Part I: Understanding the Endgame
Wealthy families are different from ordinary families in at least one very particular way. It is not so much about lifestyle (though that can be an obvious part of it). The biggest difference has to do with the daily realities of living life in relationship to the mechanisms of accumulated capital. Lifestyle choices are only one aspect of that reality.
When substantial wealth is accumulated, it comes with a whole series of structures designed to protect the pool of gathered capital. These structures consist most often of trusts, corporate entities, governance mechanisms, interlocking accounts, legal agreements and charitable organizations. Every family of wealth has its unique configuration of these entities and structures designed to accomplish the general goal of preserving capital. The more particular goals are to preserve capital in ways consistent with the sources of the wealth, the intention, and desires of the founding generation, and the management of that capital within the ambit of the family system. If one takes a snapshot of this complex of legal and financial structures at the death of the wealth creator, one could consider that inherited structure as a “surrogate” for the authority and power that previously resided in the wealth creator. (See, Marcus, 1992.) The law (as applied through this complicated surrogate) has taken the place of the founders who are now deceased. The state’s legal infrastructure is now acting in loco parentis for the absent founders and is casting a long shadow on the individuals within the family. Living with this surrogate and in its shadow is the fundamental hallmark of wealthy families. How they live in that shadow – in matters of lifestyle, individual choice, and family culture – is the outworking of the impact of accumulated capital in the life of the family.
When the legacy of accumulated capital passes to the heirs, the bare surrogate of the legal structure begins to take shape in its operation – its administration becomes clear, and the family dynamics around it emerge and congeal into stubborn patterns. The formal surrogate that existed at death emerges over time as a functioning formation. (Id.) Official fiduciaries take on their duties. Family leadership begins to arise. Most importantly, members of the family now organize and orient themselves individually and collectively around this “surrogate” of patrimonial legacy as a “formation” and come to define fiduciary and leadership roles within the family. Individually, the surrogate must be integrated into the psychology of each family member. Collectively, there arises a family culture informed by and affecting the formation. This formation becomes a central fact in the life of the wealthy family. And so, it is the adoption of this formation – and its consequent impact on the family – that is the central reality of wealthy families. They live their family life in the shadow of legal entities that control capital. This all may seem obvious when laid out, but sometimes insight arises from taking a look at basic realities in a different way.
The Endgame
The formation functions as a core reality in the family of wealth until its endgame. That endgame seems, generally to follow one of three patterns.
Division: Cook the Goose and Serve It
The first endgame is the “simple” division and distribution of assets. One might consider this to be the scenario where the goose that lays the golden eggs is killed and a rich meal is had by all. Here assets are distributed to heirs with no common threads holding those heirs together. Each has an individual relationship with a fiduciary and little relationship with other heirs. This almost always results in relatively quick dissolution of the gathered capital formation and the assimilation of the wealthy family back into the middle class over the course of a generation or two. More often than not, there is a good bit of suffering that occurs as the wealth is consumed and eventually lost. Great wealth has a tendency to do great damage without the countervailing forces of personal character and deeper commitments to social productivity. Even where those exist, the temptations of wealth often subvert them. Those parents who use the surrogate as a way of continuing to parent their admittedly incompetent children and grandchildren foster this outcome. Even in those families that work hard to avoid entitlement in its grosser forms, there is always at least a subtle complex of psychological issues raised by inherited of wealth. Partial or complete disinheritance is rarely a solution and often does real damage. In this endgame, usually, there is a lost generation or two between the accumulation of wealth and its eventual disappearance. It is an endgame that can be fraught with entitlement, risky behavior, narcissism, substance abuse, psychological damage, business failures, and general malaise in heirs. There are of course, many happier exceptions but I have seen no one leave this game unscathed to at least a small degree.
Preservation: Care for the Goose and Enjoy the Eggs
The second endgame is one of preservation. In practical terms, the family engages in a rearguard action against the vicissitudes of time. The goal of this game is to steward assets responsibly and make them last for as long as possible. This approach is based on a belief that people are happier when they act responsibly. Threats to wealth abound – financial risk, economic risk, tax risk, political risk, administrative risk, and, most of all, familial risk. If family dynamics are good, the preservation scenario results in an environment with solid formal and informal fiduciary roles.
