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Book Review
Family Wealth Keeping It in the Family: How Family Members and Their Advisers Preserve Human, Intellectual, and Financial Assets for Generations (2004) by James E. Hughes Jr. Reviewed by Kris Freeberg March 9-11, 2018 |
"Shirtsleeves to shirtsleeves in three generations."
I learned about this in Dr. Kirby Rosplock's book, The Complete Family Office Handbook. Throughout it, she referred often to James E. Hughes.
As the sixth generation of a family of attorneys who advise wealthy families, Hughes knows what he is talking about. In a quiet, humble, and understated way, the man exudes a pleasant fragrance of competence.
As the sixth generation of a family of attorneys who advise wealthy families, Hughes knows what he is talking about. In a quiet, humble, and understated way, the man exudes a pleasant fragrance of competence.
The above "Shirtsleeves Proverb" is popular in the Wealth Management Space. In Asia I understand it's paraphrased "Rice paddy to rice paddy in three generations." In Ireland, it's "Clogs to clogs . . . ."
Regardless how it's said, the idea remains the same: keeping wealth is difficult. In families there tends to be a vicious cycle:
Despite the advantage of five preceding generations of family experience in his profession, Hughes found himself still struggling with this same proverb in the sixth, leading him to doubt his own competence. He embarked on a soul-searching period. This book is the fruit of his search.
Regardless how it's said, the idea remains the same: keeping wealth is difficult. In families there tends to be a vicious cycle:
- The Bootstrap Generation creates the wealth;
- The Noblesse Oblige Generation inherits it with mixed feelings and a vague understanding of how it was created; and
- The Spendthrift Generation, fairly clueless as to how it was created, squanders it.
Despite the advantage of five preceding generations of family experience in his profession, Hughes found himself still struggling with this same proverb in the sixth, leading him to doubt his own competence. He embarked on a soul-searching period. This book is the fruit of his search.
Take-Aways
In no particular order, here are some key take-aways I got from this book:
For help avoiding such hazards and keeping wealth in your family for healthy reasons, please contact me.
Respectfully submitted,
Kris Freeberg, Economist
[email protected]
(360) 224-4322
- Love. "Every family I have observed that is successfully preserving its wealth is a reflection of the five virtues of Truth, Beauty, Goodness, Community, and Compassion. Transcending all of these is its reflection of Love" (xv). See also Chapter 16, "The Roles of Aunts and Uncles" (157).
- Spirituality (and Axiology). "I am convinced that without this spiritual component, a family cannot succeed in preserving itself, since its value system will fail and with that failure will come its disintegration" (xv).
- Definition of Wealth. "The wealth of a family consists of the human and intellectual capital of its members" (4). (Notice that it is NOT simply cash, cash equivalents, or the assets listed on a balance sheet. Those things are all EFFECTS. In this book Hughes deals with CAUSES.) "Very few families understood that their wealth consists of three forms of capital: human, intellectual, and financial. Even fewer families have understood that without active stewardship of their human and intellectual capital, they cannot preserve their financial capital" [My emphasis] (8). Develop in each family member the seven intelligences described in Howard Gardner's book Frames of Mind (37).
- Happiness. "The mission of family governance must be the enhancement of the pursuit of happiness of each individual member" (4).
- Uniqueness & Governance. "A family can successfully preserve wealth for more than one hundred years if the system of representative governance it creates and practices is founded on a set of shared values that express that family's 'differentness'" (4), including its secrets (44). Develop a family Constitution (19) defining a representative system of governance (21) that includes a Judicial Branch of a Council of Elders (22). See also Chapter 18, "The Role of Elders" (173).
- Four steps for good governance: 1) Establish an excellent decision-making system. 2) Develop a formal process for each generation to reaffirm its acceptance of this system. 3) Adopt an amendment process to cope with unforeseen situations. 4) Adopt a formal set of checks and balances (26-29).
- Positive Decisions. "Families should employ multiple quantitative and, more importantly, qualitative techniques to enable them, over a long period of time, to make slightly more positive than negative decisions regarding the employment of their human, intellectual, and financial capital" (4).
- Succession Planning. "When businesses fail, it is most often due to poor long-term succession planning" (5). A family IS a kind of business. Many fail to realize this.
- Every generation must generate wealth. Nobody gets to coast. The coasting of the Noblesse Oblige and Spendthrift Generations is a big part of the problem. If only one generation creates wealth, the sheer math of everybody else's tendency to "be fruitful and multiply" dilutes it.
- Think long-term. Don't expect every year to yield increase. Allow for cycles. Think five generations out. For a family, short term = 20 years. Intermediate term = 50 years. Long term = 100 years. Think of the Copper Beech Tree (on the book cover), that takes 150 years to mature. "No one who plants the tree will ever see it full grown" (13).
