6 ms·

Why Do 70% of Families Lose Their Wealth in the 2nd Generation? (2018)

35 points by jonathan_landy 2y ago

deleted 2y ago
[deleted]
jarsin 2y ago
I love how all these articles assume families are functional and they all act in the best interest of each other.
- jonathan_landy 2y ago
  I submitted it because I saw a comment somewhere else about the rich being locked into unfair advantages and classes ossifying. Seems to not be true if these stats are to be believed.
  - harimau777 2y ago
    It could also be interpreted as demonstrating the advantages that the rich have: Even those families who somehow manage to build up wealth likely to lose it within two generations. Meanwhile the ultra-wealthy are able to continue being ultra-wealthy from one generation to the next regardless of how competent that generation is.
    - Ekaros 2y ago
      1% of 1 billion is 10 million. That is lot of money to spend on consumption. And in many cases such consumption doesn't necessarily entirely destroy spend money. Think of classic cars or art or real estate... Only real way to destroy such amount of money is something stupid like starting an airline... The ultra-wealthy territory is one were actually losing becomes hard, if you have even some moderation in actions.
  - creer 2y ago
    Exactly. "The rich" as a narrative is everywhere. While in financial terms, it is not all that difficult to keep wealth growing. To the point that in a hundred years - not all that long - any "new wealth" should turn into a truly massive pile. But there aren't, or very few. On the contrary, the top of the Forbes list is mostly new wealth.
cushpush 2y ago
Another aspect: savings and investment habits. If you are born rich and have savings and investment habits that are good, you will remain rich. Savings and Investment habits are a large determinant. The article suggests that the prior generations' "worry about entitled behavior" is the second dominant cause, while financial illiteracy trailing behind at third (in order of presentation). But I find that quite misleading. Are the wealthy really wanting to put their offspring at a disadvantage because it is perceived as laziness? That's "patently false" as my friend says.
- creer 2y ago
  It takes time and serious work to learn about investing beyond clichés. Past even the basic professional level which is entirely "mechanical" - grounded in practices, not in understanding. Meanwhile if one heir is headed to med school and the other is going from vacation to harebrained scheme, what are you - the patriarch - going to do? Neither has time or inclination to learn seriously.
urda 2y ago
I'm not completely shocked, and for a lot it does come down to literally greed. My grandparents immigrated to the United States on both sides of the family, and had my father and mother respectfully. They saw their work ethic and worked equally hard, reaching to high levels in their medical fields. They then had a few children including me, and now I'm the only child left "standing" because my sisters turned into classic "Southern Belles" and once the cash flow stopped from the folks they quit coming around. My brother turned to booze and the bottle, thinking partying is the only true answer. It's just depressing that out of the 4 children who had the same education and upbringing, I'm pretty much the only one in the generation that "gets" the concept of finance and money. My sisters and brother? Literally no work ethic. They are literally proud to scrape by, avoid holding a job, and avoid helping our aging parents. But the sisters demanded the most lavish things and weddings, and the brother expected that my father and I would have infinite resources to keep bailing his ass out of trouble. It is no surprise that I've maintained a healthy relationship with my parents and family, while they've continued to seek the next quick buck in their lives.
- oezi 2y ago
  You started with "it does come down to literally greed", but the rest doesn't include what I would consider greediness, namely that many times the parents do not properly pass the wealth down the generations because they want to hold onto it until retirement or death. Financially it would make most sense to pass money early (invested in ETFs) and ensure that children can step on the property ladder early on, but this requires parents to pass a lot of wealth in their mid-40ies to mid-50ies.
acover 2y ago
Where does the 70% of families lose their wealth statistic come from?
- wheelinsupial 2y ago
  They do not cite it, but searching that sentence on Google brings up a few articles mentioning a “20-year study by The Williams Group involving 3200 families, show that 70% of families lose their wealth in the second generation and 90% lose it in the third.” But I can’t find an article in a quick check on er website. There are some mentions on their website about how splitting the family fortune dilutes it and causes families to lose money. There are families in Europe that pass the bulk of the family fortune to the oldest son. That son does what they can to help the rest of the family live comfortably, but the rest certainly aren’t rich. So, this statistic may only be applicable to American families or places where it’s common to successively divide the fortune up.
