Family Wealth Paths

A New Look at Family Wealth

Professor John Davis’ multi-year study on multigenerational family wealth reveals surprising findings on the misconception that wealth vanishes in three generations. His study shows how family wealth is typically created, often lost, and sometimes regenerated over  generations. The philosophies and practices that families use to build sustainable wealth over generations is at the heart of his findings.

 

“I like to remind people: Businesses come and go. But the families behind those businesses can endure for generations. Several years ago, I asked how successful families survive for generations and led a multi-year study to uncover the answer.”
– Dr. John A. Davis

 

Introduction to Family Wealth Research Concepts

To understand what keeps a family successful for generations, follow the money.  A family’s joint economic interests provide a center of gravity around which the family orbits. When a family decides to continue something together, family members unite around a common mission and purpose for another generation. These families take on a long-term perspective in the way they treat their assets, one another, and the community. They may move in and out of industries and regions, or buy and sell different companies, because successful multigenerational families do not focus on the success of their legacy company as the measure of success; they shift their mentality to grow the family’s overall financial wealth.

Successful multigenerational families identify with their entire portfolio of assets (including the family company).  They concentrate on how to grow the portfolio over time to meet the family’s needs and help the family achieve its mission from generation to generation. Successful multigenerational families rise above the “company view” to develop an overall family wealth strategy. That is how a family achieves multigenerational success and sustainability.

How does wealth move over generations? I researched hundreds of families to trace how wealth travels over generations—and it is not always lost by the third generation, as the “Shirtsleeves to Shirtsleeves” axiom leads us to believe. It turns out that family wealth follows three alternative paths over time. I created the “Family Wealth Paths” framework to illustrate how family wealth travels over time.

Family Wealth Paths John Davis Concept

Wealth tends to grow rapidly in a single generation–either in the founder generation or one of the early generations.

And then it takes one of three paths.

 

Family Wealth Paths: Shirtsleeves PathPath 1: It declines.
This is called the Shirtsleeves Path, which follows the three-generation axiom.

Wealth travels this path typically for two reasons:

  • The family consumes its assets faster than it generates assets; and
  • The business is in a maturing or declining stage in its industry, is not keeping pace with technological advancements, and is not regenerated.

 

 

 

 

 

 

 

Path 2: It decliFamily Wealth Path: Quick Descentnes faster.
This is called the Quick Descent Path, which happens for the same reasons as the Shirtsleeves Path, and in addition:

  • The family makes a bad bet (or two) in overly risky investments that do not turn out well; and/or
  • Financial assets are divided due to family conflict, perhaps costly lawsuits, or divorce.

On this path, families lose a lot of money quickly.

 

 

 

 

 

 

 

Family Wealth Paths: RegenerationPath 3: It grows.
Families that do well financially over generations are on the Regeneration Path. These families follow a number of philosophies and practices to grow their wealth, such as:

  • Have strong management talent running their operations
  • Stay united as a family
  • Stay focused on their family mission
  • Control their lifestyle expenses
  • Diversify at the right time
  • Develop family talent, including—in every generation—grooming wealth creators who know how to make money for the family.

 

 

 

 

Families that are intent on remaining successful over the long-term and building wealth over multiple generations follow my guiding principles and practices for regenerating wealth. These are described in my forthcoming book. To be notified when my book is available, please contact me.


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Additional Concepts by John Davis

Family Enterprise

Family Enterprise

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Stages of Development of the Family Business

Ownership Stages

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Family Sustainability Framework

Family Sustainability
Framework

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Three-Circle Model of the Family Business System

Three-Circle Model
of the Family Business System

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A family should use its assets so that they are productive and return value and satisfaction to society and the family.

John A. Davis