How Can Wealth Pass Three Generations?

How can wealth pass three generations?

The emergence of “Clogs to clogs in three generations” is based on the observation that the first generation creates a kingdom of wealth, the second to spend it and the third to finish it. According to an economic study conducted by Williams Wealth Consultancy Limited, wealthy families lose about 70% of their family fortunes by their second generation, and a stunning 90% by the third.

Whether it is due to a changing business climate or the fading interest of the successors, the longevity or the life span of a family business is always documented to be difficult to predict. The overlapping needs from a family and the business often develop contradictions. So, what are the challenges involved and how can a family sustain its business in consideration of all the conflicts?

The Challenges

A qualitative case study “2017 China Private Wealth Report” jointly issued by China Merchants Bank and Bain & Company found that the population of high net worth Chinese individuals with personal investments of more than RMB10 million has reached 1.58 million in 2016. The finding showed 40% of them are from the first generation and the second generation accounts for 10%. As the population of the second generation grows, the pressure of these children in the family businesses also increases with a mission to perpetuate and sustain their businesses for the future. Before we look at how this mission can be accomplished, let’s look closer into what the common pressures and challenges are:

The 3‭ ‬Pressures‭:‬

1. Sustaining the Foundation

On one hand, parents hope their children will follow their foot-steps, family principles, values and management style, and wish they can simply harmonise with their long-established family business by pushing their children hard. On the other hand, some choose not to bring up the subject too often to avoid giving too much pressure to the children. From time to time, we also witness some remarkable first generations “won’t let go” and hang on to the business, which leads to many frustrations for their successors as it will postpone all the strategic plans and decisions they wish to implement. These plans could be the ideas to implement more formal guidelines or build new management protocols etc. The implementation process may seem smooth at first in fortunate scenarios, but may not always be the case, as these new changes can often contradict with the historical “blueprint” developed by the first generations.

Note: In big families, first generation can also be uncles, aunties or other key family members, and not just parents of the family.

2. Lack of Experience

When second generation injects their new entrepreneurial vision and passion to the family business, the aim is to undoubtedly grow and scale up the company from its existing mode. However, lack of practical experience in making appropriate corporate decisions can create problems. As a natural practice, most of the second generations are often placed and arranged to work in their family offices as soon as they graduate. They have minimal exposure to the operational processes and the business working environment since the leader has been running the business for so long. In this case, the heirs are not always willing to make changes as they foresee they will need to bear risks or consequences from potential failure. Due to lack of experience, we also see that the first generation feel uneasy and not confident to agree with successors’ new strategic plans and ideas. Eventually, it also explains why younger generations are reluctant to step out of the “comfort zone”.

3. Responsibility and Accountability

To help a business grow, apart from having new visions and innovations, optimising internal operations is just as critical. As the next generation succeeds, they can manifest hidden defects through corporate governance, such as updating or establishing new management mechanism which can enable them to become more agile in responding to future challenges. Inevitably, the transitory process may be interrupted by many parties due to disagreements. Therefore, it is fundamental for the younger generations to be determined enough to stick with their original ideas as setbacks and the noise of defeat will only grow as time progresses.

Sustainable Heritage

In view of the pressures and challenges, second generations should always have a positive and optimistic mindset. At the same time, they need to put immense effort with strong determination to grow the business by making new changes and gaining acceptance from all key stakeholders. It is obvious that you cannot get promotions and compliments based on nepotism alone; even a key family member will need to work hard to earn his place at the table. To keep up, they need clear-cut roles, boundaries, governance and well-defined succession plan. Let us now look closer into the 3 guidelines to point second generations to the right track:

The 3‭ ‬Solutions‭:‬

(1) Family Trust

Set up family trust to arrange, distribute and manage wealth according to family members’ wishes, so that wealth can pass on to protect the next tier of generations and create lasting success. Additionally, setting up a trust is perceived to be an effective tool for tax saving, as well as to avoid future potential disagreements as when the keyman of the business passes away. Of course, this requires a step by step discussion that involves thorough planning with the entire Management Team.

(2) Life Insurance

Life insurance is becoming more and more popular. Why? It is a handy and cost-efficient tool to ensure that the deceased individual’s family is well protected and can even potentially accumulate wealth as a result. Recently, there are a lot of insurance plans launched in the market with new product features, aiming to provide more flexibility for the payer and the beneficiaries for better liquidity purposes.

(3) Exploring New Opportunities

In addition to inheriting the family business, the successors need to continuously explore what’s out there in the world, recognise any potential risks and explore new business opportunities. Without a doubt, they have to learn how to assume risks, overcome hurdles and be innovative at all times to enhance and enrich their precious family businesses.