From Riches to Rags

Mom used to like to see ‘how the better half’ lived – meaning that she liked to understand how rich people are different than the rest. She suspected, and you know for a fact, that there are many venues open to the ultra wealthy (those with upwards of 10 million dollars) about which the mere middle class or affluent folks never know.

In his book, Strategy for the Wealthy Family: Seven Principles to Assure Riches to Riches Across Generations  by Mark Haynes Daniell claims that ‘There is a discreet world of the respected super-rich, where family legacies, high-return portfolio investments, successful family businesses, philanthropic endeavors, and protective trust practices have been refined and have evolved to reach the highest levels of excellence in private wealth management. These practices and strategies have been employed to build and protect great family fortunes across generations in many countries around the world.”

“Until today”, he says, “the benefits and wisdom of that world have been inaccessible to most of us.”

There is a lot of advice out in the world for folks trying to get out of debt, or trying to save enough to retire, put their kids through college, or even take that next family vacation. There isn’t much around to help people like you, who have made (or are working on it) their first million or two and are wondering how best to manage their money and their families to enable a lasting wealth effect for a few generations, instead of going from Riches to Rags in three generations.

When I found this book, it struck a chord with me. It changed my thinking about wealth and my approach to it. I started trying to implement some of the strategies it discussed in my grown family. We started having an annual family meeting, for example. I developed thoughts and have held discussions with my kids and their families on wealth across generations, even outlining a plan to build a 100 year wealth plan which included this Checklist for Long Term Family Wealth Planning.

My family is at the start of our journey in trying out some of the concepts, making slow progress, but because the book had such a big influence on me, I plan to share thoughts on various sections of it with you in several posts.

The theory behind the book is that people at various levels of wealth, but starting at a net worth of at least a million, will benefit to varying degrees from the principles Daniell defines here. I believe that is true, conceptually at least.

You are a huge success if you have made it to the million dollar mark, but when you look at the relative effectiveness, for instance, of having your own family office at a net worth of a million versus at a net worth of 10 or 100 million, there is just no comparison.

In this post, I just want to show you Daniell’s seven ‘principles’. He refers to these principles as elements in the family strategy and says that the very most successful families integrate all 7 of them into their family strategy.

Principle 1 – A Framework for Family Strategy
To begin, the family has to decide to set a family strategy with an objective of multi-generational preservation and growth of family wealth. The strategies of the most effective families have all 7 of the principles included.

In this principle, the family also develops their idea of what wealth is. Family wealth has to include, not only financial assets; but also integrity; accomplishment; physical security, heath and fitness; knowledge, wisdom and spiritual growth; family harmony and individual family member happiness. Each family has to define their own idea of wealth.

Your family strategy has to take into consideration the starting wealth level as well. Daniell defines four categories of wealth – from one million to more than 100 billion. And describes what families in that category may look like and what their strategies might entail.

For example, he defines the lowest wealth category (Category I) as having between one and ten million dollars with an average investible amount of 5.5 million. At this level of wealth, he sees that a luxury lifestyle is possible. Many retail investment avenues are open to these families (but not some of the private ones open at higher levels). He says many families don’t need (and can’t afford) a single family office or complex organizational structures to run the family. Financial structures are generally simple trusts, or trusts with several sub-trusts dividing the money equally between heirs. However, he does believe that the 7 principles will help this wealth level preserve their wealth beyond three generations.

In talking about the evolution of the family across generations he notes that the family unit starts out small, tight, cohesive and single minded. As the second generation matures, a family business may be split between ownership and management – if one kid wants to go into the business and the other just wants shares of it. Further fragmentation is introduced quickly as the third generation (the cousins) emerge – each raised by different family units with potentially different desires, legacies and goals).

Finally, he talks about the process of getting to a family strategy and the content of it.

My family is still working our way through this start up phase.

Principle 2 – Family Organization and Leadership
In this principle, he wants us to organize the family and manage the surrounding eco system.

In these chapters, the book discusses the importance of defining who your family is – what are your values, your vision and actually which members will you include. Daniell talks about holding family meetings, and even organizing the family into a working organization (with perhaps an elder council, a next gen group, a philanthropic committee, an investment group) – with each part having a defined role and contributing to the greater family goals.

Each wealthy family has what he calls an ‘eco-system’ of supporters, advisers and assistants to help them manage the family and it’s wealth. These are the lawyers, financial advisers, family office staff, next generation trainers, accountants, trustees and etc that are involved in the family affairs. An entire chapter is devoted to problems in raising up the next generation – from teaching them financial literacy to involving them in family affairs and letting their generation put it’s stamp on the family vision.

He shares information on use of family offices, private banks and elite private investment managers as well.

Principle 3 – Family Wealth Preservation
To preserve family wealth, Daniell suggest that we should structure asset holdings and adopt practices for long term asset preservation.

Here Daniell presents history lessons to us on how world events, taxes, and poor investment management can quickly strip a family of it’s assets. He also talks about the need to plan for passing the wealth from generation to generation and presents some of the risks inherent in that (such as taxes or heirs squabbling over the estate). He concludes with some scary thoughts on how wealthy families are at risk – not only for their wealth, but also for their privacy and personal safety.

Here’s a brief synopsis of the remaining four principles, which I will cover in a future post in a bit more detail.

Principle 4 – Family Wealth Management
In these chapters, the author suggests that you should diversify assets and access the best investments and investment managers by having a formal process of asset allocation and wealth management.

Principle 5 – The Family Business
Family businesses can be great wealth creators, but they can also cause discord among family members and family members can create havoc in the business. Here he wants us to clarify and integrate family business strategy with long-term family wealth plans.

Principle 6 – Effective Philanthropy
Each family has it’s own definition of how to give back. The family can agree to share wealth in a manner that unites the family and gives it meaning.

Principle 7 – Living a Truly Wealthy Life
Finally, Daniell recognizes that the lives of individual members of wealthy families can be negatively impacted by the wealth and he encourages us to remember the unique nature of individual family members – including yourself.

What do you think so far? I hope I haven’t made your eyes glaze over! If you make it big (or already have), how will you figure out what all that wealth will mean and do to you and your family?

Do you care to preserve it for future generations, or do you think that would create a harmful class society?