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How to Manage Wealth Across Generations

Cross-cultural psychology can help your family avoid the pattern of wealth creation and loss.

Nearly every culture in the world has a term for it.

In Italian, they say, "From stalls to stars to stalls." In Japan, it's, "The third generation ruins the house." In China, they make it plain: "Wealth does not survive three generations." The general pattern of wealth created and wealth lost in three generations has persisted across cultures and centuries. How, then, can you help your family to avoid this fate?

In his book, Strangers in Paradise: How Families Adapt to Wealth Across Generations, Dr. James Grubman draws on cross-cultural psychology to teach the importance of healthy integration when a family has acquired wealth.

When a lower- or middle-class family comes into wealth, they are like immigrants arriving in a new land. Scientists who study cross-cultural psychology have identified three coping strategies that immigrants commonly use to adapt to their new surroundings: avoidance, assimilation, and integration. According to Dr. Grubman, people who migrate to the "land of wealth" fall into the same three categories.

Many who come into wealth harbor fears that they will lose critical parts of themselves or their heritage if they adopt a wealthy lifestyle. Like immigrants who don't learn the language, hold firmly to their old customs, and rarely associate with the natives of their new country, avoiders cling tightly to their middle-class identity.

Some level of concern for preserving one's values and relationships among the newly wealthy is certainly appropriate, but this can become a problem when people fearfully hide their wealth from the world, and even from their children.

"By and large, the avoidance response is an anxiety-type paradigm," says Dr. Grubman. "Avoiders are constantly asking themselves, 'What if?'" Dr. Grubman explains. "If I spend money, what if they see, and then I am a target for fraud, or loans and gifts? What if I seem like a greedy person? What if I lose my soul when I embrace wealth?"

Avoiding can also lead to family turmoil. Children of avoiders may not learn of their parents' wealth until well into their adult years. This can lead to feelings of hurt and betrayal, especially if they have made major concessions in their life decisions based on the assumption of being limited financially. The second generation is also left to manage a large body of wealth without ever having been taught, or had the opportunity to observe, positive wealth-management skills. Too often, when avoiders die, "Fear and money are bundled together tightly and passed on as one inheritance," says Dr. Grubman. As a result, the next generation is likely to lose wealth.

How can you tell if you're an avoider?

1) Do you believe the negative, toxic stereotypes about the wealthy?

2) Are you afraid that embracing wealth could make you become like the stereotypes?

3) Do you fear that wealth will make you a target for fraud, scams, or hostile envy from others?

If you answered yes to any of the questions above, you might be avoiding.

Some immigrants try to be as American as possible, as quickly as possible. They learn the language, eat American food and listen to American music, and generally break ties with the world they left behind. Many who come into wealth do the same.

This strategy of transition makes a clean break from the lower and middle classes, opting to relish the luxuries available in the land of wealth. Many people who assimilate to wealth do not want anyone to know that they come from more humble circumstances.

Where avoiders tend to hold on to their money and never feel safe, assimilators experience an exhilarating sense of safety and freedom--but often spend themselves right back out of wealth.

Like the children of avoiders, the children of assimilators rarely see positive examples of wealth management. The skills that are critical to managing a family's wealth across generations (such as weighing a purchase against one's budget) are lost on assimilators. An assimilator may wonder why anyone with millions of dollars would bother with a budget.

How can you tell if you are an assimilator?

1) Do you believe that money is a sign of success, power, or prestige?

2) Does the idea of wealth arouse feelings of powerful desire?

3) Do you try to avoid people finding out about your more humble past?

If you answered yes to any of the questions above, you might be assimilating.

Integration is the best--and most challenging--strategy for transitioning to a life of wealth. Integration involves maintaining the values and skills from the middle class that are the most useful and treasured, while remaining open to learning new ways of living that are unique to wealth.

Integrators talk openly with their children about their wealth and involve them in financial decisions. Integrators want to learn the financial skills that are necessary to managing wealth and model them for their children regularly. Integrators generally feel a sense of peaceful continuity between the land they left behind and the land to which they have come. They focus on helping their children understand how to enjoy wealth while keeping the important values from the middle class alive in their home.

How can you tell if you are an integrator?

1) Do you put little stock in stereotypes about the wealthy?

2) Does the idea of wealth trigger a fairly minor emotional response?

3) Do you feel a sense of continuity between your past and present, embracing your new life while also holding on to the values and people you care about from your past?

If you answered yes to any of the questions above, you may be integrating well.

Breaking Out of Avoidance and Assimilation
The three strategies are not mutually exclusive. You may find yourself moving in and out of each strategy over time. Ideally, you will settle into a life where the parts of your past that you value most are well integrated with the parts of your new life that bring you joy and security. To get there, you may need to break yourself out of avoiding or assimilating from time to time.

According to Dr. Grubman, the things that help avoiders are the same things that help people with anxiety. No amount of financial security can help with avoidance because "the problem isn't the money--it's the 'What-ifs,'" says Grubman. "The trick for avoiders is to turn the 'What if?' into a 'So what?'" He suggests that avoiders challenge themselves to spend a bit more in order to see that the land of wealth may, in fact, be a safer place than they believe.

Assimilators need to learn to enjoy the benefits of wealth while exercising moderation. Identifying activities and things unrelated to money that bring you joy can be a good start. Learning about money management and modeling moderation for your children will go a long way to helping them maintain wealth.

There are plenty of resources available for people who are transitioning to wealth. Dr. Grubman's book, Strangers in Paradise, and the Sudden Money Institute are good places to start.

Lastly, be patient with yourself. The process of successfully transitioning to wealth can take several years. Go slow, be thoughtful, and happy integrating!