Family Wealth—Keeping It in the Family: How Family Members and Their Advisers Preserve Human, Intellectual, and Financial Assets for Generations
by James E. Hughes Jr.
Bloomberg Press, 2004
257 pp., $39.95
From Ben Franklin to Bill Gates, history testifies that America is a great place for pursuing wealth. It’s not such a great place, however, for keeping it, at least over several generations. As far back as 1852, novelist Herman Melville could cite as a “common saying” the view that, “be a family conspicuous as it may, a single half-century shall see it abased,” for “in our cities families rise and burst like bubbles in a vat.”
That common saying—“shirt-sleeves to shirt-sleeves in three generations,” in another variant—is just what James E. Hughes Jr. sets himself to combat in this thoughtful, informative, and highly readable book. Hughes privately published it in 1997. Now retired from the law, he’s seen that edition become something of a cult classic among some estate planners and their clients. This handsome revised edition from Bloomberg—with new material on family ritual, mentorship, and much else—should greatly extend the reach of Hughes’ ideas.
Hughes’ book concerns families much more than wealth. It does discuss sophisticated planning techniques, including the use of varieties of “control without ownership,” family offices, and even family banks or private trust companies. But unlike the tens of thousands of financial advisors or “wealth managers” in the world, Hughes focuses not on preparing wealth for families but preparing families for wealth.
Riches change a family, but not essentially. Hughes trenchantly asserts this fundamental point: dollars are only one part, and not the most important, of a family’s “wealth.” The rest includes the individual family members’ abilities and talents, their intellectual skills, their interests, and their social or business connections—qualities he sums up by speaking of “human” and “intellectual capital.” And Hughes shows families how practically to marshal this capital. Taking his lead from the Rothschilds and Rockefellers, Hughes encourages wealthy families to meet regularly, to keep members apprised of one another’s interests and abilities, to direct their varied strengths to a shared goal—such as philanthropy—and even to keep a “family balance sheet” that lists the family’s human and intellectual, as well as financial, assets. Every family possesses human and intellectual capital, but rich families have the liberty to reflect on, coordinate, and share these assets to an extraordinary degree. That so few rich families do explains, in Hughes’ view, why they don’t remain rich for long. And their loss is not only financial; they also lose the spiritual deepening and personal enjoyment that can come from this coordinated effort.
His focus on people and families rather than on finances alone allows Hughes to address the deeply felt human difficulties that great affluence often brings. As one advisor recently confessed to me, “Of course my clients don’t want to lose their money. But they don’t want to lose their kids either. And what can I tell them?” Hughes and others of his school (such as Charles Collier, author of the excellent Wealth in Families) sometimes face the complaint from planners and advisors: “Hey, I’m not my clients’ rabbi, priest, or social worker.” But what this objection misses is that as our society increases in affluence, many people are not looking for (additional) rabbis, priests, or social workers. They are looking for ways to connect their material wealth with their already existing spirituality—their aspirations about the ultimate things, which may include the state of their own souls, the good of their community, and the happiness of future generations of their families. Without that connection, material wealth can come to look like a burden, a distraction, or even a threat to what matters most.
This book’s special virtue is to combine the enduring (what matters most) with practical advice about everyday challenges. For Hughes, philanthropy provides a way for wealthy families to better the world, while cementing and deepening their own relations: If a family is willing, he recommends making philanthropy the basis for developing a system of shared governance and regular family meetings. Hughes also advises that these family meetings, besides reviewing financial figures and grants, also include reciting family stories and repeating family rituals, whether that’s a shared song, a particular excursion, or a meal at a special place.
Hughes’ chapters on the rights and duties of trustees and beneficiaries are classic, and should be required reading for members of either group. On taxes, Hughes speaks with startling clarity on a subject that (wrongly) consumes so many people’s attention: taxes, he points out, form one element of a family’s liabilities. But no thriving business spends most of its time focused on liabilities. It’s certainly easier (or at least more quantifiable) to busy yourself with the estate tax, gift tax, generation-skipping tax, and income tax, than with developing your true family capital. But in the end, it doesn’t pay.
Hughes’ focus on the long haul has slowly but surely caught on. As Capgemini, a financial services business, detailed in its 2004 World Wealth Report, “Many ultra-wealthy families are creating ‘100-year plans,’ in which family members are treated as business divisions and emphasis is put on corporate-inspired guidelines such as family mission statements, governance structures, and guidelines for communications.”
Another strategy Hughes advises, also coming into its own, he calls “investor allocation,” the careful selection not just of investments but of who in the family should hold an investment, based upon the long-term growth and income plans for the family as a whole. While almost everyone today preaches that asset allocation (within accounts) proves the largest determinant of yield, Hughes rightly sees that investor allocation (within families) holds enormous weight for the family’s long-term financial and social health.
But does Hughes, then, inadvertently turn parents into CEOs, children into subsidiaries, and families into corporations? Does his work represent, not a defense of family life, but the capitalistic economy’s final conquest of the household? Is it right to convince yourself to see your parents, siblings, and children as “partners” in an extended business enterprise? Can the prudence demanded in a business aiming at 100 years of success fit with unconditional, generous familial love?
It would be odd if it didn’t, for Hughes aims above all at preserving families rather than riches. Everything he says about family mission statements, shared family history, meetings, and rituals militates against seeing the wealthy family as a business first and family second. Perhaps that attitude explains his comfort in quoting from Plato and Aristotle, Confucius and Dante—hardly exponents of the spirit of capitalism. But most of all it explains the great weight Hughes puts on philanthropy as the center of a family’s shared activities and governance. He would see every wealthy family make philanthropy part of its mission, a part that, among other things, helps distinguish it from other families.
He also argues that engagement in philanthropy (whether through a private foundation or donor-advised fund) helps teach members about investments, taxation, trusteeship—and even more importantly about their own interests and values. Family philanthropy provides the perfect introduction to shared governance. Hughes, in short, does not try to use guilt to nudge rich people into giving, nor does he hector them with it as a duty. He makes a cogent case that family philanthropy offers the immediate reward of cheerful giving while also serving as the foundation for long-term familial success.
In 1906, former Harvard University president Charles Eliot concluded that one of the reasons wealthy families eventually disappear is, “The wise rich father will try to put his sons into those beneficent professions and occupations which have strong intellectual and moral interest, and in which pecuniary independence is a distinct advantage.” In other words, the kids become statesmen, scientists, and philanthropists rather than moneymakers. I am sure that Hughes would not dispute Eliot’s basic point: The best inheritance the rich can leave their children is the belief that there’s more to life than money. But money, wisely mastered, can help a great deal in pursuing those higher aspirations. Hughes offers practical strategies for directing material goods to higher goals, and for making sure future members of your family can pursue their aspirations as well. He would make families not just ready for riches, but worthy of them too.
Albert Keith Whitaker is research fellow at Boston College’s Center on Wealth and Philanthropy, managing trustee of the Morton Foundation, and a planner/specialist at Tanager Financial Services.