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What it takes to build a great family

Introducing James E. Hughes, Jr., Esq. the author of Family Wealth: Keeping It in the Family, and of Family: The Compact Among Generations.

James E. Hughes, Jr., Esq. was the founder of a law partnership in New York City specializing in the representation of private clients throughout the world. He is now retired from the active practice of law. He is a frequent lecturer for and member of the Purposeful Planning Institute, an early member of the Family Firm Institute, and has spoken at a number of their annual gatherings. He is an advisor to SAFOX in Shanghai, whose mission is to advise Chinese families on how to nurture multi-generational success. He has frequently addressed international and domestic symposia on avoiding the “shirtsleeves to shirtsleeves” trap. Mr. Hughes’ focus is helping families flourish by promoting the growth of their “capital” in many areas: not only financial but also human, intellectual, social and spiritual. Mr. Hughes is a Fellow of Wise Counsel Research Foundation; co-author with its founders, Keith Whitaker and Susan Massenzio of “The Cycle of the Gift” and “The Voice of the Rising Generation”; and co-author, with Mr. Whitaker and Hartley Goldstone of “Family Trusts”.

Mr. Hughes’ wisdom fits perfectly into our series on the blessings and curses of inherited wealth. He emphasizes the long-term, patient vision a great family needs and the importance of recognizing that enduring multi-generational wealth requires more than mere money. We have an old saying in America: “shirtsleeves to shirtsleeves in three generations.” This refers to the cycle of earning and spending that depletes many a pool of family wealth over decades.

Mr. Hughes reminds us: “As it takes 150 years for a copper beech tree [metaphorically, a great family] to mature, plant today because there is no time to waste.” He points out that “The vision underlying a system of family governance must be the enhancement of the pursuit of happiness of each individual family member as part of the enhancement of the family as a whole for the purpose of achieving the long-term preservation of the family’s wealth: its human, intellectual, and financial capital.”

While we at Sicart can be successful long-term investors and capital allocators, managing fortunes of families over generations, Mr. Hughes inspires us to look at the family’s prosperity and well-being in a broader, more holistic way.

We had the pleasure of discussing with Mr. Hughes a number of lessons he has shared with families over the decades. Here are some highlights:

The importance of family governance

In Family Wealth, he warns: “Without careful planning and stewardship, a hard-earned fortune can easily be dissipated within a generation or two.” Furthermore, “Wealth preservation is a dynamic process of group activity, or governance, that must be successfully re-energized in each successive generation to overcome the threat of entropy.”

Mr. Hughes explains: “If a family thinks it is in business to enhance the lives of its individual family members, it discovers the most powerful form of preservation thinking it can do.”

We are reminded of the importance of governance beyond financial capital alone: “Very few families have understood that their wealth consists of three forms of capital: human, intellectual and financial.”

Constant growth and renewal matter most: “Families fail to understand that wealth preservation is dynamic, not a static process, and that each generation of the family must be a first generation – a wealth-creating generation.”

There are three steps that we need to keep in mind:

• “Once a family understands that joint decision making is a form of governance, its next step is to choose the system of governance that will serve the group of people who will be affected. To put it another way, the family must choose the system of governance that will cause the greatest number of family members affected to accept the decision as fair and to accept the individual consequences that flow from it.”
• “The second step is adoption of a formal process for each successive generation to reaffirm its acceptance of the family’s system of governance.”
• “The third step in achieving a successful system of family governance is the adoption of a process to amend its practices as the family evolves. “

Keeping the family narrative alive

In Family Wealth, we learn about the need to nurture each family’s identity: “Families fail to tell the family’s stories. These stories are the glue that binds together the individual members of the family. Family stories give members a sense of the unique history and values they share, their ‘differentness.’ A family that does not inoculate its young against childhood diseases would be risking its most precious assets. Failure to inoculate the family’s young against entropy with the vaccine of its history and the values that are contained in its stories is similarly risky.”

The importance of ritual in family’s long-term success

Mr. Hughes tells us: “Families who recognize with ritual the important passages in their members’ lives seem to fare better at overcoming the shirtsleeves proverb. This should not be surprising, since the creation and practice of rituals marking important developmental steps in the life of a human being are at the core of successful tribal life. Tribes are extended generations of an original family.”  He mentions coming of age, arrival of a new member, and incorporation of new members from outside as some of the important life stages that the rituals could honor. He adds, “Ritual thus serves two purposes in the life of a family seeking to thrive for many generations. It helps individuals develop from one life stage to another, and it helps the family succeed by promoting the development of its members.”

The family balance sheet, income statement and the long-term investment horizon

In Family Wealth, we are introduced to a broader definition of a family balance sheet: “The family balance sheet and family income statement are key tools for measuring the health of a family’s long-term wealth preservation business.” Among the family’s assets, Mr. Hughes lists intellectual, financial, and social capital. Liabilities can range from failure of family governance, death, and divorce to inflation and income taxes. In Hughes’ view an income statement should measure the family’s annual performance in managing its human and intellectual capital.

Mr. Hughes extends the usual long-term investor horizon to 100 years (or three generations) for family capital. He reminds us: “Families often fail to apply the appropriate time frames for successful wealth preservation.”

The complexity of interwoven family relationships

In Family Wealth we find this suggestion on managing the complexity of family relationships: “One of the things that we recommend families do at their governance meetings is to make a diagram of the family as a whole, of all of their interwoven relationships, and then make a similar diagram of all the individual relationships each family member shares with all of the other family members.” He adds: “For family members and their advisers to understand the complexity of a family’s relationships and their unique character as a composite of those relationships helps the family to understand how it exists and how it functions.”

