A deeper look at a white paper published this month, which highlights that around 80 per cent of families with significant wealth or businesses will succumb to the “shirtsleeves to shirtsleeves” phenomenon.

Families passing on significant wealth or a business from
the second to third generation face a different set of challenges than those
experienced during the G1 to G2 transition, as G3 family enterprises “do not
rest on the pre-existing policies or practices that have got them this far,” according
to a white paper published this month.

The paper, Good Fortune: Building A Hundred Year Family Enterprise,
is written by Dr Dennis Jaffe and uses term “generative family” to describe the successful transition of a family enterprise across
several generations (view an examination of G1 to G2 here).

It highlights that around 80 per cent of families with
significant wealth or businesses will succumb to the “shirtsleeves to
shirtsleeves” phenomenon, as new complexities arise when more and more family
members take a slice of business ownership. But it is at the G2 to G3 stage
when numbers “increase exponentially,” and this is driven by a number of factors,
the paper outlines.

While siblings usually grow up in one household, cousins belong
to several family entities: their “nuclear” family,
their “branch,” and the larger extended family. 

Meanwhile, third generation households will have different values and
expectations about money; they are often geographically dispersed, too, and
grow up in separate households with other members who are, essentially,
strangers to the family enterprise. And while G2 siblings differ in their ages
by “only a few years,” G3 cousins may differ by “one or two decades,” Dr Jaffe
writes.

The family enterprise must strive to keep cousins “aligned and
connected,” as said family members may not be sure why they are associated with the business. “They need to make a new commitment to it, and as such move
from being a blood family to a family of affinity, a family by choice,” the
paper says. 

Securing family ties during the G2 to G3 transition involves motivating members to want to do
the work to remain partners. While this can be achieved by building personal relationships across family branches and
developing a shared, extended identity, families must be able to anticipate the difficulties -
and adapt accordingly. 

Dr Jaffe's report gives the following example:

“After his G2 father died, a G3 family leader found that
several of his cousins expected to join the board to direct the family real
estate company. However, he anticipated that some of them were not ready for
the job, and appointed some of their more qualified spouses to the board
instead—a move which previous generations would likely not have taken. Because
of his position in G3, he knew that he had to defend these choices to the
family. He thus convened sessions to educate the rest of the family about the
challenges facing the business and about the role and responsibility of the
board. Despite bruised feelings, his siblings grew to accept his decision. He
also reached out to involve G4 members in these sessions.”

Building the family network

Dr Lilli Friedland, president at Executive Advisors, last
year wrote that whilst family leaders have “multiple expectations for the next
generation,” oftentimes they have not shared their thoughts with family members,
or integrated them into in parenting practices.

“Family members have a much greater opportunity to succeed
when they know others’ expectations of them,” Dr Friedland said. “As a result,
family wealth and financial advisors are increasingly introducing family
systems experts into the transfer of family wealth process, particularly at
early stages,” (view full article here).

Meanwhile a report earlier this month argued that the 2008
financial crisis has affected the way wealthy families view their investments
and make important decisions, as the patriarch adopts a more inclusive approach
to managing family assets.

The findings resonate with Dr Jaffe’s report in that, regardless
of a family's level of wealth, relationships with advisors are no longer “just
with the patriarch,” Jeff Ladouceur, director, SEI Private Wealth Management,
previously told Family Wealth Report.  

“The advisor’s role has shifted to include not only providing his position
and point of view but also facilitating the discussion among the family members
and helping drive them towards making an informed, collaborative decision,” Ladouceur
said. 

Good Fortune: Building A Hundred Year Family Enterprise - published this month by Wise Counsel Research - is
based on a sample of 38 families, of which all but two had a self-reported net
worth of over $200 million; the median value was between $600 million and $800
million.

Dr Dennis Jaffe, author of the report, is on the judging
panel for the inaugural Family Wealth Report Awards 2014 (view details here).