This month, family office consultant Joe Reilly interviews Lisa Gray of graymatter Strategies on tensions in wealth management, the concept of real wealth and why stewardship destroys motivation.

Joe Reilly:  You wrote a wonderful book about working with families ten years ago where you note the tension that exists in wealth management between providing advice and preserving margins.  Has anything changed?

Lisa Gray:  Thank you -  I’m thrilled that you’ve read my first book!  And yes, the tension is definitely still present.  Financial institutions still have to report quarterly earnings so nothing has changed there.  On the other side of that, I am seeing greater interest by large institutions on the family dynamics side of things—primarily because clients are demanding it.  This is a good development.

The problem today is that these institutions, along with their advisors, think they can simply expand their practices and do the family dynamics work themselves when the depth of service clients need in these areas lies outside advisors’ expertise.  Firms are clearly still chasing margin by purchasing multi-family offices or developing internal family dynamics divisions. Unfortunately, many of these are simply conduits for marketing different products or services.  This becomes very confusing for clients and it makes it difficult for service-hearted advisors working for these firms to provide effective access to the help their clients really need to address these issues fully.

On the positive side, any recognition for the need to address the family dynamics side of things is a huge step forward.  The problems occur when this is viewed as just another door through which to sell products and services.

Joe Reilly:  You recently wrote about a concept you call “real wealth.”  Could you describe what this is?

Lisa Gray:  Real wealth is the source of the material and financial wealth.  Specifically, real wealth consists of the intellectual, social, and human capacities of the founders and of each family member.  It’s the idea behind a business.  The social connections that procure the funding needed.  The ability to attract the right people to execute the idea.  Then voilà!  A transaction occurs that materializes real wealth into financial capital and material assets.  These are the by-products of real wealth, the material and financial assets.  These are what our society commonly refers to as “wealth” but they are really just the by-products of the real wealth.

Financial and material wealth can be lost through the capital markets, unsuccessful private investments, natural disasters, or through divorce or a family lawsuit.

Since real wealth was the originator of the financial and material wealth, it also has the ability to recreate it.  It can do this by a) starting new businesses or b) using the established brand and loyal customers to rebuild an existing business or c) revitalizing a business that has been languishing.  Families can also employ the real wealth of other family members to recognize new opportunities and create new and different enterprises.  This is also known as organic entrepreneurship.

Real wealth lies at the core of everything.

Joe Reilly:  Why is real wealth important to the wealth advisor?

Lisa Gray:  Focusing on the real wealth does three things for an advisor:

1. It shows the client that this advisor understands their needs at a deeper level than others.  This increases trust, loyalty, and wallet share.

2. It helps advisors build relationships with the entire family, not just the individual with whom they’ve been working.  This creates an annuity for the advisor’s business with new generations of clients within the same family.

3. Focusing on their clients’ real wealth leads advisors to understand their own real wealth, leading them to create better business models that offer a win/win for them and for their clients.  This increases satisfaction in their own careers.

All three make advisors more valuable to their firms.  These advisors will have the larger, higher quality relationships.  They also help advisors competitively establish their own independent firm if that is their goal.

Joe Reilly:  Do you think inherited wealth destroys motivation?

Lisa Gray:  It certainly doesn’t have to.  Inherited wealth most often yields two primary effects: guilt for spending something the beneficiary didn’t create, or living the “high life,” which can include a lack of motivation.  Living the high life doesn’t only include high levels of spending.  It can inspire lethargy, lack of fulfillment, and cause heirs to seek affirmation from unhealthy sources.

There’s a third effect that happens only rarely.  This is when heirs employ their inheritance (financial and material by-products) to facilitate the development of their own real wealth.  Inheritances should be well-deployed, not just stewarded for the use of others.  This is different than living the high life.  This is dynamic, responsible ownership.  It’s also different than stewardship.  Stewardship actually destroys motivation because it fosters the guilt and burden aspects of an inheritance rather than the life-fulfilling ones.  Development of each heir’s real wealth creates more of wealth’s by-products for future generations to enjoy.

These are very complex issues whose roots go back within a family for decades and even for generations.  That’s why the second generation is so very important—they are the first heirs and what they do with the inherited byproducts of wealth sets the precedent for every generation who follows.  That doesn’t mean it’s impossible to change the dynamic.  Especially if we shift our thinking to the real wealth focus, we open myriad opportunities for inheriting wealth’s by-products in a life-enhancing way.  But getting the second generation on track from the outset sets a trajectory for family flourishing for generations to come.

