Preparing children to avoid the third generational wealth trap

Irrespective of geography or history, families businesses have been lost as they are passed down through the generations.

So clear is this phenomenon that countries over the globe how their own sayings for it. In the UK it’s ‘rags to riches and back again in three generations’, in the US they say ‘shirt sleeves to shirt sleeves’ and in Asia it’s ‘rice patty to rice patty’. Whatever the saying, the theme is the same: by the time the family business reaches the third generation it will not survive.

However, as Simon Bloom covers in his book Passing the Buck: How to avoid the third generation wealth trap, it is possible to not only maintain but grow the business as it moves through the family.

The key is in preparing each successive generation to manage the challenges of running a business. They need to be equipped with the skills and tools to make the right decisions and drive the business forward.

Parents and grandparents need to be aware of their own limitations and those of their offspring to ensure that whoever is at the helm is adequately qualified to be there.

Emotion can be defined as: a physiological change of state; created by the release of neuro-transmitters; initiated by either internal or external stimuli. Or the physical experience of pain in the body, created by chemicals.

Finding emotional intelligence

The most effective succession planning starts early; that is from childhood.

Of course it is still too early to determine whether children are willing and able to take over the family business, but it is in the formative years that one learns how to process our emotions. It is in adequately processing emotions that one is able to react appropriately to situations; in short to cope.

Developing a child’s emotional intelligence (EQ) is critical for children to achieving success in the most important areas of life. A high EQ is proven to enhance a person’s life in ten key areas:

  1. Increased sense of well being
  2. Ability to deal with adverse situations
  3. Greater level of intimacy with friends
  4. Creating boundaries, to keep oneself safe
  5. Greater happiness
  6. Decrease or remove possibility of mental illness
  7. Increased enjoyment of friends and family interacting with you
  8. Less physical illness

Wealth as an obstacle

Unfortunately for many children brought up in wealthy families the focus is not on recognising and processing emotion. Instead money is often used to cushion the impact of unpleasant events preventing the child from every coming to terms with how they feel and the consequences of their actions. For example, a terrible school report may be met with the response ‘Well what use is education, you can work for me’. In this scenario, the child is not allowed to feel fear of failure or sadness. There is no motivation to do better or to try harder.

Similarly, a teenager may crash the Merc causing irreparable damage, only to be told ‘that’s ok, we’ll buy another one’. Here the child does not have to experience guilt or shame. They are not expected to take responsibility for their actions and learn nothing from the experience.

The same may be true of positive emotions. Where a child does well in a field not associated with the business or one that does not yield monetary reward, they may be dismissed or the parent may fail to acknowledge the child’s success. This prevents the child from feeling joy or happiness. Such a retardation of these feelings has many potential negative outcomes such as inducing feelings of worthlessness and low self-esteem. It is no surprise that many children in rich families end up turning to drink and drugs and developing destructive dependencies.

While there are many benefits of being from a wealthy family, money can also distort perceptions. Children will likely feel a misplaced sense of entitlement; they might lack any sense of obligation or responsibility; and they may feel worthless or be short of self-esteem.

Successive generations need to understand that money does not define an individual, nor can it be relied upon to resolve all of life’s problems. Instead wealth is a great privilege for which one should be grateful and

The solution lies in understanding, managing and processing emotions.

Processing emotions

Emotions are the feedback system that make us aware of some internal or external issue that requires attention.

The animal/emotional (or sub-conscious) brain works at about two million pieces of information a second. Meanwhile the human/logical (or conscious) brain functions at only 7 ± 2 bits a second. So there are many things one cannot keep in our conscious awareness at any one time. Emotions communicate the different issues are important for us to acknowledge and process.

The challenge is that dealing with emotions is often painful and uncomfortable, and as human beings we have the ability to divert our attention from them and to ‘be in denial’. This causes significant issues in many areas of life, such as showing self-control and fostering healthy relationships.

As we have discussed, parents in wealthy families may use money to better divert children’s attention from dealing with emotions. Instead it can be much more beneficial to encourage children to listen to their emotions, to allow them to translate those emotions into feelings and then to learn the appropriate response.

Importantly, children need to learn to limit and contain unhealthy emotions since it these that cause psychological problems.

For example, if children are allowed to experience shame from performing poorly at school or crashing the car, then that discomfort may provoke them to behave differently in future.

There are five steps that help one deal with emotions effectively

  1. Become aware of them.
  2. Sit through them, feel them and learn to contain them.
  3. Interpret then and learn what they are communicating.
  4. Learn when to act on them and when to just be informed by them.
  5. Use the energy that has been created by them in a healthy way.

Table one shows the benefits of being able to process emotions fully; ultimately it leads to happiness not just in oneself but in others.

The earlier parents work on developing emotional intelligence with their children the more likely they are to be able to process their feelings effectively later in life. Indeed, an ability to manage several emotions at once is a critical skill in running a business, especially one with the myriad complexities as a family business.

To summarise, the third generation wealth trap is pervasive but not inevitable. As we have explored in previous articles, if successive generations have mastered certain life skills they stand a far better chance of building the business far into the future. The most fundamental of all skills is managing emotions and the best teachers are parents and grandparents.

If children can understand how they feel and respond appropriately they have the best foundation on which to tackle the rest of life’s challenges.


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