Lessons of Legacy – how to flourish as a family.

For those who love a good series, ‘Succession’ is one of my personal favourites. Critics have called it the best series on TV, and it’s received numerous awards, including two golden globes for best televisions series.  The story follows a media baron by the name of Logan Roy, the family patriarch facing his 80’s with declining health, still adamant that he is the only one who can sustain the business, with ultimate say over all decisions. Three out of four of his children contend for leadership roles in the company, perhaps viewing it as an entitlement, but also as a way to capture their dad’s attention - something the viewer assumes, was forgone in lieu of Logan business success.  

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Last week was the season finale. Logan, the founder of ‘Roystar Global’ has passed away. The three children, Kendal, Siobhan, and Roman contest each other for who (of each of them) are best suited to take over leadership of the business. As if birthright qualifies them to lead the multinational. 

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Spoiler alert - ultimately, none of the children ascend to CEO of the business. A foreign billionaire buys the business, the family’s legacy – the business – gets sold, and the children are left with an emptiness in purpose, wondering what it is that they should do with their life now – despite tremendous wealth. 

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Family Legacy – more than one type of wealth. 

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For all its moodiness, ‘Succession’, or the Roy Family, teaches us exactly what family success ‘doesn’t’ look like. Financial wealth is not the only form of wealth that’s relevant, yet it is often the only one that is prioritised – especially by most advisors – be it from financial advisors like us, to lawyers, accountants, or board members. The logic being that ‘If we protect wealth, we protect the family.’ 

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Whereas a more prudent focus may be: ‘how do we protect the family, from the risks of wealth?’ 

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In Succession, despite the enormity of Logan’s business and financial success, this is clearly a failing family dynamic. Relationships have come and gone; his children desire but never receive ‘love’, often challenging their dad’s leadership as a means to request it, and the kids clearly struggled to find their own purpose or independence in the shadow of their father’s success. The ‘friends’, board members, and other confidants that surround the family, do so not out of sincerity, but self-interests. 

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For anyone who wants to know what we do – this backdrop provides useful context. Every family, founder, executive that we work with are ‘financially successful.’ They have accumulated wealth because of hard work in their career, often building a business from little or nothing. That success often comes with the expense of significant time invested. Time away from family; less time invested into good health; business travel instead of holidays. There comes a point where this changes. Priority shifts from purpose in business to purpose in life. The accrual of capital creates the opportunity to control how you spend time and to invest it in the capacity that matters most to you. 

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For those who want the freedom of time, this requires being hands-off or ‘passive.’ 

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1. Appropriate structures should be put in place – those that provide asset protection, tax efficiency, and to support your objectives (including how wealth will eventually transition).
2. Appropriate investment decisions in to achieve your required returns in public (and some private) markets, should be able to provide for you and your family in perpetuity. 
3. Access to trusted advisors – If you have decided to be more hands off – who can you draw for the facts or resources to make appropriate decisions? If you’re still in business – who are the executives or staff that you can trust to manage it? While trusted advisors are undoubtedly useful to the currently generation, this will be magnified for the next generation. Who can your spouse, your kids, your grandkids turn to when they are struggling with significant strategic decisions if you’re not there? Who can help prevent unforeseen risks? Who can help equip them with knowledge and experience in areas new to them?
4. Family balance sheet – aside from having the structures, financial resources, and trusted advisors in place, how do you ensure that the family can flourish in other areas of life? 

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As emphasised, points 1-3 involve financial capital, how to protect it, grow it, and provide security to the current and future generation. How to take responsible risks, what members can afford – or can’t. But point 4 extends far beyond this and arguably, will be a much more important question. 

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5-Types of Capital 

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Giving credit where it’s due, much of the following ideas are summarised from ‘Complete Family Wealth’ by James E. Hughes JR. I highly recommend reading it and any of Hughes’ literature. 

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As Hughes describes, financial wealth should follow a list of other priorities. He would start by saying that the reason a family exists is to enhance the lives of its members. When every member is flourishing, the whole system is working. While the word ‘wealth’ is often assigned to financial wealth, the word is a derivation of well-being. It should, therefore, be thought about with this breadth. That speaks to purpose and ultimately the first capital — legacy. You're aspiring to a family that's going to last for 150 years (or more). What’s required for each family to thrive? 