Joe Reilly:  Are there unsolvable family problems?  

Lisa Gray:  There are no family problems that are completely unsolvable. It’s also true that trying to find a “solution” may not be the best option or may lead the family down a more harmful path. It is particularly difficult when some family members want to resolve an issue and others would rather just leave things as they are.  Sometimes it feels safer and more comfortable to stay in a dysfunctional situation than to try to break out of it because we know what it’s like in the current situation.  We’re not sure what might happen if we try to change things. So we inadvertently “choose” not to solve them.

Sometimes, consultants and advisors only add to this problem by trying to impose their own solution.  The reality is, we cannot solve any problems for our clients.  That’s something we must recognize as well as the family.  But we can guide the family in finding their own pathways.  They need us to add perspective, to get to know them intimately, and to have the service heart to realize that the solutions we might impose would be a temporary fix and might actually do more harm than good.

Fear can keep families from even wanting to find a solution.  It takes great courage for a family to face these fears and I greatly admire any family who decides to do this work.  Sometimes just learning to manage a situation or finding a pathway toward a better way of interacting is better than seeking a full-out solution.  Other times, complacency and inertia keep the family in a delusional state that “it will all work itself out on its own.” Especially if fears remain hidden, they continue to be fed by the delusion that doing nothing is better than upsetting the apple cart.  Of course, this only makes things exponentially worse and always sets up some major crisis down the road that can threaten the family’s ability to continue.

The hardest thing for families to realize is that these fears are almost always overblown.  We make much more out of them because, through our archetypical generational view of the world, we make assumptions about others that foster these fears.  It’s a very generational thing to feel that if we tell the children about the money, they will want to “push us into our grave” to get their hands on it.  It’s also a very generational thing to be concerned that knowing about or having access to the financial and material wealth will “spoil” our children.  Even the view that younger generations are overly entitled is based in generational perspectives.  That’s why understanding these perspectives is so critical to understanding the family dynamic and the foundation for the way family members interact with each other.

And however service-hearted we may be, not even the best consultants or advisors can help a family who does not want to be helped.  However, my experience is this: even the most resistant families will “give it one more try.” This is a huge opportunity and it is also a point where the consultant has to be particularly skilled. Although they’ve been able to get a foot in the door to help the family, it is still a very delicate situation that must be handled gracefully, with great skill, empathy, and even love for the family client.

Most families I work with really do want to get on a better path.  That doesn’t mean it will be easy for them.  One of the most fulfilling aspects of my work is partnering with a family and encouraging them to face what may look to them to be insurmountable.  It’s my task to give them the best options, share the best of my experience and expertise, and guide them in finding their own way.  Then my role is to support them over the long term in staying on the path that best fits their needs.  Once a family chooses a path that seems right for them, the ability to stay on that path long enough to make all the hard work worthwhile can be challenging.  But incredible things can happen as a result.

Joe Reilly:  Most family governance processes are structured around the chronological generations within the family.  How important is considering the wider national and social generation a family member is in?

Lisa Gray:  It’s extremely important. The perspectives of chronological generations (G1, G2, G3, etc.) are certainly important.  Yet each of us is part of a larger generational cohort in society.  Each of us knows whether we are a Silent, Boomer, Gen-X, or Echo/Millennial generation member.  We also know which characteristics of our larger societal cohort we subscribe to—none of us subscribes to every characteristic of the larger generational persona.  But we automatically know which characteristics resonate with us.

We bring these characteristics into the way we interact with our family members and our view of the world is our default frame of reference.   That means we often make assumptions about how another family member feels or make judgments about their behavior that are completely false.  These assumptions and judgments impact the way we interact with our family members.  This interaction is also known as family dynamics.

If ignoring or failing to understand these differences in views can cause us to make false assumptions and judgments, it can also cause us to set up a governance system that is onerous at worst and inhibiting at best.  Coupling even a base-level understanding of the societal-generational perspectives with the chronological-generational perspectives (which are indigenous only to families of wealth) fosters governance that encourages engagement, good business practices, family flourishing, and wealth creation.