Have you ever heard of the Chinese proverb “Wealth does not last beyond three generations”? Or maybe you’re more familiar with the American expression “Shirtsleeves to shirtsleeves in three generations”? These two sayings refer to how wealth may pay, but it may not stay.
According to a 20-year study by The Williams Group involving over 3,200 families, it was found that seven in 10 families tend to lose their fortune by the second generation. Meanwhile, nine in 10 tend to lose theirs by the third generation. This phenomenon is famously known as the third-generation curse.
For many affluent families, this so-called third-generation curse is seen as a plague because it states that the majority of them will lose both their wealth and their business as soon as it reaches the third generation. But although most of them are aware of this curse, they tend to believe that the chances of it happening are slim.
If you think the third-generation curse happens due to some mystical or magical reasons, you’re very wrong. Families would not go bankrupt if they know how to manage their wealth well. There are plenty of reasons that contribute to this generational wealth curse, such as bad investment decisions, having to pay hefty taxes, inflation, and natural dilution of assets as they share the wealth among heirs. And other common causes would be the younger generation not prepared to carry such responsibilities of wealth stewardship since they grew up rich and do not have the experience and knowledge of growing wealth.
While the third-generation curse can be very much real, there is a way to overcome it. At the Singapore Management University Lee Kong Chian School of Business (SMU LKCSB), the Academic Director of the Master of Science in Wealth Management (MWM), Assistant Professor Mandy Tham explained that wealth can last beyond the third generation as long as it is properly managed and succession planning is carefully planned.
First things first, those who are inclined to spend big must know how to put aside their credit cards or hire a qualified wealth manager. Wealth managers can use their expertise to help high-net-worth families protect their wealth and pass it to the next generation. While writing a will is sufficient for most families, for those with extremely high earnings, wills are not airtight enough as they can be challenged, and sometimes even forged.
In these types of situations, it is recommended that they opt to get more complex wealth solutions such as setting up a trust fund or a Single Family Office (SFO). An SFO is a private entity that is set up to manage the wealth of an ultra-high-net-worth individual and their family members. Through this method, the SFO is owned and controlled by family members and will manage the assets for and on behalf of the family by centralising, preserving, and growing the family fortune.
Families could also set up a generational plan with a written strategy designed to equip future generations with the necessary information they need to carry out the plans set before them. People tend to keep their values, wishes, and money confidential. And when they do this, they miss the opportunity to share their knowledge and wisdom with future generations. When setting up a generational plan, do not assume that your family members know what your strategies are.
The goals stated in the plan should be to set specific provisions on how the money will be used and restrictions should be placed to decide how the money will be accessed and replenished. Legal documents will be used as a guide, therefore, it is important that future generations are able to understand your intentions and know how they can play a part in preserving the family’s wealth. Family members can also come together to outline the vision of a family legacy and plan their wealth strategies. This way, each family member will understand his or her role in continuing the legacy.
Last but not least, another surefire solution, according to Assistant Professor Mandy Tham is education. To her, education is the key to preserving wealth. This does not only concern the high-net-worth individuals but also their future generations and fellow financial planners as well. With financial literacy, families get to build a proper foundation in place, strategise and manage their wealth accordingly to ensure that it can last for generations to come.
Financial literacy is very important regardless of your background or status. With great financial knowledge, you get to build your wealth and even help others build theirs. Join our team if you want to build a fortune while learning how to properly plan and manage your wealth so that it lasts beyond generations!