There’s an old saw that says entrepreneurial families go “from shirtsleeves to shirtsleeves in three generations.” In other words, their money doesn’t survive the transition to younger generations.
These days, however, experts are questioning the truth of that adage as families focus more on intergenerational education and planning. In fact, a growing body of evidence suggests that, over time, family wealth and family enterprises perform better than the non-family variety.
Given the debate, we thought we would ask Canadian advisors how their clients are faring these days. What are they doing to avoid rocketing from rags to riches and right back to rags?
We asked four experts to weigh in.
Developing and building non-financial wealth
Don Steele, founder of Sterling Family Capital in Burlington, Ont., blames the focus on financial capability—as opposed to human, social and intellectual capabilities—as the greatest risk to family longevity. Those skills must be built into the next generation, he says.
“This is the biggest question that people in my business are trying to deal with,” Steele adds. “Invest not just in a portfolio of assets that they will inherit, but invest in them and the family to build the capabilities and the courage to become more impactful inheritors of the capital.”
Families also need to build and use good governance structures, as they are “the foundation for everything. And using them will also force those systems to evolve.”
As advisors accept that families need to connect their financial and non-financial strengths, “that argues an opportunity—maybe even a need—for advisors to become better collaborators,” Steele says. “There is enormous opportunity potential for professionals to collaborate more effectively in service of the families that they work with.”
The evolution of advisory professionals
Jamie Herman, partner at the Toronto accounting firm Fruitman Kates LLP, holds that the “shirtsleeves to shirtsleeves” prediction is outdated.
When his father was working in accountancy, “it was about being a good accountant,” he says. “Now, it’s about being a good advisor. I think that over time we’ve done a good job of educating the next generation.”
He cites the proliferation of professionals with the Family Enterprise Advisor (FEA) designation as one reason why family fortunes are no longer foundering after the first few decades. “Things get better over time,” he says.
However, families who decide to forgo professional advice may enter risky territory. “I’ve seen it: They sell a business and think they can do it on their own, and they burn though a lot of wealth because they don’t ask for help.”
Another risk factor is the failure to empower the rising generation. Herman recommends holding family meetings, creating a family constitution, writing an investment policy statement and establishing a finite “fund basket” that next-generation family members can manage.
As an example, he mentions a highly successful third-generation family with two grandchildren.
“One was very philanthropic and not too interested in the family business. They basically just wrote a cheque and said, ‘Go on your way,’ which I think is appropriate,” he says. “The other child ended up being very business-oriented.”
Storytelling to ensure longevity
Families today understand that communicating with their next-generation members is key to survival, says Brad Jesson, principal, Family Office Advisory, with Northwood Family Office in Toronto.
“From the Canadian perspective, even 20 years ago people were not that transparent around their level of wealth, or when and how that would transition. But I think now you’re seeing people are much more transparent with their children and grandchildren,” he says.
The power of good storytelling can go a long way toward building family solidarity and ensuring long-term success, he adds. One way is by documenting and sharing their achievements and lessons learned.
“Some do it in a highly formal way—they commission a video about their history and legacy,” he says.
In another example, a daughter in a third-generation family interviewed the founding grandparents, then in their 80s, every week for a year about their lives and their impact on their community. Then each of the grandchildren, who were in their 20s and 30s, were given part of the material to transform into a book chapter. The result was a beautiful gift that also created a unique bond among the family members.
“The families that have done a really good job of storytelling have done really well,” Jesson says.
Building a framework of communication
In studies about the longevity of wealthy families, one of the most common causes for succession failure is a breakdown of communication and trust.
“There’s a lack of a common vision, lack of a communication framework for all of the generations,” says Nancy Marshall, managing consultant and head of Family Office Solutions with Prime Quadrant, a multi-family office in Toronto. “They have difficulty dealing with conflict, especially around sensitive topics, or there’s an unwillingness of all of the parties to support the succession.”
The goals of family unity and business success are not naturally aligned, she adds, and family dynamics are often emotional. Often, it can be difficult to negotiate a transition without the help of an unbiased outsider.
“It’s not that we want to take the family out of family business, but often families do better with a facilitator or an advisor,” she says. This is useful in helping family members recognize their preconceptions and built-in assumptions.
Families should define a shared vision and values and implement them throughout their activities, she says. “That will serve you well in successive generations.”
In addition, many families often stipulate that next-generation family members must work elsewhere for a number of years, she adds, to gain skills and perspective and to avoid a sense that they have been hired only because of their family position.
The Canadian Family Offices newsletter comes out on Sundays and Wednesdays. If you are interested in stories about Canadian enterprising families, family offices and the professionals who work with them, but like your content aggregated, you can sign up for our free newsletter here.
Please visit here to see information about our standards of journalistic excellence.