Finance / Governance / Wealth Management

Will the Real ‘Wealth’ Please Stand Up!

The Practitioner
Wealth. It’s a cornerstone word in the family business vocabulary. But is its use on point? Or are we simply promulgating a gargantuan myth that feeds an entire industry and fuels family business owners’ constant quest for a lasting legacy?

As recent offerings in FFI’s publication The Practitioner suggest, the answers to these questions are not entirely polar opposites. In fact, viewing wealth as financial and material facilitates much of our existence. Family business success creates “wealthy” families. And it is at that precise moment that a family buys into this concept called “wealth.” Hook, line, and sinker.

We have assigned “wealth,” the roles of power, influence and control along with many others. Those roles have been cemented so solidly that we simply accept them as if they and true wealth were one and the same. The truth is, the things we commonly think of as “wealth”—currency, ‘real’ assets, material goods—are all byproducts of the genuine article. They are not really wealth at all; they are convenient representations to which we have assigned roles to facilitate our daily lives.

How do we know this is true? Take currency, for example. Currency can be a barter agreement, a piece of paper universally accepted to be exchanged for goods and services, or fast forward to today, something more ethereal like…bitcoin, which has recently been added as an online currency conversion selection. Anything can become currency. It just has to be universally assigned that role.

Such role assignment fuels the myth. It infiltrates our daily thought so well that the myth seems impossible to dispel. Yet within that seeming impossibility is the perfect opportunity to do just that.

If we were playing the 1950s game show, “To Tell the Truth,” we would ask, “Will the real ‘Wealth’ please stand up!” This once popular show featured three guests, all claiming to be the same person. The real person was sworn to tell the truth (a.k.a. the name of the show) in an affidavit. The game show host would read this sworn affidavit and a panel of celebrities would ask the three guests questions, then guess which of the three was the real person.

If wealthy families and their advisors questioned “Wealth” today, it’s not likely that many would guess correctly, even after asking multiple questions. What kind of affidavit would “Wealth” swear to?

In working with young adult generations of families of wealth, I spend at least one session asking them what wealth means to them. Their answers are enlightening. From some of their answers (certainly not all) the affidavit of the first of our three guests claiming to be “Wealth” might sound like this:

“I make life luxurious, comfortable, and fun. When people hear about me, I immediately get their attention. I monopolize conversations—sometimes to the exclusion of all other topics. I can help keep the ‘right people’ in and the ‘wrong people’ out. I cover up problems. People do things with me that they might not do without me. I create jobs all over the world for people who want more of me or who want to manage me. I impact governments. I give people confidence. So much so that people who have me may think they are invincible. I am so highly prized that even people who are blood relatives will fight each other over me.”

But is this Real Wealth? Or is it just a byproduct—a tool that can facilitate all of the above. If Guest One stood up at the end of the game, we would be looking at an imposter.

Why? This “Wealth” is self-described as:

  • Security
  • Luxury, comfort, and fun
  • Influence and power
  • Confidence builder
  • Global influencer

This “Wealth” takes all the air out of a room once it enters. But once it’s gone, it’s gone.

Then there’s the second guest, the “Wealth” that becomes a burden. Its affidavit might sound something like this:

“Those who have me think of me constantly. They feel ruled by me. They don’t know much about me so they just stay quiet, take their dividend checks, and let others make the decisions. Or they don’t really know what to do with me. They may pretend they don’t know me. They may come to hate me because they feel so much responsibility and so little license to enjoy me. They may hand over my care to someone they shouldn’t trust. Or they may use me in harmful ways to escape me.”

This “Wealth” is also an imposter, even though it may have the best of intentions. It causes its owner to beg for freedom. It saps the joy out of life. It squelches opportunity and dictates the future. It disempowers. It does exactly the opposite of what is intended: it exposes the real family Wealth to great risk. And within a generation or two, it also goes away.

Real Wealth, Guest Three, can never be depleted. Its affidavit would ring true. It can be ignored, squelched, or go unrecognized but it will always make itself known, given the opportunity. Real Wealth consists of:

  • The ideas behind new companies, products, and inventions
  • Family members who are engaged together toward a common purpose
  • The leading generation’s influence on rising generations and even across generations to carry on family values
  • Confidence in one’s innate abilities and prudent risk taking to employ them
  • A desire to make the world a better place
  • An understanding of how the byproducts of wealth can hurt or enhance
  • Relationships with family members
  • A meaningful, fulfilling life

Real Wealth directly impacts portfolio performance. A 2012 groundbreaking academic report issued by the Wharton Global Family Alliance benchmarking portfolio performance in single family offices proved that non-financial components are primary drivers of single family office performance. Yet, the misunderstanding that wealth is financial and material remains intact.

Real Wealth consists of the intellectual, social, and human capacities of family members and the relationships that facilitate them. This is not a new concept. In fact, it is one that is gaining ground in wealth conversations. This is a good and very encouraging development.

What’s not being acknowledged is the fact that intellectual, social, and human capacities are actually assets to be managed. Intellectually, we accept this, yet in practice we continue to give the majority of our attention to the utilizable aspects of wealth’s byproducts instead of the Real Wealth that fosters them.

There are three reasons for this.

  • One, the byproducts are more tangible, so it’s just easier. By assigning the byproducts of wealth the power of Real Wealth, we function within an artificial construct that feels more comfortable. This construct “protects” us from having to develop and maintain relationships with family members. It allows us to follow our own pursuits even at the cost of our family relationships. The belief in this construct is pervasive. More often than not, it is supported by the family’s advisors, whether they disseminate financial, legal, tax, or even philanthropic advice.
  • Two, most believe there is no clear way to bridge the gap between the myth and reality; and
  • Three, most think the governance over financial and material asset management has no application to—and should remain completely separate from—the management of the family’s real assets.

Each of these three is a supporting myth that promulgates the delusion that wealth is financial and material—a delusion upon which we often hope to build a lasting legacy.

Dispelling the myth creates a new and directly beneficial wealth management paradigm in which Real Wealth informs the management of its financial and material byproducts. Performance records are only good until someone beats them. Comfort, security, and influence tend to leave when wealth’s byproducts depart just as quickly as they came when they arrived. Then there’s this proverb that says wealth is depleted within three generations—a mantra that has become so prevalent that a colleague calls it a self-fulfilling prophecy.

Prioritizing the management of the Real Wealth over the management of its financial and material byproducts provides greater stability during downturns in the capital markets. It enables us to better manage or even prevent family lawsuits; to create truly confident family members who live dynamic, contributory, and fulfilling lives; and to unify families so they do not just survive, they thrive. But without a conscious, purposeful, and pragmatic connection to the ongoing management of wealth’s byproducts, Real Wealth deteriorates on the sidelines and the myth continues.

So, how can we get the Real Wealth to stand up? The only way for Real Wealth to make itself known is for families and those who advise them to shift their collective focus away from the byproducts of wealth and invest the majority of their attention and time to a family’s non-financial assets—the intellectual, social, and human capacities of each family member. This type of wealth is organic to the family. It is unique to the family because each family member is a unique individual. It is the stuff lasting legacies are made of.

And it seems oh, so difficult to manage. But the families who have the courage to ask their Real Wealth to stand up wonder why they didn’t do so long before.

About the contributor:

Lisa GrayLisa Gray is a specialist in family governance that keeps families intact through generational planning. She is managing member of graymatter Strategies LLC. Lisa can be reached at lisa@graymatterstrategies.com.