- tacticalturtle 2y ago
  This piece seems to do a good job investigating it: https://jamesgrubman.com/wp-content/uploads/2022/06/2022-06-There-is-no-70-rule-JGrubman-IFOJ.pdf https://jamesgrubman.com/wp-content/uploads/2022/06/2022-06-... The original source was a study in the 1980s examining 200 family businesses in manufacturing in Illinois, and since then a collection of financial advisors and estate planners have cited it (often without attribution). Edit: As an aside, I understand that different industries have different standards - but it seems insane to me that any professional piece, let alone a well known brand like Nasdaq, would drop a statistic like that without any kind of attribution.
- creer 2y ago
  This is the entire premise in The missing billionaires - A guide to better financial decisions, Victor Haghani and James White, 2023. But this is an investing book, not sociology. They consider billionaires in the introduction and they point to the Forbes list rather than a specific study. Which is not unfair. Billionaires are counted and listed. Not hard to take a glimpse. Their observation is counter to the usual cliché narrative that the rich have only one way. Up, can't lose. Indeed if you consider that, starting with, say, one billion, I would be able to invest not too conservative, not too aggressive and still draw out insane amounts of money to "live on". Meaning that in theory, starting with a billion, there is only one way, up. Meaning that a billion dollar wealth, invested, should own the world after a few generations. But this is obviously not what's happening. The Forbes list is full of relatively new wealth. Ancient wealth (more than 3 generations) stands out in the list. It's not common. And the highest wealth is first generation! And that's even though magazines tend to list the wealth of an entire family on one line - never mind that it's dozens of people.
z5h 2y ago
Luck. Model an agent that has some odds of doubling wealth, maintaining wealth, or halving wealth per iteration of some game. It's easy to generate downward trends.
- djmips 2y ago
  Yeah it was a bit annoying they didn't mention luck in the opening of this article. That being said, work ethic and a some inoculation against nihilism are necessary ingredients.
- wrp 2y ago
  Yes. TFA ignores what I think is the biggest factor. In researching family history, I've been struck by how important chance was regardless of how smart and hardworking they were.
beardyw 2y ago
> The third generation never realizes the struggles and sacrifices the previous generations endured. The only thing they know if a life of plenty and have a real lack of understanding of what is needed to create and maintain the lifestyle they have grown accustom to. Having made this perfectly valid point, the article seems to ignore it from that point on. Yes,that is the problem but can you fix it?
- dyauspitr 2y ago
  Yes you can. Apparently there are agencies that carry out intensive lifelong financial education that begins around 10 and carries on from there for very high wealth families. I read an article about it once but can’t find it anymore.
toomuchtodo 2y ago
https://web.archive.org/web/20240803165555/https://old.reddit.com/r/fatFIRE/comments/18o2to7/stupid_trust_fund_kid_here_looking_for_advice_on/keeomoj/ https://web.archive.org/web/20240803165555/https://old.reddi... https://web.archive.org/web/20240803165742/https://old.reddit.com/r/fatFIRE/comments/134k6gs/what_do_you_do_to_protect_your_wealth_for_and/jifdpb2/ https://web.archive.org/web/20240803165742/https://old.reddi...
- creer 2y ago
  Reddit has several fascinating glimpses in the mess that are (some) very wealthy and trust fund situations. Never clear which ones are somewhat fiction and which completely genuine but still interesting. In one of your threads, there is the mention that there are still tons of these "old money" families around. Yes. But hardly any of them is in the Forbes list range of billion dollar wealth. When mechanically, most of them might still be somewhere around there, had money been managed better.
sidewndr46 2y ago
can't this be summed up as lots of countries have laws (or historically had) against establishing perpetual trusts? It'd be trivial for someone like Gates to set up a trust that pays out to all his heirs indefinitely without them being able to directly extract the assets of the trust. If it were legal.
- creer 2y ago
  I don't think so. Doubling money in 10 years, on average, is nothing extraordinary. It's a little sub-par. Far more in some 10 years, less in others, sure. But doubling in 10 years. So even a 50% inheritance tax, erm, "haircut", should be recovered in 10 years and clearly beaten after that by the next generation. IF that was the only issue. It's not the only issue.
