For successful families, key transitions occur in both the second and third generations. While the wealth creator is often focused, risk tolerant and driven, a different skill set is required in the second generation to effectively sustain wealth.

With so many of wealthy families still embroiled in business and needing to prepare the younger generation to learn the ways of enterprise, a strategy to make such preparation bear fruit makes obvious sense. In this article, Valerie Galinskaya and Matthew Wesley from Merrill Lynch’s Center for Family Wealth Dynamics and Governance™, address some of the challenges. The editors of this publication are pleased to share these insights and welcome responses.

Raising children to become productive members of society is a challenge in any family. The challenge is that much greater in wealthy, legacy-driven families. Successful families develop a resilient family culture over multiple generations.  This focus helps to sustain both the financial wealth and family unity. 

For successful families, key transitions occur in both the second and third generations. While the wealth creator is often focused, risk tolerant and driven, a different skill set is required in the second generation to effectively sustain wealth. This includes the ability to work together and the flexibility to adapt to changing circumstances. The third generation fuses the entrepreneurial and business acumen of the first generation with the collaborative teamwork of the second generation to build a family enterprise. 

In our experience, there are common traits that allow for the success of the second and third generations of leaders. In his recent research (co-sponsored by the Center for Family Wealth Dynamics and Governance™ and Merrill Lynch’s Family Office Services), Dr Dennis Jaffe, of Wise Council Research, analyzed the patterns of “generative” families - those that are able to achieve financial success while adapting and retaining shared connection.   

Drawing from our own work with multi-generational ultra-high net worth families and our collaboration with Dr Jaffe, we can identify key patterns that allow generative families to unleash the potential of the rising generation.

Develop the rising generation as individuals
The complex skills required for generational transition require, as a foundation, the development of both competence and personal character in the rising generation. 

Competence
Often children come into inheritances without the skills or abilities to manage that wealth. We have identified five core competencies across which older generations can intentionally foster learning.  

The rising generation must learn how money works, including saving, investing, spending and sharing (financial acumen), how wealth planning works in regards to legal structures and taxes (wealth acumen), how to make collective decisions (governance acumen), how to operate a business (business acumen) and, if philanthropically inclined, how to effectively give to selected causes/organizations (philanthropic acumen). We’ve observed that successful families foster competence by leveraging age-appropriate “teachable moments,” through practical experiences, exercises and readings in each area.

Coupled with nurturing competence, generative families cultivate personal character in ways that promote growth, productivity and fulfillment. Parents who consistently “rescue” their children from negative consequences miss out on resilience-building opportunities which limit their growth. Indeed, according to Professor Angela Duckworth, resilience ranks as a better predictor of future life outcomes than talent and IQ. Providing the right amount of support while setting high expectations and accountability helps young adults build the skills necessary to succeed on their own terms.

Foster a team culture
The success of the rising generation begins with building a sense of community, collective activities and defined responsibilities. Beyond individual development, thriving families focus on building a powerful family culture.

Generative families understand the purpose of their wealth and their abiding commitment to one another. They consistently adhere to attitudes and behaviors and explicitly communication their beliefs and values. Wealth creators often document their vision for the purpose of the wealth and what success means to them. Of course merely adopting this vision is not sufficient – the vision must be adapted at every generation. Extensive dialogue generates clear direction for the use of wealth and the principles that will govern collective decisions.  

Often, wealth creators and trustees don’t share information with family beneficiaries. This practice keeps the rising generation from developing the skills to be effective over time. If they are not informed, how can they prepare themselves for possible roles as business owners, family leaders or stewards of wealth? Wise families recognize that their children must be well-prepared to collectively manage that wealth. 
Many wealth creators look to answer the questions “How much do we pass on and when do we tell them?”  These questions assume binary solutions – that there is one “right amount” and “right time” for disclosure. Successful families don’t approach the disclosure of wealth like a light switch that is either on or off, but as a dimmer switch.  Information is shared in stages. For example, a family may start by defining its values and the purpose of its wealth and later proceed to explain the different “wallets” - or structures - that hold the wealth. Finally numbers are attached. Progressive disclosure follows the age and maturity level of the recipient. Responses to early disclosures dictate cadence of future disclosures. 

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Maintain momentum 
Given the complexity outlined above, families face the continuing challenge of engaging family members and ensuring accountability. Families who maintain momentum become learning communities that empower the rising generation to build upon the legacy of the past.

Family learning
Developing a family learning community requires a focused commitment of time, money, and energy. We have seen firsthand how this investment fosters family unity and develops the rising generations. Dr. Jaffe’s research shows that generative families typically hold annual gatherings for family members of all ages. 

Here they learn from family leaders and visit businesses, family offices and foundations. The vast majority of these families create interactive educational programs for younger members. They explore family history, learn financial competencies, and offer mentoring opportunities. These prepare the rising generation for their chosen careers and for future family leadership roles. 

Family champion
There emerges in almost all families a person who takes on the role of a ‘family champion.’ This rising generation leader works tirelessly to build the decision-making and ownership capabilities of members to fulfill the family’s goals.  He or she is a critical source of innovation and plays a pivotal role in bringing generations together. The example inspires other family members. These champions are vital to the forward development of the family culture. 

In the end, successful families invest the time and effort necessary to foster individual development, a team mindset and learning and leadership practices to allow them to flourish. As the member of one family we worked with observed, “Our success lies in all of us bringing our skills and talents to work for the common good.  When we do that, we evolve and everyone is better off.”  

Footnotes:
1, For additional information, please see Dr. Dennis Jaffe’s Releasing the Potential of the Rising Generation paper and our condensed and edited version How Can We Harness the Power of the Rising Generation?
2, In the research,  a ‘generative’ family met three specific criteria:
- Business or financial success: Created a successful business, or set of enterprises, with current annual revenues of more than $200 million, with the average family’s net worth more than double that (over $400 million)
- Adaptability over generations: Successfully navigated at least two generational transitions, with control being passed to the third generation or later.
- Shared family identity: Retain a shared connection, with practices and processes that sustained their values throughout an extended family.

According to Joshua Nacht, PhD, whose 2015 dissertation focused on the role of the family champion, the individual “plays an essential role in helping the family overcome the pitfalls of entitlement, and to instead become a tribe dedicated to a common goal.”

3, Source: Angela Duckworth, The Key to Success? Grit, Ted.com, http://www.ted.com/talks/angela_lee_duckworth_the_key_to_success_grit.