Rags to Riches and Back Again in Three Generations

There is an ancient Chinese proverb that states 富不过三代 or ‘Fu bu guo san dai’, which translates as ‘wealth does not sustain beyond three generations’. It is sometimes expressed in English as ‘rags to riches and back again in three generations’.

The Family Business Institute estimates that 97% of family businesses do not survive past the third generation. Or at least, some of the businesses themselves may continue to exist, but they are no longer in the ownership of the family.

Wealth professionals say it is not because of estate taxes or an inability to transfer the wealth that it often doesn’t make it to the third or fourth generation. Instead, they often argue that it is an inability to transfer the knowledge of how to create it and how to keep it. However, at SBC, we disagree with this and instead argue that knowing how to transfer wealth is not a ‘first-generational skill’. The first generation evidently know how to create it, but how to preserve and transfer and keep wealth is not necessarily knowledge which they have a need to develop or process. We believe that each generation of the family will encounter a variety of different circumstances relating to the family’s wealth, and therefore the demands on the generations and the challenges they face are, inevitably, different. This is also affected by the individuals’ different genetic and social realities.

We argue that each generation needs to understand their ‘stage’ and develop appropriate skills, which the generation before does not necessarily possess or understand, to meet the challenges they face. In many ways, these different skills may appear to put them at odds with the previous generations and, if not understood, this can cause tension. For example, the preservation of wealth may require a more conservative and less entrepreneurial approach which the first generation (or those who watch from the sidelines) may view as a sign that their children lack ambition or that they are guilty of ‘complacency’. But perhaps the second generation lack that ‘entrepreneurial gene’ and instead developed conservational skills and abilities, which are a combination of influences.

To write off subsequent generations as ‘less than’ the initial wealth-creating generation is an unfair generalisation and, crucially, is fatalistic, implying that there is no way out of this trap. What we instead argue is that it is possible to break the ‘rags to riches to rags’ cycle but that this needs to be done by training and helping each generation to develop the skills which they need to have for the particular stage of the wealth cycle in which they are living. These are often not the skills which were needed by their parents or grandparents.

The three-generation cycle is not the inevitable outcome which it is so often assumed to be. Although embedded into our cultural psyche, it is possible to avoid the three-generation trap by recognising, firstly that it is not a certainty, and secondly that it can be escaped through an understanding that we fall into the three-generation trap when we try to apply the same set of solutions to a different set of challenges. Whilst the second and third generations of a family are in a relatively privileged social and financial position compared to those of the first generation, and are required to ‘thrive’ rather than simply ‘survive’, they are also facing a more complex and very different set of ‘life tasks’, and a high level of psychological and socio-cultural development is required to meet the challenges they face.

To summarise we have included 5 key points for avoiding the three-generation cycle

  1. The three-generation trap is avoidable if we know why it happens
  2. We need to think of each generation individually rather than assuming they are the same – they will have had different experiences which will have set up fundamental alterations in their neurological structures, their psychology and their personal abilities and challenges.
  3. Sustaining wealth and business success over multiple generations requires changing approaches to short-term management and success.
  4. We need to recognise the needs of the individual family members as well as the stage and needs of the family enterprise as a whole with a thorough analysis. Then we can work out where there are similarities and differences in the generational and individual expectations.
  5. Education is key – learning about the individual challenges facing each generation and understanding them will help to develop the skills that the different generations need for their stage.

Extracted from ‘Passing the Buck? How to Avoid The 3rd Generation Wealth Trap by Simon Bloom available to buy on Amazon now.

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