dirtdobber 2y ago
I feel like this is almost always due to education around modern money systems. If a child inherits $1 million from their parents (after taxes), they may feel rich, and they may try really hard to hold onto that money by saving and buying appreciating assets. In 10 years time that money might grow to $2 million. However, the buying power of $2 million is approximately equal to $1.5 million (3% inflation over 10 years). Couple that with a 20% tax on capital gains, and their real wealth increased by only 300K over 10 years after inflation. So while their nominal wealth seems to have doubled, their real wealth was only increasing by a modest 30K per year. And this is all assuming that the person isn't spending any of that money. A different person might spend + invest and still have $1 million in their bank 10 years later... But this isn't the same $1 million they had 10 years ago --- adjusted for inflation they are 250K more poor
- bamboozled 2y ago
  What should they do ?
  - creer 2y ago
    There are two ways, I feel. 1. Spend it. In some cases that might be a fair direction. It's easy to spend 1 million. It's very hard to spend 1 billion though. 2. Seriously learn about money and investing. Really it's not impossible! But of course it's a field full of hype, hype vendors, counter-intuitive ideas, non-obvious ideas, "math" - some simple some seriously not, and nowadays very counter-narrative directions, etc... So that new fantastic books are still being written on the subject (by people who actually know what they are doing, as opposed to banking on a potential best seller.) Basically, that becomes a serious endeavor - which few people are ready for.
    - horns4lyfe 2y ago
      A truly impressive non-answer.
      - bamboozled 2y ago
Terr_ 2y ago
A few more bullet points on the pile that aren't as often discussed, probably because they don't fit grand moralistic/child-rearing narratives: * Regression to the mean. [0] Humans try very hard to avoid "dumb-luck" in any story even if it's the best available explanation. * Inheritance split to more than one heir. For the heir-scenario, imagine that Generation 1 is a single family living off the interest of $12m. They have three kids, who marry equivalently-wealthy spouses. Now Generation 2's average wealth is $8m. That's a decrease, and we haven't even begun to talk about factors like "raised with good habits" or "work" etc. ____________ [0] https://en.m.wikipedia.org/wiki/Regression_toward_the_mean https://en.m.wikipedia.org/wiki/Regression_toward_the_mean
- Terr_ 2y ago
  To digress a little on the "dumb luck" stuff... Human brains seek patterns and create stories and "find" cause and effect, and that's been extremely useful for us overall... But there are also risks and blind spots. My favorite example is the humble coin toss. Yet many people joyfully fall into faux-explanations of "hot streaks" or "overdue" outcomes etc., and retain them no matter what statistical evidence you provide. Even those who consciously reject those ideas still have to bat the intrusive thoughts away, and that's for one of the most well-studied statistically characterizable things out there.
im3w1l 2y ago
The way the birthrates are going, there is a significant risk is that you won't even have any grandchildren to inherit the wealth.
everybodyknows 2y ago
> Bringing in a Financial Planning Professional, ... The article is an infomercial.
ChrisArchitect 2y ago
(2018)
deleted 2y ago
[deleted]
jdmoreira 2y ago
It's just regression to the mean in all senses
DaleNeumann 2y ago
The 2nd, 3rd Generations ahead are entitled to that wealth they did not work for it, they simply accepted it as a gift from there relative or mother and father. They are not matching each dollar pound for pound with sweat over there foreheads. Wealth squandered, I just didn't think that 70-90% lose there wealth, it seems like an immense number to me but when you consider how careless and uninformed people get, it is not entirely surprise.
kryogen1c 2y ago
TFA and other commentors have some points, but I believe it's much simpler than all of the above: Doing a thing is a different skillset than teaching how to do that thing. Nothing more to it. If there was a self reinforcing loop where greatness begat greatness, it would be everywhere: every sport, every politician, every martial art, every resource, every industry - for centuries, millenia. Greatness and teaching greatsness are merely correlated in the best case, and are just as often counterfactual.
CraigRo 2y ago
Shirt sleeves to shirt sleeves in three generations. I’ve heard this since I was young; this is hardly new. Inherited wealth does not encourage frugality, nor does the third generation generally find working hard to be as fulfilling as the first did. You see a lot of artists and lifestyle businesses in the third generation coupled with a fairly plush lifestyle

