Vulnerable Outposts
With so many people acquiring wealth and others joining by marriage and by birth, why are only about 20% of wealth holders second generation or later?  Why doesn't the Land of Wealth swell with natives who preserve the hard work of the first generation and deepen the roots their forebearers put down?  Instead, the Land of Wealth is a frontier of often short-lived outposts.  Many descendents find themselves eventually deported from the land their ancestors struggled to reach.

The reason may not lie in bad investments or punitive taxes. It rests largely in the sociological complexity of immigration and adaptation. Parents make it in but can't teach their kids the skills needed to stay.

One pattern is based in the nature of wealth creation through entrepreneurship, especially a family business. Wealth creators are often strong-willed, persistent, creative and unafraid of risk, with a strong work ethic and sense of responsibility-characteristics shared with geographic pioneers. The stories of their journey become dinner-table sagas that teach young listeners the value of perseverance, creativity, purpose and initiative.

But the special qualities that enable the first generation to amass wealth may not serve them well in creating an environment for preserving wealth. Virtues in business are often vices in parenting. These economic pioneers may want to control decisions and not seek counsel. They may find it hard to let go and tend to dominate conversations and choices. This sets up a frustrating family climate that causes heirs to make poor decisions in relationships, business and life. The result is exile from the Land of Wealth.

Immigrant Parents, Native Children
In the face of these challenges, the analogy of immigrants and natives tells us much about how to sustain generations of wealth. The key is that immigrant parents must raise children well in an unfamiliar world.

Being an inheritor brings risks as well as benefits. Substantial wealth makes life more convenient, but spirits many transactions away from sight, impeding the learning of money skills by children. Wealth can reduce needless suffering and the struggles that build character. It can open doors but also provide improper rescues. Having access to great resources can inspire confidence, but just as easily foster a feeling of entitlement or angst. Without the steady, wise hand of a parent, wealth's children get lost-and lose. Being rich does not spoil people. The culprit is inadequate parenting.

To hold together, wealthy families need to recognize that parents and children face challenges in identity, communication and skill building.  "Arriving" changes parenting, but it does not mean parents can abdicate it. For example, using an allowance as a training tool-rather than a prize or a payoff-addresses the inheritor's need to learn and the parents' responsibility to teach.

Good parenting should also be part of estate planning. Well in advance of creating restrictive or disempowering estate plans, a family should discuss the decision with everyone. In the long run, it is better to train the beneficiary than to control the money.
But first, immigrant parents must carefully adapt to the realities of the new culture. Rigidly following an old playbook is no more helpful that throwing out the rules altogether.  The lessons learned in middle-class life must be retained yet adapted to the Land of Wealth if succeeding generations are to prosper.

The process is like a preflight oxygen mask lesson. Parents must first learn the lesson themselves and then aid their children.  Once acclimated to the new environment, parents can give their family the tools they need to navigate the shores of wealth.  They should be open, communicative and seize upon opportunities to pass financial knowledge on to the next generation.

     Market events the past two years have affected many affluent families along the fault lines characteristic of wealth's immigrants and natives.
     Many among the first-generation wealthy have experience with financial peaks and valleys and adjust spending accordingly. We've seen many wealth creators take today's turmoil in relative stride-by calmly adjusting the risk profile of their portfolios, for example. A few have even tried to find opportunities amid the turbulence.
     During this crisis, however, some in this group are uncomfortable with outside advisors handling their investment risk. For them, it's like watching someone else steer their family's ship through a hurricane-especially if this is the first crisis they are experiencing since a liquidity event. As a result, asset managers have been contending with multiple calls and e-mails, as well as angry recriminations, by clients critical of how things have been managed.
     For wealth's natives, things are more complicated.  Many have no experience living through a major downturn.  In denial or feeling entitled, some in the second or third generation continue to spend unchecked, resisting suggestions they need to be more prudent for a while to live within the family's diminished capacity. In good times, these overspenders can frustrate a family.  In bad times, they can cause conflict-to the point where their financial support may be cut off.
     At the other extreme, some heirs are panicking that their lifelong security may disappear.  They live with little sense of self reliance or vocational competence so they aren't sure they could support themselves if their family income were reduced.  These natives of wealth feel helpless, dependent and anxious despite the fact the family's resources are more than adequate to support them. 
     The latest bear market has starkly revealed the true nature of each generation.  Wealth's immigrants revert to their roots by living with risk, adversity and independence, while natives are learning how to do this for the first time. The market volatility provides family members opportunities to communicate and empathize with each other, to learn and to bounce back, as the markets always do.  Advisors have an equally strong role in comforting each generation with individual guidance and support.