What is Wealth?
How do you measure your wealth? Most of us immediately think about bank accounts, investments, or real estate. Thinking more broadly, we might include skills we’ve acquired, a social network, and health. In fact, all of these are equally valid definitions of wealth. Wealth is really what makes us flourish as human beings. That includes not only material goods but also relationships and personal development. Wealth is from the Old English word wela, meaning both “wealth” and “wellbeing.”
Qualitative wealth is what contributes most strongly to the flourishing of a family. James Hughes identified four qualitative capitals in his book Complete Family Weath. These are: Spiritual Capital, Intellectual Capital, Social Capital, and Human Capital. Ideally, the financial wealth of the family is used to support these four forms of qualitative wealth rather than the other way around.
The Four Forms of Qualitative Wealth
There are two ways to define the “spiritual capital.” The first is to define spiritual capital as the family’s shared values. Often families will identify strong positive traits (for example, loyalty, humility, or perseverance) that will be passed on from one generation to another. These enduring qualities are a kind of “spiritual capital” of the family.
The second is that of a shared dream for the future. Sustaining this type of spiritual capital on a family-level is difficult in our individualistic society. It takes a very strong vision to allow family members to share the same dream for the future. It is probably better understood in the context of a family dynasty, in which a business interest of family enterprise is a gravitational force giving family members a tangible reason (directed by spiritual capital) to work and dream together. Both of these can be encapsulated (orally but preferably in written form) as a family narrative, compiled from the individual narratives of family members.
The family’s intellectual wealth consists in the collective knowledge acquired through the life experiences of its individual members. It includes their academic achievements, professional advancement, artistic accomplishments, comprehension of personal and familial finances, as well as their capacity to both instruct and learn from one another based on their respective knowledge.
Social capital consists of a family’s relationships between family members and the broader community. On a basic level, relationships improve well-being and quality of life. Rather than merely viewing relationships as a means to further financial wealth, the family should seek to build genuine relationships founded on trust and reciprocity. A further way of looking at social capital is through the lens of asking how relationships can help family members and the broader society flourish through participation, giving, or volunteering.
Human capital consists of the family’s individual family members, their abilities, their health (physical and mental), and their ability to pursue meaningful work. Family members who have built a strong and positive sense of identity, and who are both sufficiently differentiated from, and yet synchronous with, the collective family unit contribute strongly to the Human Capital of the family.
The Family Enterprise View
In order to build wealth, both quantitative and qualitative, in a holistic way, the family needs a governance strategy that encompasses “everyone the family loves and everything the family has.” We call this the Family Enterprise View. We recommend a private family trust company (PFTC) as an ideal governance structure for the family to enact the Family Enterprise View.
However, structures are not enough to build holistic wealth. The culture of the family must support qualitative wealth generation. All the ways in which a family enhances communication, synchonicity, and trust is beyond the scope of this article. However, this article lists some concrete tools and steps that a trustee, family leader, or family office executive might take to ensure that the family is building all three of these forms of wealth.
These steps may be especially suited for an officer of family governance and education within the family office. The scope of this article is not to get into specific estate planning strategies or financial plan details. Instead, it suggests some ways in which families can build their wealth holistically.
Build the Family’s Qualitative Wealth
Qualitative Wealth Assessment
Many UHNW families have a clear knowledge of their financial situation. But how many take stock of the qualitative side of their wealth, including the health of communication, relationships, community engagement, ongoing education, etc? A qualitative wealth assessment is a systematic professional evaluation that highlights the Dangers, Opportunities, and Strengths of a family’s qualitative wealth and places them in context of the family’s quantitative wealth and broad goals for the future. (The Grupp Law Firm provides such an evaluation at the end of Phase 1 of the Heroic Family Journey client process.)
The stories we tell about ourselves are one of the most important. The family narrative is composed of the stories of individual family members, whose stories align with the overall vision of the family. These stories reinforce the reason behind the continued coherence of the family, and also contextualize the differences in opinion that family members can feel, while maintaining unity. A strong shared family narrative makes the family governance system “anti-fragile,” and is essential to the technical governance structures functioning as planned over time.
Successful transfers of wealth occur when there is continuity between generations. By drafting a family constitution, the family comes together to communicate its shared values to subsequent generations. The family constitution is a morally (rather than legally) binding document. It defines the family’s vision and mission and broadly explains the legal structure and asset or business operations of the family enterprise. Ideally the document is a living and collaborative document that family members actively participate in writing, reading, and updating.
Family Wellness Check
Most families do not stay under one household for long. By the time the third generation takes on leadership of the family enterprise, there may be dozens of family members in various locations nationally and internationally, spanning four or more generations. In this case, it is important not only to have family assemblies and retreats, but to connect on a more frequent level. Is each family member flourishing, or at least have basic needs met? Consider a wellness check, perhaps a phone call from a trustee or the family office, to each household to ensure that no valued family member is slipping through the cracks.
Constant learning is the key to constant growth over time. The family should have a curriculum that provides learning opportunities to family members at every age and ability level. Topics could include financial literacy, entrepreneurism, and leadership. For example, provide families with a family education “scope and sequence.” This document could map out topics and resources for family members at different stages. A good time to kick off a family education program using fun, relational activities might be at a family retreat. Follow up content and communication could happen virtually for the rest of the year.
Many families donate money to charitable organizations reactively by addressing an immediate need or as a last-minute tax reduction strategy. When families create a giving mission around intentional philanthropy, they can decide their target areas of interest and then track the impact of their gifts. Not only does this have a greater positive effect for charitable organizations, but it will benefit the family as well. Philanthropy, especially if centered around a Private Foundation, is an excellent way for the family to come together to make decisions that are at the heart of who the family is. The rising generation can also become involved in philanthropy as a learning experience in administration of the family enterprise.
Even though not all family members may be active owners directly engaged in family governance, all family members are still owners in the family. It makes a great difference whether these members act in the best interests of the family. Fostering a robust sense of ownership among members not engaged in governance can come through identity-building relationships and activities. For example, there may be a bi-annual family retreat to strengthen relationships among different generations and family branches.
Another common activity is an annual democratic Family Assembly that has some decision-making over education decisions and has the ability to ratify and alter the family constitution. At these Family Assemblies, family leaders can reiterate the family’s vision and apprise family members of the mission (actions) being taken to achieve this vision. By remaining informed, family members who are not active owners can still appreciate their shared purpose in the family enterprise. Ultimately, each family member needs to feel that they belong in the family. Each family member’s actions have a direct impact on the wellbeing of other family members.
Families often go through a lifecycle in which significant wealth is created through the ownership (and sometimes the sale) of a closely held business. This wealth is then stewarded through the next generations. However, families almost always grow and spend faster than typical investment returns can build assets. This is why many “century families”, to use Dennis Jaffe’s term, are generative. They continually produce, rather than consume. In order to concretely support new business ideas, the family could put aside money in a fund, and appoint a committee to decide on which family ventures to invest in. In return, the family could receive accountability for the business endeavors of its members. Investment in entrepreneurial ventures within the family is one of the best chances that a family has to grow its qualitative and quantitative wealth at the same time.
The key to a flourishing family in its qualitative wealth. Families who wish to have a multi-generational legacy would benefit from a comprehensive plan that addresses each of these. We have provided some strategies on how families can build each of these four qualitative capitals: spiritual, intellectual, social, and human.
Disclaimer: The above content is for educational purposes only. You should not construe any such information or other material on this site as legal, tax, investment, financial, or other advice.