How to beat the third-generation curse

Wealth may pay, but it may not stay — that’s a piece of conventional wisdom that appears to transcend cultures. A Chinese saying that goes “Wealth does not last beyond three generations”, for example, is essentially stating the same belief as to the American expression, “Shirtsleeves to shirtsleeves in three generations”.

And data does back up these aphorisms. A groundbreaking 20-year study conducted by wealth consultancy, The Williams Group, involved over 3,200 families and found that seven in 10 families tend to lose their fortune by the second generation, while nine in 10 lose it by the third generation.

However, there are ways to be at the odds. In a masterclass hosted by Assistant Professor Mandy Tham, the Academic Director of the Master of Science in Wealth Management (MWM) at the Singapore Management University Lee Kong Chian School of Business (SMU LKCSB), she expands on the idea that wealth can last beyond the third generation as long as it is well managed and the succession planning is carefully planned.

A dissection of dissipation

Firstly, let’s look at why great fortunes dwindle over time.

In some cases, family disagreements can negatively impact family fortune. That’s how Yeo Hiap Seng – the company that started the popular Yeo’s brand of drinks in Singapore – fell into the hands of the competition. When descendants of the founder, Yeo Keng Lian, fought over the business and family properties, the ensuing court cases caused the company’s share price to drop. This allowed a rival family to acquire majority share ownership and subsequent control of the company.

Of course, descendants are not always to blame. In some occasions, it boils down to sheer extravagance.

Take the example of the King of Pop, Michael Jackson – a world-famous entertainer who ultimately died with over US$400 million in debt. His extravagance was once described as a “billionaire spending habit for only a millionaire's spending budget”, especially with the expensive upkeep of his home and private amusement park - Neverland Ranch. Not to mention, he faced many lawsuits from creditors and accusations of sexual harassment during his lifetime, and that also put a drain on his fortune.

How to beat the curse

Big spenders may simply have to learn to put their credit cards away. However, those with other worries such as creditors will need to protect their assets with proper planning and knowledge, which can be provided by a qualified wealth manager.

These wealth managers are armed with the expertise to carry out asset protection and succession planning, which is extremely crucial for those in the high or ultra-high net worth space. “For people with a lot of wealth, typically the first thing to note is that they are not going to outlive their wealth. It’s more about how to protect that wealth, and pass it on to those they love,” says Assistant Professor Mandy. 

Some may wonder whether it’s enough to write a will, but for the very rich, wills are not airtight enough as they can be challenged, or even forged. Take the case of Hong Kong’s Nina Wang, once Asia’s richest woman with an estimated fortune of over S$5 billion. When she passed away in 2007, a former lover presented a forged will claiming she had named him the sole beneficiary to her fortune. Even after the court ruled his document a fake and sentenced him to 12 years in prison, court battles still continued for many years over the meaning and legal effect of her actual will.

Banking on better solutions

That’s why more complex wealth solutions such as setting up a trust fund, or even a family office, may be required. The latter is considered a sophisticated solution, says Assistant Professor Mandy. A single family office is a private wealth management advisory firm serving a single family, hence it is able to serve the purpose of centralising, preserving and growing the family fortune, which includes providing a platform for family members to reach an agreement on investment goals and family legacy.

Looking at examples of wealth that has lasted beyond three generations can offer illuminating lessons as well. International food conglomerate Cargill Inc., for instance, was founded in 1865 by American business executive William Wallace Cargill. It has stayed in his family for four generations, and remains one of the largest private companies in the world, with nearly US$120 billion in revenue in 2018 and over 160,000 employees in 66 countries.

According to Assistant Professor Mandy, one thing the Cargill family did right was distinguishing between management succession and ownership succession. “Children who may succeed you as owners need not succeed you as managers,” she notes. “This is a concept which Western countries have adopted to preserve the old money in European families that have been passed down over many generations. Here in Asia, we have new money. So we’re still getting used to the idea that managerial positions don’t have to be passed on to children.”

In line with developing trends in the sector, the MWM programme is the first in Singapore to embed three Advanced Wealth Management Programmes which are IBF-accredited at Levels 1 and 2 under the new 2018 IBF Standards for Wealth Management – Relationship Management (Private Banking). The curriculum covers six different services of wealth management in detail: asset management, risk management, client relationship management, tax planning, retirement planning and estate planning. It also answers to the increasing industry demand on how to set up a charitable foundation to preserve the family legacy, as well as investing in sustainability.

“These days in wealth management, private bankers need to be increasingly sophisticated. We recently introduced a module on cross-banking solutions to private bankers, so that they can identify corporate/investment banking needs of clients who own businesses, and collaborate across banking units to provide holistic solutions for such clients,” says the professor.

Ultimately, she believes education is the key to preserving wealth, and this means education for both the high-net-worth individuals, their future generations, as well as those who advise them. With that foundation in place, and the right management and strategy, wealth can definitely last much longer than just three generations.