A family bank enhancing its intellectual and human capital

Mr. Hughes introduces the concept of a family bank with its unique role in strengthening the family: “The family bank provides a means for a family’s wealth to be leveraged by making loans available to family members on terms not available commercially. These are loans that would be considered high risk by commercial bankers but are low risk to the family because of their contribution to the family’s long-term wealth preservation plan. Loans from a family bank are usually for two purposes: investment, to increase the family’s financial and intellectual capital; or enhancement, to increase the family’s intellectual and human capital.”

Control without ownership

In Family Wealth, we find this valuable advice: “Control without ownership expresses a way of thinking, a philosophy. This concept, when practiced, powerfully assists a family to overcome the proverb ‘shirtsleeves to shirtsleeves in three generations.’ Control without ownership means that each family member adopts the idea that ‘I am the owner of something if I control it, even if I am not the legal owner of that thing.’”

Mr. Hughes further adds: “As the years have passed, I have discovered that people are in fact very willing to give up ownership, but not control of decision making. Fear of loss of control is often so profound that it continues to permeate some individuals’ planning processes after their deaths.”

Finally, we read: “Every plan for the long-term wealth preservation has to take the issue of control into account and find a way to deal with it positively.”

Beneficiaries and trustees

Mr. Hughes tells us “Two complex relationships are formed between a beneficiary and trustee when a trust is created. First is the legal relationship, and the resulting individual and joint responsibilities created by that relationship. Second is the behavioral dynamic between a beneficiary who is fully educated on what it means to be a beneficiary, and a trustee who understands that his or her role is to be the beneficiary’s representative.”

He adds, “When a beneficiary and a trustee fully appreciate each other’s roles and responsibilities in the governance of the trust, their understanding advances the family’s long-term wealth preservation plan by making joint governance of the trust a positive experience for both parties. “

The role of personne de confiance

In Mr. Hughes’ book Family: The Compact Among Generations, we are introduced to the role of personne de confiance. He explains how “Personne de confiance almost always begin their careers as personnes d’affaires” and how “for centuries, these devoted professionals sought to achieve the highest status that family could bestow: the personne de confiance.”

He further shares: “In my father’s explanation, there lies another clear way to distinguish between the personne d’affaires, the person offering advice or knowledge, from the personne de confiance, the person offering courage. The person offering knowledge fills a gap in client’s needs at a level that requires no ongoing lifelong relationship with the client.”

We also learn that: “The person offering courage asks very different questions of the client, often bearing on a transition in the life of a family member or in the life of the family as a whole. Courage is the defining word because the serving professional, as personne de confiance, will frequently be expected to provide the courage needed for decision at hand, when the client knows the right answer, but lacks the resolve to act on it.”

Personne de confiance plays a role of a confidante, intermediary, among others. We, at Sicart Associates, grew to appreciate the importance of personne de confiance in a long-term success and well-being of a great family.

Family philanthropy

Family philanthropy is a frequently recurring topic that we have discussed in earlier parts of our series. In Mr. Hughes’ book, we are reminded of its importance: “Philanthropy is first, perhaps, the fundamental parent expression of personal and family values. If the family mission statement is an expression of these values, philanthropy is often the best way to move them into practice. Philanthropy can often be a means for family members who are isolated from society by their wealth to connect with the larger issues of the world and to find an active and meaningful place in it.”

The roles of mentors in the family

In Family Wealth, we learn: “Mentor represents two roles: first, that of regent, a person of deep trustworthiness who can safely hold the space for another, while that other goes on a quest; second, that of the elder and teacher who can instill knowledge in another, particularly wisdom about the other person’s journey of self-discovery.”

The author concludes: “Successful mentoring is a dialogue in which both parties learn something essential.”

Grandparents and grandchildren – natural allies

Mr. Hughes highlights the importance of a unique relationship that grandparents have with their grandchildren: “History and literature, as well as my own personal experience, all indicate that a grandparent’s relationship with his or her grandchildren is filled with pure love. Grandparenting offers the chance to teach the family positive virtues, stories, and myths without the parental obligation of being concerned with discipline and passing on by admonition the family’s negative experiences.”

In our conversations Mr. Hughes added: “Many surveys of Millennials and GenXers advise that these groups feel their grandparents are those they admire the most—not celebrities.”

 Family inversions, a new phenomenon

Mr. Hughes also commented on an interesting demographic shift that affects planning across generations. Historically the field has assumed an ever-increasing number of family members as generations evolve. However, he says, “In every developed country of the world the birth rate is far below replacement and even lower when applied only to the 1%. Thus, the reality for almost all families in the developed world (and now rapidly in the developing world among the equivalent 1% populations), families are inverting. Clearly within the next two family generations many of these families, as demography predicts, will have branches go extinct if not the family itself. I believe the planning community has missed this completely and needs to understand that its statistics about families’ unfettered growth are not only wrong — they are predicting the exact opposite of families’ realities. Helping families project their actual realities is critical to their planning realistically and fruitfully.”

Our highlights by no means cover all the great lessons from Mr. Hughes’ book – Family Wealth. We highly recommend exploring it in more detail, as well as his other publications including The Cycle of the Gift: Family Wealth and Wisdom, and Family: The Compact Among Generations.

Bogumil Baranowski – July 19th, 2017

Available as a video podcast or audio podcast (iTunes and Podbean).

Disclosure:

This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.