deleted 2y ago

[deleted]

jarsin 2y ago

I love how all these articles assume families are functional and they all act in the best interest of each other.

jonathan_landy 2y ago
I submitted it because I saw a comment somewhere else about the rich being locked into unfair advantages and classes ossifying. Seems to not be true if these stats are to be believed.
- harimau777 2y ago
  It could also be interpreted as demonstrating the advantages that the rich have: Even those families who somehow manage to build up wealth likely to lose it within two generations. Meanwhile the ultra-wealthy are able to continue being ultra-wealthy from one generation to the next regardless of how competent that generation is.
  - Ekaros 2y ago
    1% of 1 billion is 10 million. That is lot of money to spend on consumption. And in many cases such consumption doesn't necessarily entirely destroy spend money. Think of classic cars or art or real estate... Only real way to destroy such amount of money is something stupid like starting an airline... The ultra-wealthy territory is one were actually losing becomes hard, if you have even some moderation in actions.
- creer 2y ago
  Exactly. "The rich" as a narrative is everywhere. While in financial terms, it is not all that difficult to keep wealth growing. To the point that in a hundred years - not all that long - any "new wealth" should turn into a truly massive pile. But there aren't, or very few. On the contrary, the top of the Forbes list is mostly new wealth.

cushpush 2y ago

Another aspect: savings and investment habits. If you are born rich and have savings and investment habits that are good, you will remain rich. Savings and Investment habits are a large determinant. The article suggests that the prior generations' "worry about entitled behavior" is the second dominant cause, while financial illiteracy trailing behind at third (in order of presentation). But I find that quite misleading. Are the wealthy really wanting to put their offspring at a disadvantage because it is perceived as laziness? That's "patently false" as my friend says.

creer 2y ago
It takes time and serious work to learn about investing beyond clichés. Past even the basic professional level which is entirely "mechanical" - grounded in practices, not in understanding. Meanwhile if one heir is headed to med school and the other is going from vacation to harebrained scheme, what are you - the patriarch - going to do? Neither has time or inclination to learn seriously.

urda 2y ago

I'm not completely shocked, and for a lot it does come down to literally greed. My grandparents immigrated to the United States on both sides of the family, and had my father and mother respectfully. They saw their work ethic and worked equally hard, reaching to high levels in their medical fields. They then had a few children including me, and now I'm the only child left "standing" because my sisters turned into classic "Southern Belles" and once the cash flow stopped from the folks they quit coming around. My brother turned to booze and the bottle, thinking partying is the only true answer. It's just depressing that out of the 4 children who had the same education and upbringing, I'm pretty much the only one in the generation that "gets" the concept of finance and money. My sisters and brother? Literally no work ethic. They are literally proud to scrape by, avoid holding a job, and avoid helping our aging parents. But the sisters demanded the most lavish things and weddings, and the brother expected that my father and I would have infinite resources to keep bailing his ass out of trouble. It is no surprise that I've maintained a healthy relationship with my parents and family, while they've continued to seek the next quick buck in their lives.

oezi 2y ago
You started with "it does come down to literally greed", but the rest doesn't include what I would consider greediness, namely that many times the parents do not properly pass the wealth down the generations because they want to hold onto it until retirement or death. Financially it would make most sense to pass money early (invested in ETFs) and ensure that children can step on the property ladder early on, but this requires parents to pass a lot of wealth in their mid-40ies to mid-50ies.

acover 2y ago

Where does the 70% of families lose their wealth statistic come from?

