Given there are now more billionaires than ever, the theory of the “three-generation curse” seems particularly relevant.  But is the wealth built by a first generation (most often, an entrepreneur) destined to dissipate by a third generation?  Can one protect one’s hard-won assets from future mismanagement?  My thoughts led first to identifying causes, followed by a consideration of how to prevent the erosion of wealth.

How Wealth Erodes:

Failure to impart a work ethic.

Heirs who have ready access to family assets may feel “entitled” and lack motivation to preserve the wealth.  Independently wealthy young adults are often referred to as “trust fund babies” and recently, the buzzword “affluenza” has entered the conversation—a reference to unhealthy psychological effects that are due to affluence.

Lack of financial education

Those who inherit wealth (or experience sudden wealth) may not know how to manage it effectively, perhaps spending lavishly and making poor choices – such as imprudent investments.

Conflict within a family

Disputes over the allocation of an inheritance or discord among family members with regard to property and other tangible assets may lead to expensive legal battles.

Poor planning

Failure to create a clear, coherent plan for the distribution of assets can lead to depletion of wealth through investments that fail to produce the high returns that allow a family to build on a foundation of affluence.

Economic disruptors

Inflation and market volatility can diminish the value of an inheritance, especially the value of an investment portfolio that is not thoughtfully diversified.

Lifestyle choices.

Wealth over generations is also affected by the number of children who will be named as heirs, the high costs associated with divorce and other familial matters.

As an example, Cornelius Vanderbilt, once one of the richest men in America, built a shipping and railroad empire founded with relatively little money that Cornelius borrowed from his mother.  His heirs decimated the fortune by spending recklessly on fine art, yachts, thoroughbred horses and several grand homes in New York City and Newport, Rhode Island.   Perhaps prescient, the patriarch is quoted as saying, “Any fool can make a fortune; it takes a man of brains to hold onto it.”  Vanderbilt’s children failed to do so.¹

How Wealth Can Be Preserved

While there are no guarantees that an affluent family will remain so in ensuing decades, I found of interest an article published on Nasdaq’s Personal Finance page entitled, “Generational Wealth:  Why Do 70% of Families Lose Their Wealth in the 2^nd Generation?”  Nasdaq’s contributor points out that the failure to discuss one’s wealth with heirs is likely to result in “unnecessary taxes, costly estate fees, and possible family strife.”² As a preventative:

Open the Lines of Communication:  Prepare the next generation and take advantage of “teachable moments” so that family members can learn and become knowledgeable enough to participate in decisions that affect the family’s wealth.

Share Decision-Making: The inability to properly manage an inheritance may simply be that the wealth creator did not involve children in the thinking and practices that lead to building and managing wealth.

Consider  Professional Advisor or an Impartial Trustee: Challenges may arise that family members are not equipped to handle.  An objective individual could free discussions from the biases and emotions that can override rational decision-making.

Develop a Plan:  An informed plan provides a roadmap for how wealth should be managed and invested for future generations. 

As a financial adviser,  I am convinced that professional expertise and an understanding of the “psychology of affluence” can play a crucial role in protecting wealth.  But ultimately, perhaps it is a legacy of sound values—a sense of purpose and shared responsibility—that will preserve and even expand an affluent family’s wealth.

1. Quoted in Fortune’s Children: The Fall of the House of Vanderbilt, a family history written by cousin Arthur T. Vanderbilt II.  See:  https://www.forbes.com/sites/natalierobehmed/2014/07/14/the-vanderbilts-how-american-royalty-lost-their-crown-jewels
2. Generational Wealth:  Why Do 70% of Families Lose their Wealth in the 2^nd Generation? October 19, 2018, published 3:22 pm EDT https://www.nasdaq.com/articles/generational-wealth%3A-why-do-70-of-families-lose-their-wealth-in-the-2nd-generation-2018-10