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Building a Family Dynasty

Posted on: April 1st, 2021

Building a Family Dynasty

Chances are, you have considered passing some of your wealth on to your children or grandchildren. But what if you could create a family financial dynasty—a legacy that perpetuated your wealth and values long after you’re gone and stretched to impact multiple generations?

That’s exactly what some Super Rich families (net worth of $500 million or more) aim to do—and it’s something you can pursue as well, even if you have far less wealth.

Here’s why creating a family dynasty may be a good idea for you—and some key issues to consider.

A long-lasting legacy

Some wealthy families seek to perpetuate their fortunes, their business interests, and their stature and family cohesiveness across the generations. What many of them are aiming to achieve is a family dynasty. There are many ways to think about dynastic wealth. We use the following definition when researching the concept:

A family dynasty is a cohesive economic entity in which the perpetuation of family wealth and values lasts for five or more generations.

Family dynasties consist of multigenerational families who have shared businesses and investment portfolios that support the family members. When it comes to facilitating dynastic wealth, the idea is for the family fortune and human capital to last long enough to reach at least the great-great-grandchildren of the founders.

Key questions

The perpetual question for the establishment and continuity of a dynasty is: Why stay together? To establish a dynasty, there has to be strong reasons for families to stay together and be united (especially in terms of financial management). You might consider questions such as:

  • What are the advantages of investing together?
  • What are the disadvantages of investing together?
  • Which way does the scale tip—to the advantages side or to the disadvantages side?

Another important question a wealthy family considering the issue of a dynasty has to answer is: How should the family use its wealth? Here the aim is to better define the purpose of the family fortune. There are no inherent right or wrong answers. Instead, the goal is to find areas of consensus and ways to keep different family members constructively involved.

Along the same lines, a wealthy family needs to determine how it is going to empower future generations. For example, how will the family communicate its values to heirs? It is often a serious mistake to assume that family members will grow up and be able to take responsibility for the family fortune. It is much wiser to construct a clear path for heirs to become proficient and responsible.

Family cohesiveness across generations

While some family fortunes are so immense that they can last for generations no matter what happens, these are usually the exceptions to the rule. For most of us, our money has to grow if we want to create a dynasty.

That said, a family dynasty involves much more than just a very large pool of money. To build a family dynasty, what is normally needed is an array of agreements coupled with shared values and objectives—all supported by strong accountability.

Over time, there will be continual changes in business, social, political and physical environments. A wealthy family will need to adapt and, where possible, benefit from these changes. At the same time, as the wealthy family goes into the second and later generations, the complexity within the family tends to increase. For instance, there will likely be more branches on the family tree—resulting in a more diverse set of interests, needs and demands. It therefore becomes increasingly challenging to ensure family members continue to work together cooperatively.

With each passing generation, there are probably more branches of the family with their own agendas. Conflicts can arise as those not in control butt heads with those family members responsible for making critical decisions—especially about managing the family fortune.

One approach to fostering family cohesiveness is to determine areas in which the self-interests of key stakeholders (such as family members and senior management at the family businesses) and the self-interests of others overlap. This information proves very useful in developing support for the family’s vision.

One complication that will likely arise: Some family members may want to take their share of the wealth and go their own way. The probability of this occurring rises along with the number of inheritors in the family. And when wealthy families fragment, they are more likely to see their level of wealth decline. To maintain a family dynasty, family members need to anticipate the increase in heirs and dispersion of a percentage of the wealth.

Note: There can be subtle but distinct differences between family cohesiveness and family harmony. The former is about keeping the family fortune together and the family comfortable with how that is working. The latter is about feeling good in working alongside your family. Family cohesiveness is possible without family harmony, but family harmony is not possible without family cohesiveness.

Locking in family members

Sometimes founders, and even later generations, use legal structures and entities—including trusts, foundations, corporations and partnerships—to cement a dynasty across multiple generations.

This highly formal approach can help ensure a desired legacy. But there can be serious complications that result from locking in family members. Forcing clever people to work together can produce unintended consequences, such as paranoia. It is not unheard of for family members in these situations to be duplicitous and manipulative.

Some of these legal structures and entities can pose problems for future generations. For example, a trust established by a wealth creator might be totally out of sync with what is going on with the family or in the world a generation or two later. The consequences are usually legal battles that make lawyers wealthier and the family poorer.

The need to grow the family fortune

As noted, most wealthy families who want to create family dynasties must continue to grow their assets. Often one good way to do so is to consolidate the family wealth to create as large a pool as possible. The benefits include:

  • Access to otherwise inaccessible investment opportunities
  • The ability to negotiate better terms, including fees
  • Being able to work with highly talented and experienced professional investors who manage only large sums        

That said, growth can be complicated by the parameters some wealthy families put in place, such as:

  • Equal shares to all family members
  • Never touch the principal
  • Transfer of wealth that incorporates lifestyle restrictions

It can be very useful to calculate the return on investment needed to maintain the family dynasty. In our experience, for a wealthy family to stay on an even plane, it may require an annual rate of return in excess of 10 percent—and sometimes well in excess of that number. This can be too high for some of these wealthy families to maintain over the generations. This is one reason why we see some dynasty-building families buying into private companies, alternative investment funds and real estate.

The role of family offices

Among the wealthiest families, we find that single-family offices are often instrumental in creating successful family dynasties. One reason is that single-family offices are designed to leverage the power of a family’s aggregate wealth. This ability to use the family’s combined wealth gives single-family offices some distinct advantages, including:

  • Accessing and negotiating with elite professionals so as to get exceptional service very cost-effectively
  • Sourcing and doing deals that can be instrumental in creating more wealth
  • Receiving preferential treatment in various life scenarios—moving to the head of the line, essentially

In addition, single-family offices can provide an array of services and products that are meaningful to a wealthy family beyond wealth management—such as promoting cohesiveness and the family’s particular values.

That said, you need truly sizable wealth to justify the creation of your own devoted single-family office. The good news is that you don’t need one to gain access to tools that will help you create and maintain a family dynasty.

The reason: The growth of both multifamily offices and virtual family offices means that more families today have access to professionals and other resources who can help them think through key issues related to family dynasties—and get them set up to pursue their legacy goals.

This report was prepared by, and is reprinted with permission from, VFO Inner Circle.  AES Nation, LLC is the creator and publisher of VFO Inner Circle reports.

Disclosure: The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra IS or Kestra AS. The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. It is not guaranteed by Kestra IS or Kestra AS for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS.

Fusion Wealth Management is not affiliated with Kestra IS or Kestra AS. https://www.kestrafinancial.com/disclosures

VFO Inner Circle Special Report
By Russ Alan Prince and John J. Bowen Jr.
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