wheelinsupial 2y ago
They do not cite it, but searching that sentence on Google brings up a few articles mentioning a “20-year study by The Williams Group involving 3200 families, show that 70% of families lose their wealth in the second generation and 90% lose it in the third.” But I can’t find an article in a quick check on er website. There are some mentions on their website about how splitting the family fortune dilutes it and causes families to lose money. There are families in Europe that pass the bulk of the family fortune to the oldest son. That son does what they can to help the rest of the family live comfortably, but the rest certainly aren’t rich. So, this statistic may only be applicable to American families or places where it’s common to successively divide the fortune up.
tacticalturtle 2y ago
This piece seems to do a good job investigating it: https://jamesgrubman.com/wp-content/uploads/2022/06/2022-06-There-is-no-70-rule-JGrubman-IFOJ.pdf https://jamesgrubman.com/wp-content/uploads/2022/06/2022-06-... The original source was a study in the 1980s examining 200 family businesses in manufacturing in Illinois, and since then a collection of financial advisors and estate planners have cited it (often without attribution). Edit: As an aside, I understand that different industries have different standards - but it seems insane to me that any professional piece, let alone a well known brand like Nasdaq, would drop a statistic like that without any kind of attribution.
creer 2y ago
This is the entire premise in The missing billionaires - A guide to better financial decisions, Victor Haghani and James White, 2023. But this is an investing book, not sociology. They consider billionaires in the introduction and they point to the Forbes list rather than a specific study. Which is not unfair. Billionaires are counted and listed. Not hard to take a glimpse. Their observation is counter to the usual cliché narrative that the rich have only one way. Up, can't lose. Indeed if you consider that, starting with, say, one billion, I would be able to invest not too conservative, not too aggressive and still draw out insane amounts of money to "live on". Meaning that in theory, starting with a billion, there is only one way, up. Meaning that a billion dollar wealth, invested, should own the world after a few generations. But this is obviously not what's happening. The Forbes list is full of relatively new wealth. Ancient wealth (more than 3 generations) stands out in the list. It's not common. And the highest wealth is first generation! And that's even though magazines tend to list the wealth of an entire family on one line - never mind that it's dozens of people.

z5h 2y ago

Luck. Model an agent that has some odds of doubling wealth, maintaining wealth, or halving wealth per iteration of some game. It's easy to generate downward trends.

djmips 2y ago
Yeah it was a bit annoying they didn't mention luck in the opening of this article. That being said, work ethic and a some inoculation against nihilism are necessary ingredients.
wrp 2y ago
Yes. TFA ignores what I think is the biggest factor. In researching family history, I've been struck by how important chance was regardless of how smart and hardworking they were.

beardyw 2y ago

> The third generation never realizes the struggles and sacrifices the previous generations endured. The only thing they know if a life of plenty and have a real lack of understanding of what is needed to create and maintain the lifestyle they have grown accustom to. Having made this perfectly valid point, the article seems to ignore it from that point on. Yes,that is the problem but can you fix it?

dyauspitr 2y ago
Yes you can. Apparently there are agencies that carry out intensive lifelong financial education that begins around 10 and carries on from there for very high wealth families. I read an article about it once but can’t find it anymore.

toomuchtodo 2y ago

https://web.archive.org/web/20240803165555/https://old.reddit.com/r/fatFIRE/comments/18o2to7/stupid_trust_fund_kid_here_looking_for_advice_on/keeomoj/ https://web.archive.org/web/20240803165555/https://old.reddi... https://web.archive.org/web/20240803165742/https://old.reddit.com/r/fatFIRE/comments/134k6gs/what_do_you_do_to_protect_your_wealth_for_and/jifdpb2/ https://web.archive.org/web/20240803165742/https://old.reddi...

creer 2y ago
Reddit has several fascinating glimpses in the mess that are (some) very wealthy and trust fund situations. Never clear which ones are somewhat fiction and which completely genuine but still interesting. In one of your threads, there is the mention that there are still tons of these "old money" families around. Yes. But hardly any of them is in the Forbes list range of billion dollar wealth. When mechanically, most of them might still be somewhere around there, had money been managed better.

sidewndr46 2y ago

can't this be summed up as lots of countries have laws (or historically had) against establishing perpetual trusts? It'd be trivial for someone like Gates to set up a trust that pays out to all his heirs indefinitely without them being able to directly extract the assets of the trust. If it were legal.

creer 2y ago
I don't think so. Doubling money in 10 years, on average, is nothing extraordinary. It's a little sub-par. Far more in some 10 years, less in others, sure. But doubling in 10 years. So even a 50% inheritance tax, erm, "haircut", should be recovered in 10 years and clearly beaten after that by the next generation. IF that was the only issue. It's not the only issue.