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Human capital 

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The first form of capital is human capital. Is every single member of your family flourishing (physically and mentally)? Are their dreams known to you? And are you seeking to bring each of their dreams to life? 

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Question: Wwhat are the dreams, desires, passions, and personalities of each family member? Who do you define as your family and what do they want out of life?

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Intellectual

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The second consideration is intellectual capital. What do you know? What are you learning? Is your system constantly learning? And then comes the key: Are you sharing what you learn? 

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Question: What skills, qualities, lessons, and education can provide the tools for each family member to innovate and create. What can help each member achieve their potential?

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Social

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The third capital is social or the core practice of the family. Can you make decisions together? When you think about a 150-year journey or 100-year journey, or even a six-week journey, what you find is that you have to be making joint decisions.

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Question: What is the quality of relationship each member has with one another? What about with their personal and professional network? How can these be improved? 

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Spiritual capital 

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Spiritual capital comprises the family’s ability to share and sustain an intention that transcends each member’s individual interests. Sometimes that shared intention is described as a shared dream.

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Every family begins the journey of family wealth with some sort of shared intention, that is, with some form of spiritual capital. Other signs of spiritual capital include humility—the recognition that this journey is fraught with challenges and exceeds the strength of any one of us alone—and gratitude—toward those with whom we share the journey, those who came before and those who will come after us. 

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‍Financial Capital

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And then finally we have financial capital. So, what is the role of financial capital in supporting and growing those other four qualitative capitals? It is the growth of the four qualitative capitals that determines your fate. Families that align their financial capital in service to growing those four qualitative capitals become families of affinity.

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Financial capital greatly contributes to families’ ability to cultivate their other forms of capital. It makes possible quality healthcare, education, philanthropy, and the time and opportunities to come together and talk about building and sustaining a shared dream. The opportunity to cultivate these qualitative assets—and not spend one’s precious days labouring solely to make ends meet—is a great gift, which financial capital makes possible. In turn, the qualitative capitals have a way of repaying that gift. With the growth of human, intellectual, social, and spiritual capital comes a high probability of growing the family’s financial capital.

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Why consider all forms of capital?

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Family wealth management fails if we do not consider all types of capital. For example: 

• If you have financial wealth, but lose your health due to sickness or illness, can you enjoy it?  
• If accumulating wealth comes at the cost of relationships with family, is it truly worth it? 
• If you gift your children wealth, but they can’t find purpose with it, is this a good outcome? 
• If your children don’t have the skills to run your business, should they assume control? 

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As is the case with every client and family that we work with, we are put in a privileged position to hear their story, their history, the risks they have taken, their failures, the time, and trade-offs they made to achieve their respective success. So, when we consider managing wealth, we need to first acknowledge and understand the sacrifices made to achieve it. If a mother or father has worked for 20-30 years building a valuable business, but that has come at the cost of missing key moments in their children’s early or teenage years; and maybe their kids have had their own children (or are about to) – there is probably a motivation to have the freedom to be there for their grandchildren. 

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If the conversation between adviser-client is simply one of “how much do you need” now that you have retired, sold, or transitioned from that business – it ignores many of the more important motivations. And similarly, if the adviser understands this motivation but continues with “how much do your kids/grandkids need”, it ignores the other types of capital that I mentioned earlier.  

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Starting the conversation sooner

Many families see the topic of family wealth, family decision making, emotions, money, or potential business challenges as a taboo topic. Perhaps as a form of security, or ownership, the wealth creator sees it as their responsibility to manage these decisions and not create any undue or unwanted stress on their kids or other family. A noble endeavour. But given your children or other relatives may be an eventual stakeholder in the family’s affairs – be that for a business transition/succession if it is mutually desired; when looking at care for you if you become unwell; or at inheritance. Talking through goals, objectives, needs and challenges and inviting participation exposes them to your thought process earlier, invites them to offer suggestions (problem-solve) and have an awareness of each members interests. To protect human capital, families need to know how each person feels, what their goals are, what’s required for them to flourish, and this can only happen with discussion. 

