Are you growing your family wealth?

March 10, 2023

Several years ago, I worked with a wealthy Silicon Valley family to help them untangle some challenging financial knots. The family consisted of a divorced middle-aged mother and her two adult sons, all of whom were overwhelmed by the burden of wealth that the mother’s very successful father had left to them. Competing priorities and a sense of individual entitlement seemed to thwart every effort to help them agree on how to manage their wealth and preserve it for the generations that followed. As a result, their family balance sheet dwindled. More significantly, the sons struggled to find meaning and direction in their lives. They were the living embodiment of the Chinese proverb: “Shirt sleeves to shirt sleeves in three generations.”

I first came across the shirtsleeves-to-shirtsleeves proverb in a very insightful book by James Hughes, Jr. called Family Wealth: Keeping It in the Family. The proverb refers to the tendency of a family’s wealth to dissipate rapidly once the founder of the fortune passes from the scene. According to Hughes, this tendency is so dominant, it is almost a rule. However, families can combat this tendency by focusing on building their human and intellectual capital even as they accumulate financial assets. Human capital refers to the interpersonal relationships within the family, while intellectual capital refers to building the capacity of family members to contribute to the family’s ongoing development.

When human and intellectual capital are neglected, financial assets rapidly succumb to life’s inevitable challenges. It is like another proverb—the one about building on a sandy foundation. Building family wealth on a solid foundation requires that we think more expansively about the definition of wealth and the nature of family.

Henry David Thoreau once said that “wealth is the ability to fully experience life.”  He was probably referring to individual wealth (Thoreau was not a “family man”), but I think he was also getting at the heart of the matter as it relates to family wealth. Family wealth grows as we help all members of the family learn to experience life fully. This is not an easy endeavor. In fact, in a paradox that can be quite perplexing, a family’s financial assets can actually cramp the growth of second- and third-generation inheritors when they become dependent on inherited wealth.

Avoiding this fate requires that we act intentionally to develop the human and intellectual capital of family members—especially in the rising generation. Education is key, as is ongoing involvement. Casual or sporadic effort will not suffice. Showing them by your example that moral action is more important than money and that living well is about more than enhancing lifestyle can help family members learn to experience life fully. Families are uniquely designed to model these important principles. However, the natural course of development in families often works against it.

When two people come together to start a family, their relationship is based purely on affinity. Affinity refers to the fact that they love each other; they enjoy each other; they share values and goals and commitment. This affinity generates tremendous creative energy. However, as children and grandchildren come into the family, blood ties begin to supplant relationship based on affinity. Unless affinity is reestablished, feelings of entitlement and privilege will take over and the family’s wealth will soon be nothing more than a memory—shirt sleeves to shirt sleeves in three generations. James Hughes describes it this way:

“When a family thinks of itself as connected by blood as opposed to affinity, it becomes a closed system. … Modern physics tells us that if a family system isn’t open, it cannot get the energy in each generation that is needed to replenish the energy that it inevitably loses. When a family thinks of itself as a family of affinity, it is defining itself as an open system. It is a family system that declares that anyone who loves its stories and embraces its value system is welcome to join. Such a family knows that for its own well-being, each generation must bring in more energy than it loses.”


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Steven C. Merrell  MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey.   He welcomes questions that you may have concerning investments, taxes, retirement, or estate planning.  Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA  93940 or email them to: smerrell@montereypw.com