Newly Rich: Managing the Risks and Opportunities of First Generation Wealth
What do you do, and how do you begin,
when you have created or received a substantial amount of
wealth for the first time?
This quandary is surprisingly common among those who have created or inherited, but not yet figured out how to manage, a great financial fortune. This sudden wealth can come about through many sources: professional success, business sale, lottery win, inheritance or divorce settlement, to name but a few of the most common.
Many successful business owners or other ‘suddenly wealthy’ individuals have not had the time, training, and exposure to put together a clear legacy plan for themselves and their families. Others may not have had the interest or aptitude to develop the skills necessary to learn how to manage a financial fortune, much less an enduring family legacy. The key steps in that plan are as follows:
- Define your new vision of the future and supporting values
- Decide on your future philosophy of wealth, and then structure and manage your wealth as appropriate
- Establish a disciplined and professional approach to wealth management
- Organise and educate the whole family, with a focus on NextGen leaders
In order to preserve wealth, protect the family, and realize a set of objectives for the future, wealth owners need to design and implement a well-structured legacy plan. Only by addressing the interrelated set of challenges on an integrated basis and looking forward across multiple future generations can the family even come close to realizing their more aspirational hopes for the future.
What goes into a legacy plan?
The approach proven to be most successful over time contains the following elements (all of which are expanded upon in the various chapters and sections of this book) in the following order:
- Define your new vision of the future and supporting values: A sudden accumulation of wealth, or the change from operating assets to a substantial pool of liquid wealth is a major change in the life of the family and individuals concerned. This kind of event always creates a ‘point of inflection’ for a family, a point after which things are substantially different from before, and after which there is a far wider range of outcomes possible than in prior states of being, from positive to negative. Wealth owners need to decide what they want to accomplish in the future, who they want to become, and set the values and guiding principles they and their family will respect along the way to create the best possible future for their families and themselves.
Definition of success: This will require you to define success for you and the other members of your family, both short and long term, putting in place a system to set clear supporting objectives and measure progress against them. These objectives will need to contain goals for the development of both ‘hard’ (technical or financial) and ‘soft’ (individual, family and social) capabilities and achievements. - Decide on your future philosophy of wealth, and then structure and manage your wealth as appropriate: One key step for anyone with significant asset base is to define your philosophy of wealth and understand its implications. Are you (and possibly your partners, spouse and children) ‘proprietors’ of wealth (who can spend it, invest it or give it away as they see fit) or ‘stewards’ (who hold wealth in trust for future generations) . The answer for many families is a combination of both, with a set quantum to be managed as personal wealth and the rest, possibly in a common pool that may or may not include shares in a family business, held in trust for future generations.
Action implications: The appropriate asset structures, investment disciplines and distribution principles can then be established to ensure the founder’s objectives are carried forward long after he or she is no longer present. - Establish a disciplined and professional approach to wealth management: It is always a temptation for the newly rich to rush into an immediate phase of celebration, extravagant spending, impulsive investment and listening to the crowd of people, some qualified and some not, offering advice and opportunities to allocate some of your new found wealth to them. Although difficult to do for many, best practice is to proceed carefully, deliberately and on a step by step basis to define the purpose and objectives of your wealth, allocate assets appropriately, ad then select and manage
Build a supporting eco-system of capable and trustworthy advisors: High quality advice, financial oversight and implementation support is essential, as is tapping in to the various sources of ideas and opportunities available to for investing and preserving. Designing and aligning the appropriate eco-system, possibly including an effective Family Office, and selecting and managing the most qualified advisors – all of whom should be both expert and trustworthy- in many areas including tax, legal, PR, investment, family dynamics and others – is a necessary part of any successful approach to newly acquired wealth. - Organise and educate the whole family, with a focus on NextGen leaders : With so much at stake, it is essential to organize the family and establish an effective leadership model and define the right approach to formal governance for the family. Among the common activities here are to create a Family Council, possibly multi-generational and possibly a mix of family and non-family members, to address all aspects of the family enterprise (family, business, wealth, philanthropy and other) and draft a Family Constitution.
Education is essential: Insightful authors have talked about ‘residents’ and ‘immigrants’ to the land of wealth. The former are families who have long established principles and approaches that have enabled them to remain as a long term beneficiaries of family wealth. ‘Immigrants’ are newcomers, newly wealthy people who have much to learn to ensure they adapt well and understand how to become successful long term residents in this privileged world. An educational program needs to be set for each family member, and especially for family leaders current and future.
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