dirtdobber 2y ago

I feel like this is almost always due to education around modern money systems. If a child inherits $1 million from their parents (after taxes), they may feel rich, and they may try really hard to hold onto that money by saving and buying appreciating assets. In 10 years time that money might grow to $2 million. However, the buying power of $2 million is approximately equal to $1.5 million (3% inflation over 10 years). Couple that with a 20% tax on capital gains, and their real wealth increased by only 300K over 10 years after inflation. So while their nominal wealth seems to have doubled, their real wealth was only increasing by a modest 30K per year. And this is all assuming that the person isn't spending any of that money. A different person might spend + invest and still have $1 million in their bank 10 years later... But this isn't the same $1 million they had 10 years ago --- adjusted for inflation they are 250K more poor

bamboozled 2y ago
What should they do ?
- creer 2y ago
  There are two ways, I feel. 1. Spend it. In some cases that might be a fair direction. It's easy to spend 1 million. It's very hard to spend 1 billion though. 2. Seriously learn about money and investing. Really it's not impossible! But of course it's a field full of hype, hype vendors, counter-intuitive ideas, non-obvious ideas, "math" - some simple some seriously not, and nowadays very counter-narrative directions, etc... So that new fantastic books are still being written on the subject (by people who actually know what they are doing, as opposed to banking on a potential best seller.) Basically, that becomes a serious endeavor - which few people are ready for.
  - horns4lyfe 2y ago
    A truly impressive non-answer.
    - bamboozled 2y ago

Terr_ 2y ago

A few more bullet points on the pile that aren't as often discussed, probably because they don't fit grand moralistic/child-rearing narratives: * Regression to the mean. [0] Humans try very hard to avoid "dumb-luck" in any story even if it's the best available explanation. * Inheritance split to more than one heir. For the heir-scenario, imagine that Generation 1 is a single family living off the interest of $12m. They have three kids, who marry equivalently-wealthy spouses. Now Generation 2's average wealth is $8m. That's a decrease, and we haven't even begun to talk about factors like "raised with good habits" or "work" etc. ____________ [0] https://en.m.wikipedia.org/wiki/Regression_toward_the_mean https://en.m.wikipedia.org/wiki/Regression_toward_the_mean

Terr_ 2y ago
To digress a little on the "dumb luck" stuff... Human brains seek patterns and create stories and "find" cause and effect, and that's been extremely useful for us overall... But there are also risks and blind spots. My favorite example is the humble coin toss. Yet many people joyfully fall into faux-explanations of "hot streaks" or "overdue" outcomes etc., and retain them no matter what statistical evidence you provide. Even those who consciously reject those ideas still have to bat the intrusive thoughts away, and that's for one of the most well-studied statistically characterizable things out there.

im3w1l 2y ago

The way the birthrates are going, there is a significant risk is that you won't even have any grandchildren to inherit the wealth.

everybodyknows 2y ago

> Bringing in a Financial Planning Professional, ... The article is an infomercial.

ChrisArchitect 2y ago

(2018)

deleted 2y ago

[deleted]

jdmoreira 2y ago

It's just regression to the mean in all senses

DaleNeumann 2y ago

The 2nd, 3rd Generations ahead are entitled to that wealth they did not work for it, they simply accepted it as a gift from there relative or mother and father. They are not matching each dollar pound for pound with sweat over there foreheads. Wealth squandered, I just didn't think that 70-90% lose there wealth, it seems like an immense number to me but when you consider how careless and uninformed people get, it is not entirely surprise.

kryogen1c 2y ago

TFA and other commentors have some points, but I believe it's much simpler than all of the above: Doing a thing is a different skillset than teaching how to do that thing. Nothing more to it. If there was a self reinforcing loop where greatness begat greatness, it would be everywhere: every sport, every politician, every martial art, every resource, every industry - for centuries, millenia. Greatness and teaching greatsness are merely correlated in the best case, and are just as often counterfactual.

CraigRo 2y ago

Shirt sleeves to shirt sleeves in three generations. I’ve heard this since I was young; this is hardly new. Inherited wealth does not encourage frugality, nor does the third generation generally find working hard to be as fulfilling as the first did. You see a lot of artists and lifestyle businesses in the third generation coupled with a fairly plush lifestyle