Some families are born into wealth. Others create it.
Family wealth is money that no individual is going to spend. It's capital that is used to advance the collective goals of the family, and help the individual members be successful and find their calling in life.
And anyone can have it.
Every family started somewhere, and you start with what you've got. People who aren't wealthy yet could implement a lot of these systems. But they need some breakout wealth creation. Which leans into the point of today's article. How come you don't see a lot of black families practice building "family wealth"? I'm not talking about hiding money in your mattress.
I'm talking about building a family business of creating generational wealth for the next 100 years. I recently read the book Family Wealth--Keeping It in the Family: How Family Members and Their Advisers Preserve Human, Intellectual, and Financial Assets for Generations and it provided an insight, an idea, I never thought about or took seriously until now. We see wealthy white families all the time ranging from the Rothschilds and the way down to the Trumps.
Not saying, morally, anyone should aspire to being like the Trumps. However, this is a serious question. How come the black community en masse don't own family dynasties? My immediate answer was that we simply don't know how or believe that we don't earn enough to start a journey like that. Well, today I have answers for you. Here are steps that I learned from this book to take on starting your family wealth project:
Appoint a Chief Emotional Officer (CEO)
The dual-income setup might sound smart, but it might make families poorer over time.
When both spouses have normal jobs, working normal hours, neither will have the time to do something extraordinary. The real secret to a family fortune is permanence. Permanence begins at home. And family wealth fails because families fail.
Leaving one at spouse at home (the CEO) to instill family values and provide emotional support will prepare the children to handle the wealth later on. The wealth creator can focus on making the money.
Keep your hands off the money
Few people can tolerate an investment that grows, even at 10% per year, for a very long time. They want the money now. They have spending plans.
But family fortunes should stay out of reach. Otherwise, they'll "be consumed by spending that has been 'necessary and appropriate'—and isn't.
Build a safety net
Every family needs "escape velocity" wealth—money that shoots up so fast, you can't shop fast enough to keep up with it.
They can get it though "compound interest," or "owning assets that can't readily be turned into cash."
The former refers to savings or investments, while the latter can "go up 10 times or more without adding to your expenses." Some examples: timber, a business, or real estate.
Invest in undesirable real estate
Old, rich families may own 'prestige properties, but it is likely that the new fortune was made elsewhere—perhaps in poor housing or chicken farms.
Rather than spring for a sweet pad in Malibu, consider buying some mansions in a less-than-ideal area. Then flip them for profit after you've renovated them.
Make your fortune in business
Most family fortunes are created by successful business, not by careers. Not by professions. Not by investing. Not by winning the lottery.
A business is the best way to build a fortune because:
- It's a more permanent form of wealth than cash
- The income stream can help support the family
- It teaches family members the value of money
- Businesses "give families a way to leverage their own skills and knowledge"
Don't buy the Wall Street dream
Wall Street sells dreams, hopes, and pie in the sky. And it's not cheap. They are there to help themselves make money … by taking it from you.
Short of charging high service fees, wealth managers' investments tend to be the worst. The best ones "go to friends and family—the people 'in the room' when the deal is done.
Resolve to work 12 hours a day
Everyone is trying to make money in the easiest possible way. One sure way to make more money than others is simply to work harder.
Working for 8 hours a day won't make you any richer than anyone else who's working 8 hours.
If someone works for 12 hours a day, he'll not only work 50% more, but also have 10,000 more hours on the job.
A person with so much more experience should be much more valuable.
Avoid "conservative" investments
By the end of the twentieth century, 'safe, conservative' investments had blown up three times.
Stocks went bust in 1929. Bonds went bad after World War II. And gold went bust after 1983. And then, at the end of the century, stocks went bust again.
Today's "safe investments" are U.S. Treasury Bonds. Not the best bet for long-term wealth.
Never take a big loss
Let the market tell its story and invest accordingly. Don't take a big loss because you can't recover from it.
Sometimes it pays to stop chasing alpha—the next deal, the next stock, the next triumph—and step back and look at the big picture.
Bet on the underdog
In practice, investors act like befuddled crowds. They tend to bid up certain favorite investments far beyond what the random walk would suggest.
This makes those investments—the very ones that most people want to buy—the very worst ones, because they are selling above what a purely random system might provide.
"Random and unfavored" investments might perform better.
Set up a dynasty trust
The most suitable owner of family wealth that we know of is a trust or a dynasty or perpetual trust. It will last forever and can help families avoid hefty gift or inheritance taxes.
A trust can grow wealth, too.
Put $10 million in a dynasty trust today. At a 6 percent annual rate of return (w/o capital gains or estate taxes), it will grow to about $184 million in 50 years.
Move to a low-tax state
Short of fleeing the U.S. to dodge taxes, families can move to a low-tax state. There's no law against it.
Consider a tax haven
You never know what will happen to the currency in which your country is calibrated. The dollar, the pound, the euro, and other currencies are controlled by the governments.
Tax havens help families spread out their wealth and provide low-cost jurisdictions for managing it.
Establish a Family Council
The Family Council is a group of family members who make executive decisions for the whole.
This group performs several functions:
- Manages and drafts legal documents
- Oversees family property management
- Resolves family conflicts
- Formulates policies, including policies for those working in the family business
Draft a mission statement
A family's trust has no-built in disbursements, meaning no one receives any money at a certain age. This was set forth in its mission statement, which defines the family's values.
For example, it states that the fund will be used to support family members starting new careers, fund member educations, assist in emergencies, fund business ventures and startups.
A family constitution can further spell out a family's core beliefs and mechanisms for managing wealth, including how to run the family business.
Set up the family bank
Family money won't fund lifestyles, but it will fund "productive pursuits." That's where the family bank comes in.
A family bank, run by the Council, works like "an insurance fund, lending money to family members" as needed. This eliminates bank fees, interest payments and insurance charges.
And it keeps the money where it belongs: with family.
Find a strong leader in each generation
It's key for the patriarch to find someone who will command the same respect and authority when making money decisions.
The best you can do is start early, include everyone, and be consistent. And work hard to build consensus for key moves.
Transfer the reins of power
Do this sooner than later, while he still has his wits about him.
Usually they don't do it until the last minute, when they're on their deathbed and the inheritors don't know the responsibilities or what it is.
You need the transition to take place long before the patriarch dies. (Children) should already be managing assets and know what they are, and know how they work.
Don't let family conflicts fester
Enough said. Inner conflicts within the family will cause problems in the immediate and long term future. This causes wars that could end up with legal fights.
This in itself will put the family foundation in danger of collapsing. Set up a mediation between two conflicting family members and hash out the problems with reasonable solutions.
Establish an investment committee
When the wealth creator passes, who will look after family investments? An investment committee can do it.
Future generations should be taught about managing money from their teens on. This means learning about investing through books, courses and websites, and sitting in on family council meetings often.
A wealth strategist will "hold everyone involved with family investments accountable for performance, establish clear objectives and goals and translate their big-picture outlook into manageable investments."