By design within the formation, the formal fiduciaries are the advisors and administrators who work to preserve the family capital as legal, trust, accounting and financial professionals. At their best, these professionals provide wise counsel. Elsewhere I have called this “patriarchal” succession. By emergence outside the formation, an informal fiduciary-like structure of family leaders arises to manage the family dynamics that pose the greatest risk to the formation (the functional structure that holds family capital). These people are supported by consultants and advisors who help the family function more effectively. This is “matriarchal” succession.
If the fiduciary system works well on both the technical and human sides[1] – the interface between “structure” and “culture” for those who follow this blog – then wealth endures. It takes hard work to ensure that this fiduciary structure remains healthy. It requires knowledgeable oversight on the technical side, and it requires conscious and persistent leadership development on the human side. In short, the proverbial goose is cared for – which requires work and coordination – and the eggs are enjoyed for as long as possible.
This preservation scenario typically has one of two basic outcomes. Often, with poor formal and informal fiduciary practices, there are catastrophic breakdowns of trust and communication – or there is a triumph of self-interest over familial well-being – which results in battles of control for the accumulated capital. This frequently arises where structures to preserve wealth are in place, but no one is prepared to operate these structures properly. As the moral authority of the fiduciary structure within the family system fails, litigation ensues. The capital formation is picked apart. Sometimes factions within the family “win” these battles and gain greater control of the patrimony – they end up with the goose as it were. Frequently, the costs of such battles are so high on both psychic and financial levels, that the patrimony is a casualty of the process – here the goose dies in the crossfire. That said, there are families that resolve their concerns in litigation and use settlements as a dispute resolution technique – here the fight is over the allocation of the eggs, not the control of the goose itself. All are very expensive forms of decision making, but not all that uncommon. Typically, these formations fail in their goal of preserving wealth. Here the family has a stated goal of preservation, but family members are, in reality, playing the first game of “Division” based on the restrictions placed on them by the surrogate.
The other endgame to the preservation path lies in fertility rates of the family members. Ultimately, the law of large numbers will be such that the wealth can no longer meaningfully contribute to the enhancement of the lives of the beneficiaries. Here the goose simply cannot keep up and finally dies of exhaustion. Over time, the wealth, which marginally supplemented a lifestyle of beneficiaries, becomes less and less consequential in their lives. If managed well by the fiduciaries – and if the wealth is used to enhance the human potential of individuals to be self-sufficient – this path typically results in a “soft-landing” for family members who have a chance to acclimate to the gradual diminishment of wealth and their assimilation back into the middle class.
In one family, the wealth supplemented the lifestyle of the second generation (all of whom had a good work ethic but all of whom lived beyond their means because of the income from the family wealth). The third generation was well-educated by the wealth – private schools, university degrees, and post-graduate achievements. In the fourth generation, with over 125 members, the wealth will supplement their education but, given the current realities, will do little more. Ultimately substantial wealth is done in by the law of large numbers. This particular family is a good family that is quietly but persistently being assimilated back into the middle class. They do, however, face an important choice in their current generational transition. They have the possibility of playing a different game and staving off the end for another generation.
Growth: Use the Eggs to Buy More Geese
The last possible endgame we will look at is a bit different – it is one of capital growth. Here the generation in power and the rising generation collectively ask not how the wealth may be preserved, but how it can be grown to keep pace with the needs of the family going forward. Here capital is being redeployed to optimize return within acceptable levels of risk. The family views its financial patrimony not merely as a static pool of capital to be preserved, but as a tool for the generation of sustainable success. Families with this view actively let go of legacy assets in favor of optimizing returns within long-term economic and social trends. To maintain peace, they will often harvest gains and distribute a portion of those gains to family members. The goal is not merely to refrain from killing the goose laying the golden eggs but to use the eggs to buy more geese. Here fiduciary structures are married to entrepreneurial or business savvy. Here fiduciaries function not merely to manage investments and preserve capital but to take calculated risks to grow it. These families become enterprising families with the professional and staff support to manage an array of investments designed not merely to preserve assets but to enhance and add substantial value to the capital formation.