- Appreciate youth & elderly. In many cases youth and elderly are under-appreciated. Only those in their 20s-60s are considered productive or useful. Youth and elderly languish. This is a tragic and unnecessary neglect of human capital that contributes to the Shirtsleeves proverb.
- Notice internal and external liabilities, and deal with them. Recognize that Entropy is a law of physics. Study Polybius' observations of systems of government, how there's a cycle that moves from Aristocracy, to Oligarchy, to Republic, to Democracy, to Anarchy, to Tyranny, to Dynasty, and back to Aristocracy again. The goal is to form and sustain a Republic.
- Focus on quality, not just quantity. Quality causes quantity.
- Story. The ability of a family to relay its story across generations is the secret sauce (12).
- Horizontal, not vertical. Collective, not individual (14). "The ability of siblings and cousins to learn to work together is critical to long-term wealth preservation" (21). Two principles of motivation for becoming horizontal and collective: 1) People will exchange lesser freedoms for greater freedoms, and 2) People will join a group if they feel free to influence or leave it (25).
- Involve all family members in investing (Chapter 5).
- Lend, don't give, to younger family members. This teaches them responsibility (33, 67).
- Establish a family bank to manage lending (79-83).
- Use the hats exercise to teach family members how to work together. Read Hats Off to You by Doud & Hausner (69).
- Philanthropy. Let philanthropy be a joint venture between grandparents and grandchildren (74-78).
- Protectors protect vulnerable parties like children and the elderly, and represent beneficiaries in their disputes with trustees (85).
- Advisers are non-family members on the family office board of directors who provide impartial, objective, broad perspectives (88).
- Mentors are vital and poorly understood. They're different than teachers, coaches, elders, or friends. "True mentorship is the expression of wisdom through intuition in guiding someone toward greater self-awareness and freedom in their pursuit of happiness. Successful mentoring is a dialogue in which both parties learn something essential. It must entail joint learning" (89). Trustees are supposed to mentor beneficiaries. Most conflicts arise when they don't, and if possible, the remedy for such conflicts is for trustees to progress into a mentoring role. See also Chapters 17 and 19.
- Hommes d'Affaires are mentors who ". . . offer a healthy and loving skepticism about others' behavior (91) . . . viewing with compassion the truth of the human condition." They're interested in the art of governance, they believe in orderly evolutionary change, they have a skeptical view of human behavior, and they're willing to subordinate ambition to a higher calling of service to others (92).
- The best outside assistants (protectors, advisers, mentors, & hommes d'affaires) like people, have "grasshopper minds", think long term, and strive above all to do no harm (94).
- While tax avoidance may be the main object of many trusts, taxes are actually the most easily handled liability on the family balance sheet (58, 100). More difficult liabilities include poor governance, unprepared heirs, broken relationships, etc.
- Control Without Ownership is a key to successful wealth transfer: letting heirs control assets while benefactors still own them (Chapter 9). "Control without ownership is the essence of being a great steward" (101).
- Trustee-Beneficiary Conflict is common and avoidable when the Trustee adopts a mentoring role with the Beneficiary, all parties read the trust documents, annual trustee meetings are managed intelligently (distribute documents weeks before the meeting, allow a whole morning for it, and have a clear agenda that all parties have an opportunity to influence), and all parties are well educated about principles of good governance (Chapters 10-11). See also Chapters 19 and 20, "The Trustee as Mentor" and "The Trustee as Regent."
- Philanthropy is a big deal and should be handled with care. Families with more than $2M in financial assets should create a formal organization to support their philanthropy (127). Philanthropy offers the family many learning opportunities listed on pp 128-129.
- Evaluate heirs for competence, readiness (Chapter 13, page 133).
- Use peer review to keep the Family Office or Trust on track (Chapter 14, page 141). Peer reviewers must be objective and impartial, and perform a review only once so that each review stands on its own (143). Their job is to notice problems, not fix them. If they notice a serious deficiency, they must abort the review and bring the deficiency to the attention of those who selected them (145).
- Private Trust Companies - for families worth > $60M. See Chapter 15, page 147. Advantages & disadvantages, pp 150-15.
- Caution about Perpetual Trusts. The final chapter is called "Unexpected Consequences of a Perpetual Trust." It contains a fascinating discussion of what has happened historically with perpetual trusts in older European countries like France, Russia, and England. Salient quotes: "Many previous societies have found the creation of a perpetual leisure class unacceptable" (199). "Planners who play to the hubris of their clients by suggesting that a perpetual trust is a monument that will endure forever are pandering to their clients' worst instincts" (203). "In my practice, it is common to meet beneficiaries who tell me that a trust has been a net negative in their lives" (204).
For help avoiding such hazards and keeping wealth in your family for healthy reasons, please contact me.
Respectfully submitted,
Kris Freeberg, Economist
[email protected]
(360) 224-4322
