Busting the popular myth of the three-generation curse

By Nick Stewart (CEO, Financial Adviser)

One of the common-held beliefs around financial planning and wealth is that most family wealth only lasts three generations: One to make the wealth, one to maintain it, and one to spend it. If you look up the three-generation wealth curse, you’ll find article after article about it. So, why does this happen? How does a family go from self-starting to feckless in such a short time?

Well… they don’t. Or at least, not as commonly as we’ve been led to believe.

This oft-cited idea, beyond the proverbs of “shirtsleeves to shirtsleeves” and similar, comes back to one study by Ward and Associates in 1987. But the problem with that is the Ward study only looked at family businesses as the measure for success, not family wealth as a holistic concept. Industry booms come and go, or people relocate or switch focus, and it makes sense that what was good business three generations ago may not be sustainable today.

In 1800s England, celery was a vegetable only the rich elite could afford to consume as it couldn’t be grown locally. Yes, celery – that thing you put in soups or as a low-calorie cracker alternative next to the hummus. It was a huge status symbol, and elaborate, beautiful vases were created to display celery as a centre piece. Celery vases were a common and thoughtful gift for newlyweds. Of course, within 100 years the celery boom was over – vases had been mass produced and celery became cheaper to purchase, which meant it lost its appeal to the wealthy and influential of the time.

If some ancestor of yours had been a bespoke celery vase maker, and had built a business around it, they might have been thriving in the first half of this boom. Once regular folks could afford celery and it became just another thing on the table, not so much. So maybe the child or grandchild who has inherited that business pivoted into some other glasswork or sold up and moved to another venture entirely – either way, they probably weren’t in the business of celery vases for long after that.

That doesn’t mean the family enterprise is gone, just because the business that started it is.

Another number that gets thrown around a lot is 70%, as in: 70% of wealth transitions typically fail by the second generation. Guess what? That primarily comes from the Ward study too, and again only addresses success or failure in terms of whether the specific business in the family was still running.

You might start to see the issue with this concept now.

Multigenerational wealth is a complex, multi-faceted thing. It’s difficult to measure it in a binary of “yes” or “no”, or “success” vs “failure”. In an article for FFI Practitioner, Dr Jim Grubman discussed the need for longitudinal research on family wealth, potentially spanning decades. Understandably this is a little hard to implement, but it would give us a much better idea of how wealth actually progresses through generations – rather than the narrowed focus on the family business, which has been the go-to since that fateful study in the late ‘80s.[i]

Here in New Zealand (and particularly here in Hawke’s Bay) we have a strong rural backbone. Many orchards and farms are family operations, passing through the generations. Families are diverse, and so is the concept of “the wealthy”. Keeping and growing your family’s wealth, no matter the size or form of assets, is more than just a matter of passion. Effective communication across generations, education, and implementing good governance can go a long way towards managing future risk for the whānau enterprise.

Anything involving family can get complicated pretty quickly. Another way you can manage risk is to engage a trusted financial adviser to be an impartial third party. As with any transfer of wealth – whether it be in the event of a loved one passing or in a transfer of stewardship for the family – it’s best to have professionals involved who can be unbiased, and are a step back from any emotions, with you and your family’s best interests in mind.

It’s normal to be apprehensive about the future, especially where it concerns your loved ones. But now that you know the three-generation curse won’t be inherently working against you, perhaps it’ll be easier to focus on what you can do – setting up a plan and taking appropriate steps to manage risk.

Provided that plan isn’t celery vases, you should be ok.

• Nick Stewart (Ngāi Tahu, Ngāti Huirapa, Ngāti Māmoe, Ngāti Waitaha) is a Financial Adviser and CEO at Stewart Group, a Hawke's Bay-based CEFEX certified financial planning and advisory firm. Stewart Group provides personal fiduciary services, Wealth Management, Risk Insurance & KiwiSaver scheme solutions. 

• The information provided, or any opinions expressed in this show, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from an Authorised Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz

[i] https://ffipractitioner.org/a-renewed-call-for-accurate-research-about-family-wealth-longevity/