“Family wealth” is a term used freely in our industry. Unlike “oligarchical wealth” or “robber baron wealth” or “entrepreneurial wealth,” “family wealth” brings the wealth down to a very human level – the family.

“Family wealth” is a term used freely in our industry. It is in the name of this periodical and used by trade associations, wealth management programs and many books. Unlike “oligarchical wealth” or “robber baron wealth” or “entrepreneurial wealth,” “family wealth” brings the wealth down to a very human level – the family. We feel good about family wealth because we associate “family” with human relationships and love. “Family” softens “wealth” and makes it feel better than just “money.” As well, talking about “family wealth” is good for business. It creates a glow of happiness in which many people are prospering and sharing in the wealth.  “Family wealth” enjoys the same popularity of use as its close cousins, “the family office” and “the family business”.

Yet, for all of its warmth, the concept of “family wealth” also creates serious problems for wealth holders and individual family members. Quite often, this term leaves families without a critical sense of clarity about whose wealth it really is and who controls it. “Family wealth” often implies that the wealth is collective. But typically, it belongs to a patriarch, matriarch or inheritor. When individual family members believe it is actually theirs, that’s when the trouble starts. That’s when it is impossible to achieve the ultimate goal of family wealth: the opportunity to self-actualize and live an intentional life full of purpose and meaning. In short, to achieve freedom from wealth.

An example illustrates how fuzzy the idea of “family wealth” can be. Some years ago, a Chinese academic told me that in China, wealth is thought to belong to “family”. He explained that was ancient Chinese culture. I asked him what that meant, since every member of a family cannot eat the whole pie and since control of the wealth had to be lodged somewhere, possibly even among a group of people. I have come to know many Chinese families over the years, but I still have no understanding of what exactly that academic meant. I find that Chinese families and families everywhere like to talk of “family wealth” but they rarely define it. As a result, I'm am never sure what they mean.

Defining family wealth

Frequently a wealth creator talks about the “family wealth,” but he or she should be asked of how that is defined. It may mean that he or she created the wealth to benefit the family; it may mean that he or she is likely to give or leave some of the wealth to family members; it may mean simply that the wealth is “private” wealth as opposed to institutional wealth. It rarely means that each member of the family has unrestricted access to the wealth or the capacity to control it unilaterally.

For a European patriarch who made gifts of his company to his children (from a prior marriage) “for tax purposes,” the clarity about “family wealth” came after a period of confusion. When he sold the business, he went to his children to say that the proceeds should be all combined - those in his name and those in theirs - and managed together in a family office. “It is all family wealth,” he proclaimed.  They complied against their mother’s advice.  Five years later, the patriarch was spending from the fund without restraint. The children tried to use the family office to build process and discipline to control the way he spent the money. The children tried in every respect to treat the wealth as owned by all of them. The relationship among the family became strained, and the family office executive was made miserable by the father’s demands and the children’s disapproval. 

It turned out that what the father meant by “family wealth” is that he had created it and it was his to use as he liked during his lifetime. It would go to the children at his death, but they had no rights to it during his lifetime. He assured them that he would “in good faith” limit what went to his girlfriend. With some conversation, he is now concluding that everyone will be happier if he returns their assets to them and starts talking about his own wealth as separate from theirs. 

A US wealth creator who encouraged his family to attend programs about “family wealth” had a different perspective about “family wealth.” Although his business was owned entirely by him, he encouraged his children to work with professionals to develop a “constitution” and a “family charter.” Because he retained control of the wealth distributions, the various gifts he was making to the children in different proportions and for different purposes perplexed the children. They could not understand how decisions were being made and why they were not participating in those decisions, an understanding that was set out in their family charter. The father was being seen as controlling and not “playing by the rules” of family wealth.

An advisor finally said to the father: “We keep talking about family wealth, but it is really your money, isn’t it?” The father replied: “Yes, it is my money, and no one has ever said that to me before.” Meeting with the children and explaining that it was his money, he established a different relationship with them. There were no entitlements, and the rules were ones he was free to make. The constitution was for “shareholders in waiting” and would become more than academic only when (or “if”) he died. With a bolt of clarity that the wealth was unmistakably his, the entire family moved into a different, less contentious relationship. The distrust among the children started to pass. The wealth started to function properly.

The importance of clarity

The patriarch or matriarch needs to delve into a consideration of what makes the wealth “family” wealth. What is meant and what are the implications? From that, the rules need to be developed, either unilaterally by the family member, or members with control – whether the parent or a wealth steward. Then the rules need to be promulgated and be well understood by everyone. Who makes the rules and who can change the rules?  Frequently, the first rule is that the patriarch actually having legal ownership of the wealth can change the rules.

Without this clarifying dialogue, “family wealth” is a meaningless, if not destructive, idea. However, with a clear understanding, families can be in harmony with their wealth. Charlie Collier titled his book, Wealth in Families, which really sets the stage more appropriately. We are talking about private wealth held by a person or a group of people who think of themselves as individuals who are connected to others through familial relationships. Only by having a concrete definition of “family wealth” can the wealth function properly and the family members achieve freedom from wealth.

Charles Lowenhaupt is chairman and chief executive of Lowenhaupt Global Advisors and is a co-founder and president of the Institute for Wealth Management Standards. He is co-author with Don Trone of Freedom From Wealth, published by McGraw-Hill.