Time to set fire to ‘shirtsleeves’ adage about family wealth, advisors say

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From “buy low, sell high” to “if you’ve seen one family office, you’ve seen one family office,” the wealth-management world offers no shortage of well-worn axioms and adages.

Among the most familiar is “shirtsleeves to shirtsleeves in three generations,” a pithy way of saying that family wealth is ephemeral. What one generation builds, the next enjoys and the third squanders.

“It’s one of those cliches that’s really coming up for some myth-busting lately,” says Daniel Trimarchi, director of family business enterprise services at KPMG Canada. “I think the only reason that families know about it is because advisors and media have put it in front of them so often.”

In fact, a growing body of evidence suggests that, over time, family wealth and family enterprises perform better than the non-family variety. For example, the National Bank of Canada’s frequent “Family Advantage” reports have often made the point that an index of family-owned Canadian businesses regularly outperforms the S&P 500.

Yet the shirtsleeves myth continues to influence wealth managers and their clients — potentially doing more harm than good.

But where did it come from in the first place?

The whole concept of shirtsleeves to shirtsleeves is often used in a way that frightens business owners.

Carolyn Cole, Cole & Associates

One likely source, suggests Trimarchi, is research published in 1987 by John Ward, a groundbreaking family-wealth scholar at Chicago’s Loyola University. Ward examined 200 manufacturing businesses in Illinois that existed between 1924 and 1984. He found that only 13 per cent made it to the third generation, and most of those survivors were only barely hanging on.

Ward’s research was intended to spark insight into the factors that can make or break family businesses over time, not to generate a truism about their chances of success. But that’s exactly what happened.

“The later interpretations of that work don’t take a raft of factors into consideration,” says Trimarchi. “Not the least being that business exit isn’t failure. If you sell a business, if you transition to a new business, is that a failure? Or is that a smart reallocation of wealth? It’s a simple reading of a very complicated set of data.”

Real-world stories

The point holds true regardless of a firm’s size. In a 2012 study examining intergenerational entrepreneurship, business scholar Thomas Zellweger and colleagues found that 90 per cent of families studied controlled more than one firm. Family enterprises transitioned, merged and otherwise evolved over time in ways that more simplistic analyses could miss.

“It may be important,” Zellweger wrote, “to shift a family’s self-understanding from controlling a ‘family business’ to being an ‘entrepreneurial family.’”
But for those studying family-wealth dynamics, tracking that more complex transition of wealth from one generation to the next becomes nearly impossible — and tough to squeeze into a concise turn of phrase.

Not helping matters is the occasional real-world story that plays into the shirtsleeves truism, such as the succession battle that has roiled the Rogers family at Rogers Communications in Toronto.

The lacklustre heir to a family dynasty is also a staple of pop culture: Think of the Roy family on the TV show Succession and its middlingly competent adult children competing for the approval of a Murdoch-like patriarch.

Look out for  ‘experience gap’

When wealth managers and clients buy into these tropes, everyone suffers, says Carolyn Cole, the B.C.-based founder of Cole & Associates, an independent family-office strategy and design firm.

“The whole concept of shirtsleeves to shirtsleeves is often used in a way that frightens business owners,” she says. “‘If you don’t save X amount of money, your children will squander it and your grandkids will have nothing.’ I believe some wealth professionals use that in a way that evokes fear, and that’s not productive for clients at all.”

The worst-case scenario, Cole suggests, is a situation where the older generation is reluctant to pass control to the next generation, potentially stifling the business’s evolution. This is often driven by what she calls the experience gap: “That’s where you may have a very capable 65-year-old owner who says, ‘I can’t turn this over to my 35-year-old kid, because there’s a 30-year experience gap, and they won’t know what they’re doing.’”

This reluctance can itself become a threat to the business, depriving it of fresh leadership and new ideas.

Trimarchi says, “My conversations with the senior generation are often about seeing life from the perspective of the next generation. That means understanding that the younger generation’s relationship with the business isn’t necessarily going to be better or worse, it’s going to be different.”

This is related, he says, to the fact that family wealth today tends to be spread over multiple enterprises: various ventures, real estate portfolios, and so on.

Next gen playing new roles

Gerry Meyer, a Vancouver-based family enterprise advisor and owner of Meyer Advisor Group, suggests yet another reason why the shirtsleeves myth may be less valid today than in years past: Many family businesses are now taking a more sophisticated approach to succession.

“The next gen may stay part of the wealth,” says Meyer. “But they aren’t necessarily active in the business in the same way. More families are starting to go to — and I hesitate to use the term — professional management, with succeeding generations taking a big-picture role as the company is managed by outside hires.”

He also echoes Trimarchi, suggesting that family businesses that are reluctant to engage the next generation are likely to fall out of step with contemporary priorities, such as ESG – the focus on environmental, social and corporate governance issues – and social responsibility.

Even John Ward’s work contains similar lessons.

Ward’s 1987 book Keeping the Family Business Healthy — which includes that influential Illinois manufacturing study — contains a foreword by Léon Danco, founder and CEO of the Center for Family Business in Cleveland. Danco wrote that family businesses often struggle because “owners typically fail to recognize the needs of the future in managing their businesses. Instead they prefer the comfort of past visions, the safety of old routines.”

In other words, it’s not the next generation that will squander that business or that accumulated wealth. Given the right tools and right chances, it’s more likely that the next generation will be the one to keep it alive.

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