How real is the third-generation curse, and how can financial advisors tackle it?
The old fear that wealth can “ruin” children could lead to rich parents making rash decisions and the fear becoming self-fulfilling. How are modern financial advisors working to tackle it?
It is a commonly held notion that wealthy families struggle to pass down and preserve their wealth beyond more than two generations. Families go from “shirtsleeves to shirtsleeves in three generations,” according to the old saying. And it’s an oft-quoted statistic that 70% of wealthy families lose their wealth by the second generation and 90% by the third.
The so-called third-generation curse is naturally a concern for many wealthy families, whose ranks continue swelling (see Figure 1). But is family wealth really so fleeting? And how do professional wealth managers think about the problem?
Jim Grubman, a family wealth consultant and author of several books on the topic, argues that much of the evidence that wealth is eroded across generations derives from a single, flawed study in 1987.
“It’s a natural human tendency to just believe a good story that seems to have solid backing,” he said. The problem, he contends, is that parents often respond by shielding their children from financial decisions, leaving them less prepared to deal with wealth when it passes into their hands. “It then becomes a self-fulfilling prophecy,” he said.
Open communication
For wealth planners, communication, education and preparation are key to enabling wealthy families to keep their wealth across generations. That approach, however, often runs counter to wealthy parents’ tendencies.
According to Stacy Francis, President and CEO of Francis Financial, parents often worry that they will somehow quash their child's ambition if they let them know how much money they may inherit.
The third-generation curse feeds into those anxieties, with the result that some wealthy parents choose to set up vehicles like silent trusts to distribute their assets after they die. The mass affluent, too, could be tempted to follow this strategy as part of their estate planning.
Ultimately, this could leave the children less prepared to deal with wealth when it passes into their hands, and more likely to mismanage it. Instead, Francis believes parents could achieve better outcomes by having open conversations about money with their children and teaching them money financial values and skills — even if it doesn’t come naturally.
“The parents were most likely raised in a household that did not talk about money either, and so, unfortunately, they're just minting another generation of kids who do not know how to handle money,” she said. “It would be amazing if we could pave the way for our kids to have that education so that they don’t have to make the painful mistakes we did.”
Noah Harden, National Wealth Planning Manager at Comerica Bank, also emphasized the importance of preparing younger generations. “In order to create multi-generational family wealth, we need to focus on preparing our heirs to manage the assets, rather than just preparing the assets to be transferred,” he said.
“Without communicating your family's values to the next generation, it will be difficult to ensure the next generation upholds those values when the assets pass down to them.”
Professional support
One way to provide that education is to involve heirs in managing family assets, as seen in some family offices, which Harden said brings several benefits.
“First, it brings structure and formality by managing the family’s wealth as an enterprise. Second, it provides opportunities for learning and leadership, developing the next generation’s ability to manage the assets. It can also provide a layer of asset protection and provide economies of scale by allowing all of the assets to be managed together — when assets are held and managed separately, we often see an inefficient duplication of efforts.”
According to Harden, family office consultants and advisors are increasingly focused on family governance and communication. “There are people who specialize just in that area — on how to have family meetings and communicate mission statements and family goals,” he said.
Key steps to getting family governance right, according to experts, could include creating a family constitution and establishing a family council. These can help answer questions of control and resolve disputes.
Wealthy families are also enlisting banks and financial advisors to help educate heirs through courses and “wealth bootcamps”. Other important elements for effective wealth succession include estate planning and maximizing tax efficiency, which may involve guidance from a financial advisor.
“Preparing heirs for stewardship of family wealth has become more structured and intentional,” said Francis. “Families are increasingly engaging younger generations through educational programs, financial literacy training, and involvement in family governance.”
Francis added that this goes hand in hand with an increasing focus among families to align succession plans with shared values and purpose, using them as an opportunity to impart financial stewardship and philanthropic goals. “This trend reflects a shift from simply dividing assets to preserving a legacy that resonates across generations,” she said.
A lifelong process
Grubman cautions that educating and preparing heirs is a long journey that is often best done within the family, rather than “turned around in a weekend.” “You have to do lifelong learning, starting when they’re young, and instill skills in a progressive, age-appropriate way,” he said.
Managing wealth requires several core competencies, ranging from financial, wealth and life planning skills to emotional and social abilities. These can be developed throughout life, as laid out by Stacy Allred, Managing Director and Head of Family Engagement and Governance at J.P. Morgan Wealth Management (see Figure 2).
This need not be as daunting as it sounds. Thanks to the rise of technology, wealthy families today have far greater access to planning tools and educational materials than in previous generations. Wealth managers have also been empowered to focus more on fostering communication.
In light of shifting family dynamics, Grubman believes that the open communication and education needed for effective family wealth transfer has a much better chance of happening today compared to the post-war decades. The third-generation curse need not be as inevitable as it may seem.
Want to learn more about wealth management trends? Check out these articles:
Cultivating the next generation of wealth managers
Dispelling myths about the ‘Great Wealth Transfer’
How financial advisors are helping the mass affluent pass down their wealth
How TikTok is transforming financial advice
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