Adviser Insight is a thought leadership series showcasing the perspectives and expertise of our firm’s financial advisers. Each article offers in-depth analysis on topics shaping the financial landscape, grounded in practical experience and strategic thinking.
The Three-Generation Wealth Paradox: From Calluses to Collapse
Shirtsleeves to shirtsleeves in three generations. Clogs to clogs. Rice paddy to rice paddy. This phenomenon is so universal that virtually every culture has their own version of this adage. The Japanese call it “from the soil to the soil in three generations”. The Chinese say “富不过三代” (wealth does not pass three generations). The pattern is so consistent that it’s practically economic gravity.
The Wealth Entropy Problem
Let me get straight to the point: 90% of family fortunes are decimated by the third generation. Not diminished – decimated. We obsess over inheritance tax and investment vehicles while ignoring the psychology to preserve wealth. It’s like worrying about the locks on your prized car, while giving your teenager the keys before they can drive.
The Three-Generation Pattern
The pattern is brutally predictable:
Generation 1 (The Founders): Typically born with nothing but hunger. They build wealth through grit, sacrifice and often an unhealthy relationship with work. Every pound saved represents a direct trade of their time and health.
Generation 2 (The Stewards): The bridge generation. These children still heard their parents’ stories of lean times. They witnessed the sacrifice. They understand that wealth isn’t an entitlement, but more the crystallised form of someone else’s labour. They typically maintain or grow the wealth, serving as capable stewards.
Generation 3 (The Inheritors): Here’s where the pattern breaks. These grandchildren wake up every day in comfort. Their reference point isn’t struggle – it’s abundance. They’ve never experienced the connection between effort and reward. Wealth isn’t earned; it simply is. They exist in what I call the “prosperity bubble,” where financial consequences are theoretical constructs rather than lived realities.
A UBS report found that even among ultra-high-net-worth families with dedicated infrastructure, family offices with succession planning departments and armies of advisers. So the pattern persists.
· 20% have no coherent wealth transfer plan.
· Another 25% have half-baked plans.
· Most alarmingly, 20% have plans that have created more family drama than a season of succession….
If the 0.1% with unlimited resources can’t crack this code, what hope do those who are merely well off?
The Unspoken Language of Money
I’ve recently joined the fatherhood fraternity, and it’s taught me many things. Yes, more time consuming than I could ever have imagined, and I think my sleeping patterns may be in violation of the Geneva Convention… It’s also given me some time to reflect on my own upbringing and how to navigate the endless money paradoxes.
In my office sits a faded painting, dark, dusty lights illuminating helmeted miners walking slowly in the shadow of a colliery. I keep it here as a reminder. My great-grandfather was crippled in a mining accident in Ashington, a working-class town in the North-East where money was never easy to come by. I didn’t have that upbringing. I lived a comparatively privileged life. I don’t want my son to have to learn hard work through the brutal path my forebears. I do recognise that my dad was not far removed from that path and how fortunate I was to have that spirit passed onto me from a young age.
If the most natural instincts is to want your children to have a better path that you did, when does that path become too easy? In medicine, it is not exposure to viruses that causes illness, but our body’s inability to recognise and fight the virus. Therein lies our paradox: the very comfort we want to achieve for our children can lead to such a sterile environment that they fail to develop their own financial immunity, what they need to survive and maintain wealth.
“Leave children enough so they can do anything but not enough that they can do nothing.” – Warren Buffet
The problem isn’t technical, it’s cultural. We’ve built sophisticated financial instruments without developing the accompanying financial wisdom. What I’ve observed is that wealth preservation isn’t primarily about sophisticated tax strategies or investment vehicles. It’s about three fundamental transmissions:
1. Values: Teaching children that money is stored human energy – someone’s time, creativity and labour converted into currency.
2. Purpose: Defining what wealth is for. Is it for security? Legacy? Impact? Without purpose, money becomes a scorecard rather than a tool.
3. Work Ethic: The uncomfortable truth is that unearned wealth often creates entitled consumers rather than productive creators. How do you instil hunger if it’s always handed on a plate?
The Wealth Constitution
The math is sobering: You can implement the most sophisticated estate planning known to humanity, plan your tax efficiency to perfection and still watch your family wealth evaporate if the next generation lacks financial wisdom.
Counterintuitively the first step in your estate plan may need to start deeper conversations with those so close to you. The beneficiaries of all your work, wherever you find yourself on the generational path. After all, they are the reason you are so concerned about inheritance tax, aren’t they?
In my role as both an adviser and new father, I’m increasingly convinced that the most valuable inheritance isn’t money. It’s mindset.
The most important asset to pass down isn’t your portfolio. It’s your perspective. Yes, soon the money will be ready for the kids.
… but are the kids ready for the money?
Please note:
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
The Financial Conduct Authority does not regulate estate planning, tax planning, trusts, or Will writing.
If this article has raised questions for you, feel free to get in touch!
