The Competence Paradox
At family wealth conferences, you’ll occasionally hear people joke that “there is no such thing as fourth generation money.” The implication of this joke is that if family money is managed well enough to make it to a fourth generation, it is almost never kept in a structure that gives family members agency over it or access to it. This joke is not an absolute rule—and things like generational dilution and taxes also play a big role in dispersing intergenerational wealth—but it does hold some truth. For wealth to make it to a fourth generation, a family must either have an extremely intentionally constructed governance structure or a system in place for training future generations to replenish the family’s fortunes every three generations or so.
A competency paradox lies at the center of many, many failed attempts at enduring intergenerational wealth. In these cases, the most competent members of the family are intrinsically also those who least need family money, meaning they don’t bother with the drama of family office politics. This frequently enables each generation’s least competent family members to exercise a disproportionate level of control over the family’s wealth.
Families may try to solve the competency paradox by tying power in the family office to impact on the outside world, but often botch how they define “impact,” making it something easy to achieve and thus exacerbating the problem. In addition to sorting for low competence in family finance leadership, such mistakes put unethical relatives who are most willing to cheese metrics in control of family finances.
It is common for a family office creator who has not put a lot of thought into how future generations will distribute money to create a governance structure composed of the most charitable and philanthropic family members. This structure is categorically doomed in any family that has more than two kids per generation. Specifically, what this system actually creates is the potential for a life path in which an individual does not have to work and can still have access to large amounts of money. Even if the money is earmarked to only go to charities, there are all sorts of ways charitable donations can be turned into income streams, such as leveraging charity board positions gained through donations to secure additional paid positions on for-profit corporate boards. This, in combination with a family-wide voting system, creates coalitions of family members who vote in blocks to maintain control and do everything in their power to make life miserable to those outside the group whenever it looks like they might try to assert any control over the system—and why wouldn’t they? If they lose their power over family wealth, they lose their only source of employment.
The above structure differentially rewards the least competent and least moral family members. Individuals who have no trouble making money by their own merits have dramatically less motivation to play the family politics game than parasites who leverage family wealth to pretend they have a real job. Having built their own successful careers, competent family members will expend less effort to be involved with the family office. In stark contrast, when the family office provides a source of income, anyone who is too lazy or incompetent to make money on their own will defend control of family resources with their lives, inevitably turning family office politics into a full-time career.
Whether or not to engage in family politics can quickly become a binary career decision for every family member when winning the family politics game becomes a full-time job. In these scenarios, getting access to family funds means abandoning all other life goals. Essentially, such systems filter out individuals with the competence and work ethic to build fortunes on their own.
In families like these, every new child and spouse becomes an existential threat to the income streams of extant members and their immediate families. When you have given up on trying to become a productive member of society and have kids of your own, it becomes easy to justify atrocious, slimy actions in an effort to ensure your own kids get a cut of the pie—especially when the pie’s division is determined by family politics instead of external measures of success.
In addition, governance systems that give equal weight to the votes of all family members encourage coalition building and the formation of voting blocks that freeze out other parts of the family and turn parents against their own children. If sliminess and an absence of ethics facilitate a rise to power within a governance structure, those “winning” traits become imprinted on future generations as a core aspect of family culture. Worse, if you try to build a family office that selects for ethics in its leadership, what you often end up accidentally rewarding is dedication to a specific religious tradition or the ability to virtue signal (this is why so many family offices go off the rails with self indulgent virtue signaling that is utterly divorced from the values of their industrious founders).
Should you blindly promote equality among your children regardless of their talent and reward virtue signaling over measurable impact and wealth accumulation, you bequeath future generations with an unfortunate choice: Fight a pack of starving dogs for a slab of meat from a corpse or learn to hunt yourself.