Sunday 2019-03-10

While this critique of family wealth management seems intentioned to provoke a Single Design Lead response -- and were there no one in-family who could fill this role, Lucas could of course -- it does have merit.

One way to think of this is as a game that the family plays together: we want it to be more fun than confrontational, and where everyone has ways to help out.

Lucas: Wealth is a form of order, and entropy attacks order of any kind. Families expand over time, and outsiders with different views marry into it. Larger, more diverse families can lose their cohesion if they don't fight to keep it. Members start to focus more on their individual needs and lose the delicate balance between individual and common goals. When the family is coherent, wealth management benefits from focus and scale. But when a family loses coherence the number of pools and strategies tends to multiply. Returns are harder to get. And, staying ahead of the taxman becomes impossible.

Skorina: So how does an UHNW manager beat entropy?

Lucas: Decades ago, when I first started thinking seriously about this, I realized that the fortune my great-grandfather had made four generations back, wouldn't last four more generations on a per-person basis. Given the scattering among trusts, the after-tax returns we could realistically expect, and the growing number of inheritors; the math didn't work. You can't beat entropy, but you may be able to fight it to a draw for a few more generations. You do it by capitalizing on the family's scale of financial wealth; and by using all of their assets, financial and non-financial. Each member of each generation, on average, has to produce enough value through their own careers and businesses to supplement the returns on the inheritance. The family wealth engine includes getting a good return on inherited money. But it also has to include the energy and talent of each succeeding generation, all coordinated with realistic spending limits. If you can do that, then you might be able to stay ahead of entropy. But, it's not easy.

-- Stuart Lucas

How do you design such a thing for a family?