Eventually, the law of large numbers is likely to catch up with even these families – but these families generate formations that sustain themselves for many more generations than the other family strategies. These families typically land softly – their assimilation back into the middle class is a slow and natural process. They also typically experience a lot of value along the way. Their productivity is a source of pride. Their civic engagement is meaningful. They know and enjoy one another more. The competence and capabilities of each rising generation remain relatively high. Many families involved in this game simply say it is more fun (when viewed over time).
Which Game Are You In?
If one looks at each of these scenarios as “games” some interesting observations emerge. For the most part, wealthy families don’t have much clarity on which game they are playing. Founders often don’t know what they want or even what the options are. They design plans that have elements of all three games, and, therefore, are likely to fail because of the weight of their internal inconsistency or contradiction. A great deal of pain and confusion could be avoided simply by the decision to play one game – are we playing a game of Division, Preservation or Growth? Once that decision is made, steps can be taken to ensure that the family is prepared to play that game well.
In the second generation, most family members are predominately involved in the game of Preservation[2] (because of the nature of the surrogates and the formation that has emerged around it). This means they are in the midst of urgent tactical concerns. They are managing businesses, or overseeing assets, or working out immediate squabbles and kerfuffles. They have little ability or aptitude for moving beyond these tactical concerns to address matters of grand strategy. Sometimes simply asking themselves what long-game they want to play becomes a useful intervention in its own right. Asking them to think “strategically” seems abstract and foreign. However, when grounded in the notion of a long-game, strategic thinking becomes relevant and even begins to shape how the tactical questions are resolved. Families with a long-game in mind tend to play the short game differently than those who are bouncing from tactical concern to tactical concern.
Of course, there are hybrids of these three games. The heir whose assets are in trust who is spending them down while the fiduciary struggles to ensure the money will last are playing between Division and Preservation. If the fiduciary is losing that battle, the game is shaded towards Division. Some families have elements of Preservation with some aspects Growth. And so on. If these are viewed as a continuum, most families will be able to quite accurately put themselves somewhere on the spectrum. Knowing the game they are in and identifying the game they want to play allows them to gain substantial strategic clarity.
In all generations, but particularly those after the second, the games can be confused and contradictory, giving rise to a host of problems and tangled family dynamics. To play effectively, those families playing longer games must understand the consequences of these games and play by rules that support the game they are consciously choosing to be in. For example, many families say they are in the game of Growth, but are actually playing a game of Preservation and may even be playing with strong elements of the game of Division. To drill down, excluding in-laws in family decision making is a hallmark of the game of Preservation and is often wholly incompatible with the game of Growth. Preservation is often played with a lack of transparency and desire for control where Growth is played with transparency based on proven responsibility and appropriate sharing of decision making. Division is played by empowering branches. Growth is played by preparing and bringing on rising generation leadership in meaningful ways. One can tell what game the family is playing by the way they are actually playing the game, not in what game they think or say they are playing.
Every generation faces the question – within some intractable legal limits set by the formation – of whether they want to play the game of “Division”, the game of “Preservation” or the game of “Growth”. Each game requires different players, different rules, different skills, different capacities, and different capabilities. Understanding what game the family is playing is a first step. Knowing what game is being played is essential to professionals advising wealthy families. It is also essential to the formal and informal fiduciary structures within the family to know which game is being played. It is critically important to recognize that no game is better or worse than any other game – different families will find different games most appropriate at different times. There is no judgment here. What is important, however, is clarity. Where families get into trouble is when there is an inability to be clear and honest about what game they are playing. Then mixed messages, poor communication, and fitful leadership degrade trust.
Of course, a great deal of conflict in families can arise over disagreements as to which game is “actually” being played and which “should” be played. Beyond that, the games of Preservation and Growth require the development of robust family cultures that will support the game being played by the family. This development of resilient cultures takes time and effort. Structures alone are insufficient – these are the surrogates without the functionality that formation requires. In our next piece, we will be exploring the arising of empowered family culture within these different games in greater detail.
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[1] Of course, the notion of sides here is an oversimplification. The technical and the human are entangled, overlapping and interpenetrating. As an analytic heuristic, it can be useful to tease these apart to gain insight and to provide a way of speaking about the complexity involved. That said, the map shouldn’t be confused with the territory.
[2] By definition a second generation that is having to work together with a formation is playing either Preservation or Growth.
© 2016. Matthew Wesley. All rights reserved.
— February 1, 2016