Managing family wealth and educating the next generation
The Chinese proverb “Wealth never survives three generations” has an equivalent in many cultures and has appeared in writing over centuries. The international notion that the first generation builds wealth, the second spends and otherwise mismanages it, and the third is left with nothing, isn’t just a platitude, though.
A study of 1,200 families who transferred wealth found that 70% of intergenerational wealth transfers fail, and with the loss of wealth comes a loss of family harmony. Wharton finance professor Richard Marston notes, “No matter the culture, families don’t have to go from ‘Shirtsleeves to shirtsleeves in three generations.’ It’s a problem when the family doesn’t start thinking about managing their wealth soon enough. The key is education, both about investments and family governance issues. Being able to choose and work actively with portfolio managers, have open discussions about wealth management, and understand each family member’s role can prevent that outcome.”
In 1999, Wharton partnered with Charlotte Beyer, founder of the Institute for Private Investors, to develop Private Wealth Management, the first academic program of its kind in the world. Over the past 23 years, more than 800 members of ultra-high net worth families have come to the Philadelphia campus for the five-day program. Marston, who serves as academic director, says, “We bring together finance, real estate, and risk management faculty who teach them all elements of investing, including modern portfolio theory and types of investments, such as hedge funds, real estate, private equity, and foreign stocks. And the program has become more international, with families from Brazil, Mexico, France, Belgium, Sweden, and China.”
The families who have taken part in the program over the years have found the teachings to be invaluable for their business and private lives. “The course has given us the confidence and tools to sit down and really reflect on decisions with advisors,” said one participant.
Others raved about the subjects covered: “All the session topics hit the mark,” said one. “I grew more confident throughout the program. I left each day and couldn’t wait for the next.”
“This program made me and my children think about a big picture of wealth and family management,” said another.
“My husband and sons will benefit from the thought-provoking family dynamics issues, but will also get them more comfortable with investments,” said a participant.
“You can be very good at building a business but not as good at managing your wealth.”
Participating families range from those who have recently sold the company they built to those in the second, third or fourth generation who are beginning to take responsibility for their family wealth. What they have in common is a need to invest coupled with a need for information. Marston points out that the participants learn from each other. “Those whose wealth has been in the family for generations have been through many experiences that the other group hasn’t faced yet. They have already hired (and possibly fired) an advisory firm. They may have some knowledge but want to learn more. Others need to learn the basics about investments. We teach to both groups, minimizing the technical terms.”
Marston refers to the family challenge as managing “Wealth, Inc.,” a “Business” that involves more than just financial assets. “We talk about the very real issues of family dynamics.” Multi-generational teams work on a case study all week involving a fictional family that has sold off its investments. The controlling father isn’t comfortable having his 40-something sons and daughter involved in managing the portfolio.
“The team members work together to create a solution for the family. When they present their results on the last day, we bring in family members from outside the program who are in similar situations. They role play and critique the teams. It’s a rich learning experience that goes beyond readings and lectures.”
Marston notes, “You can be very good at building a business but not as good at managing your wealth. But the benefits of learning how to do it won’t just provide assets for future generations. It can also promote family harmony.”
The next Wharton Private Wealth Management Program will be held in Philadelphia from May 1-6, 2022. For information, please visit: execed.wharton.upenn.edu/PWM and instituteforprivateinvestors.com.