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Family Bank vs. Gifting assets and opportunities

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Intellectual capital is earned, not given; and human capital (each member) can only flourish if they have the desire and motivation, as well as the intellect to achieve a pursuit or support their purpose. Simply gifting a child significant wealth or distributing dividends each year can destroy their motivations. Similarly, if their only job is one that has been given to them, or leveraged from your personal network, it removes the personal triumph they would otherwise have from a career struggle. In business, this can be even worse than simply gifting wealth, because they may never develop the operational skills, resilience, or humility required to lead it, but may still expect to. 

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The concept of the family bank, which I have previously discussed at length, here, is that like our big commercial institutions, money isn’t simply gifted to the borrower, but instead lent on commercial terms. The family evaluates the viability of the pursuit, the idea, or the need and approves, denies, or amends the terms to the loan. Beneficiaries have an obligation to repay this loan; make the case for it being granted, and some families choose to register security over the property, i.e., in the case of a residence. furthermore, recent regulatory changes have meant that family trust distributions (for tax optimisation) are being closely scrutinised. Section 100A is an anti-avoidance rule that applies when concessionally taxed beneficiaries (usually adult children), receive on paper distributions, which are ultimately enjoyed by another person. To address this, family trusts need to distribute or keep records for costs covered on behalf of the beneficiaries. Be that university fees, professional memberships, accommodation, groceries etc. The family may receive tax concessions from this. 

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The point here, is that for tax reasons, wealthy families with lower-income beneficiaries will often have an incentive to distribute income to them; and this can be used effectively and legally for supporting the types of capital that help the family flourish – i.e., their health, their education, basic living costs or needs, professional networking events or conferences, travel etc. whilst also being supportive of larger ventures or expenses, but doing so through loans or formal agreements that require each member to work for and repay it. 

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Family unity, rituals, and mission. 

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What I find fascinating about Australian culture is that so few of us work closely with our families to achieve more financially. Growing up, our family lived on a very multicultural street and many of our neighbours and their extended family shared a residence. They paid down their mortgage quicker, and then bought another house – often on the same street. They had regular family cook ups, which we were invited to, and it was normal to receive a container of their trademark dish mid-week, baked goods, or deserts. Eating together was a ritual, sharing stories, creating memories and a wonderful gesture of service, and bringing a community together. Later in life, all the successful people I know – truly successful people – follow similar habits with their friends, professional network and more generally go out of their way to serve others. In the process building significant goodwill. If they ask something from somebody, that somebody shows up, because they have earned that respect and friendship. These habits start at home, extend to friends and professional networks later on. 

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Practical ways to improve non-financial wealth. 

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While the exercise may seem primitive, Hughes, a veteran lawyer who advises some of the most successful families globally and has travelled the world to understand what aspects or characteristics they have in common, suggests a good starting point is to take a temperature check with the following questions: 

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As a snapshot, the Family Balance Sheet offers insights into which capitals the family has developed well or not, where the strengths of the families lie and where are the areas of opportunity for growth. A family can also use the Family Balance Sheet in an iterative way. By filling it out every year or every two or three years, the family can track the growth of its qualitative capitals. If you are interested in trying out the Family Balance Sheet, you can copy the above pages that follow and share them with your family members. 

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Family wealth management involves awareness and consideration if all forms of capital. It’s an incredibly important part of the advice we provide our clients. Over the next 10-15 years, preparing for the next-generation, and equipping them with the resources and advice to flourish will likely be the most important task for our firm – and all family wealth advisors. Where possible, we encourage the families we work with to bring their children into review or advice meetings. To ask questions. We are building out educational programs for them. And acknowledging that some of the near term challenges or goals they have may be buying their first house or starting a business, we launched a subsidiary business that can assist from a lending perspective. From an estate planning perspective – succession and wealth transfer is more than a will or document. It requires detailed planning and understanding of your family group – inclusiveness and dialogue. We are well placed to assist. 

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For those who watch ‘Succession’ – the Roy Family is an entertaining reminder that there is more than one type of wealth. Non-financial forms of family capital are usually the biggest determinant of preserving and growing wealth across generations, but more importantly, to thrive as a family. Money is simply an enabler to enhance those other forms of capital. If you would like to have a discussion on how we can help you and your next generation, please reach out today. 

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