When hearing the term Family Wealth, do you just assume a big pile of capital supporting a family? I used to, and frankly, this is the most important component, but it is definitely not the end all be all. However, Family Wealth (notice the capital letters) consists of much more than just money in the bank. Great families through time often start with financial capital, but there are a lot of wealthy families that are long gone and you nor I have ever heard of them. In fact, focusing just on the money component pretty much ensures that the shirtsleeves to shirtsleeves in three generations holds true. We must look beyond the financial in order to build real Family Wealth.
When I look to build my family, I plan on focusing on five key parts:
- Financial capital: Financial wealth is the lynchpin to setting up great Family Wealth. Why? Because having money is easier than not having money. It’s as simple as that. Having resources available makes everything else easier and things that would otherwise not be possible, possible. It’s much more challenging to do anything else on this list without financial wealth. Hence, this is still number one on the list, and likely always will be.
- Human capital: New flash: death has a 100% success rate. Which means, you will not always be there to drive your family forward. Someone else will have to take the reins at some point. How can you be sure that your successors treat your Family Wealth as you would? Focus on the values and character of your family members.
- Social capital: It’s not what you know, it’s who you know. This statement has never been more true and will likely continue to be in the future. New ventures are formed at the intersection of good ideas, financial capital, and great people leading. Having access to all of these is required. Without one, the venture will fail, guaranteed. Beyond that, building a great family requires engagement beyond the narrow financial or business world, and extends to the community around you and your family.
- Intellectual capital: Regardless of a chosen profession, there are some crucial building blocks that must be taught and learned. Family members must be able to manage money and people successfully. Within the family, the ability to work together and solve problems is crucial. Beyond that, though, I believe having a basic understanding of civics and how the universe works is important, regardless of one’s vocation.
- Spiritual capital: Being rich can be morally difficult. Why do I deserve this money just because of my birth? Having more than others can lead to guilt and depression. While my family is not religious, we are spiritual. Spirituality helps guide your heart to doing what’s right. Spirituality helps you to be brave in a universe full of unknowns. Spirituality connects us with the past and allows us to think about our impact on the future.
But first, why do all of this? The majority of the population just lives their normal existence, does the best they can, and hopes they leave things a little better than when they started. So why work so hard to instill the values and create a structure for future generations? It’s simple. I care about my children and grandchildren more than I care about your children and grandchildren. Now don’t get me wrong, I want to see all people do better and be better, because that makes the world better for everyone, including my own family. However, I’d be really, really concerned if you cared for my children more than you care for your own children. We tend to want to take care of our own, and there is absolutely nothing wrong with that. In fact, we should.
If I can give my children, grandchildren, and great grandchildren a solid base and a head start (without causing them to be lazy trust fund kids), then I will. And that goes well beyond just financial. Schools are great, but don’t really teach what’s most important. They don’t build human capital (at least not much). They definitely don’t build social capital (unless we’re talking Ivy League colleges here) and spiritual capital, and frankly, they do a poor job of building intellectual capital. That’s a parent/grandparent/uncle/aunt/sister/brother/cousin’s job. One that I am happy to take on.
Let’s take a deeper dive into the five sources of Family Wealth.
As mentioned above, without financial capital, all of the rest becomes much more difficult. Exploring how families set up and maintain wealth over generations will be a primary theme of this blog. Given that fact, I won’t get too into the weeds here, so that I can focus on the other four sources of Family Wealth.
An important point to make though is that you do not need extreme wealth to begin this process. My family is a prime example. We are fairly high income earners that have a seven figure net worth, but are nowhere near very wealthy (frankly, I don’t even put us in the wealthy camp yet). Like most 30-somethings, a good amount of our assets are tied up in personal real estate (especially given our aversion to debt and hence, no mortgages). And, we came from humble backgrounds. Both my wife’s and my parents are divorced and at or near retirement. Financially, their assets look like this:
- My mother: Social security, state pension, $300,000 in investable assets and a paid off house
- My father: Social security, $750,000 in investable assets and a paid-off house
- My mother-in-law: Social security, $350,000 in investable assets, renter
- My father-in-law: Straight-up broke and can’t keep two nickels in his pocket
One of the things that neither set of parents did was teach either of us about money in any way. I lucked out in having a grandmother who pointed me in the right direction and found things like the Motley Fool early in my college years. Thankfully, with my fairly obsessive personality, I dug right in and got on the right track.
While I generally dislike the term human capital, I think that it aptly describes the process of building up family members’ character and abilities. Human capital is the umbrella that focuses parts of the remaining three sources of Family Wealth and then some. Think of human capital as the set of tools needed to succeed personally and to sustain a great family for generations.
There are a number of qualities that I consider important, and most, if not all, need to be present to achieve great success.
- Internalized desire: The desire to continue to learn and accomplish, without being prompted by outside actors, is crucial. At some point, you get out of college and no longer have professors, advisors, or even parents pushing you. You must internalize that drive to learn more, do more, and achieve more. We’ve all seen co-workers who just seem happy to come in, do their 9-5, and check out at the end of the day. Every business needs cogs, so there is absolutely a place for these people. However, they will never be the ones to build a business, create family mission statements, or on a whim, learn the constellations or memorize the amendments to the Constitution.This is my greatest fear as a parent. How do I help my kids internalize desire and build that drive to do and be better? Is it even possible or something that we’re either born with or not? I hope that’s not the case, and will continue to strive for better ways to help my kids build that drive. Steve Martin is absolutely right: You need to be so good they can’t ignore you.
