change. They’re in their late 20s and 30s, out of college and starting their working lives, and they feel connected to everything and yet bound to little. Their willingness to embrace risk and cutting-edge investments can be off-putting to older generations.

These different experiences create different ways of thinking and communicating. Recognizing those differences is the first step toward effective family communication, which in turn is the key to preserving family wealth.

It’s all too easy to lose sight of this. For many families, especially in the U.S., today’s politicized climate can exacerbate tensions caused by generational differences. Holidays may already be tense, and a looming election may strain relationships. But at the end of the day, families need to recognize the need for their legacy to endure beyond the present moment — and how they can make it happen.

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