- Build Character: We live in a world where people lash out at random strangers on the internet for the smallest of sleights. We live in a world where people literally kill each other because one person cut another person off in traffic. Character matters, today more than ever. And nowadays, it’s actually a differentiator. I have often, in jest, boiled my life philosophy into two rules:
- Don’t be an Ass!
- Few things are as big of a deal as initially thought!How does this relate to building character? It’s the building blocks to a code of ethics that I try to teach my children. I’m hoping to instill in them some very important attributes:
- Treat others as you wish to be treated, and in fact, treat them better than that! This is the polite form of “Don’t be an Ass”.
- Initial reactions are often the most wrong. Calm down, focus, and assess. Then determine your next course of action.
- You are in no way, shape, or form inherently better than anyone else. Everyone can teach you something and you should always be open to learning from anyone (even if it’s how not to do something!). In our society, a doctor is smarter than a plumber, but a doctor and a plumber are both smarter together.
- Be doggedly persistent, but remember, all good things come with time. It will often seem like you’re doing a lot of work for nothing until one day, it pays off.
- Avoid drama and don’t be a gossip. My wife and I have a few family members and friends who when we speak with always (and I mean always) have some story or drama in their lives. Strive for low levels of drama in your life, and rise above the petty gossip.
- Be courageous and bold. Life’s biggest regrets are more often what we did not do rather than what we did do.
- Connect to the Past: Everyone stands on the shoulders of previous generations, which can be a good thing or not. In fact, we also stand on our own past’s shoulders. Our family considers it important to know where we came from. Whose shoulders are we standing on? There are always things to be proud of and things to be ashamed of in previous generations. That’s life, don’t hide it.
It’s not what you know, it’s who you know. One of the most common clichés, and yet very wrong. It’s a combination of what you know and who you know. Frankly, social capital is probably the primary reason that wealthy families maintain and grow their wealth. Great businesses or investing ideas are always a combination of the right idea, access to capital, and the right people to execute.
Wealthy families give their children a head start by simply being in the right circles. They introduce their children to business partners and other wealthy individuals. They introduce them to high level service providers (attorneys, accountants, investment professionals). They help get their children into the right schools, which do not necessarily provide any better education but absolutely provide better professional contacts.
They also tend to be members of the right organizations. I am not talking country clubs here, although that may be part of it. Think about those high level professionals who serve on charitable boards with other high level professionals. Do you think those connections don’t mean anything?
So start building connections now. Get out of your comfort zone. Volunteer with organizations that you care about and work on some high level projects. Don’t just volunteer at a place because you’re trying to meet the Board; it will be too obvious.
The importance of intellectual capital leans much more heavily on the ability to think critically and to have the ability to seek out and find the correct answer rather than just knowing random facts. Universities are (were?) a good example of that. Very little of what we’re taught throughout our time in school sticks with us. But we are able to learn the basic building blocks and get comfortable with the process of seeking out the answers in a way that is successful most of the time.
It also gives us the ability to spot bull when we see it. Math sense is a good example. If you’ve never heard of math sense, it simple comes down to this example. Quick, what is 46 times 34? Math sense does not mean you know the answer off the top of your head, but if I told you the answer was 71,412, you’d look at me pretty funny (it’s 1,564, by the way). That’s math sense. It’s not that you necessarily know the correct answer perfectly, but you can tell when something is blatantly incorrect. This is true across most subjects, and I think in today’s world, sniffing out the real from the fake is a valuable skill.
And to some extent, intellectual capital helps in social capital. Being able to hold a conversation and discuss, at the very least superficially, a variety of subjects helps you to be part of a network. Remember that at high income levels and high levels of wealth, most, if not all, people are highly learned people. There is a certain level of expectation that you’ll be able to relate. You may end up discussing last week’s Monday Night Football game, but you’re more likely to discuss Voltaire, or the War of 1812, or famine in the Sahel.
My family is not religious in a traditional sense. However, spirituality and religion are in no way the same thing. To us, practicing spirituality is a way to keep us grounded and allows us the ability to live in awe of all of the things around us. I’m a big believer in the scientific method, and believe that with time, humans will be able to explain much of the world and universe around us. But let’s step back and think about where you are today:
- You live on planet Earth, which, so far as we know, may be the only planet in the universe to hold complex life (I sincerely hope not).
- You live in a galaxy that is 100,000 light years across, or roughly 1,000,000,000,000,000,000 kilometers wide.
- You are a human – the apex species on a planet that’s estimated to hold between 2 million and 50 million animal species.
- You (likely) live in the United States or another free Western-style Democracy. Regardless of how you feel about one political party or another, you have the ability to live your life any way you see fit.
- If you’re reading this blog, you’re (again, likely) in at least the top quintile for income in the US, the top 3-5% for income globally, highly educated, and have the ability to build an amazing life for you and your family.
Spirituality allows me to be grateful. Every single day. Because I should be.
Real Family Wealth
All of these components allow us to build real Family Wealth. Without each of them, our families would be doomed to go from shirtsleeves to shirtsleeves in three generations. Most focus only on the financial. But these other components are what allow that financial capital to stay and even grow, generation after generation. They are what allow future generations to prosper as people, not just bank accounts.
Keep building my friends.