How Can You Avoid the Shirtsleeves-to-Shirtsleeves Phenomenon?

This article was originally featured in Forbes.

There’s an idea known as the "shirtsleeves-to-shirtsleeves" phenomenon, which recognizes that wealth that is created in one generation is often lost by the third generation. This speaks to the fears so many of us have when we think about what could be, especially if we are first-generation wealth creators, business owners or entrepreneurs.

In all my years of both counseling entrepreneurs as a wealth advisor and experiencing my own entrepreneurial success, I have come to appreciate that the path to creating something enduring is different for everyone. And the pitfalls on the way to legacy are, on the other hand, very common.‍

‍Entrepreneurs Are Good At Creating Wealth, But Not So Good At Managing It‍

When it comes to money management, the instincts of an entrepreneur to concentrate your resources and take risks are often antithetical to how you preserve great wealth, which is by diversifying assets and investments. In other words, the personality traits that give you the courage to bet the farm because you have nothing to lose when you are building your business are usually the wrong instincts for how you grow and preserve wealth.

So often, those who have exited a business they have grown will also have a hard time resisting the urge to make quick decisions about where to put it. All of this liquidity, all of a sudden, can be incredibly overwhelming. Developing a strategy for how you will deploy your wealth over time is just one way you play the long game of wealth preservation. I've found it’s often hard for the go-getter entrepreneur to slow down to consider all of the potential investments they might make and to take advantage of market cycles and vintage-year diversification.

Another common pitfall is for an entrepreneur who has exited the business to set up shop as a small, single-family office and begin to entertain deals. In my experience, this often attracts exactly the deals you don’t want to invest in. In the book The Missing Billionaires: A Guide to Better Financial Decisions, authors Victor Haghani and James White explored the puzzle of why America has so few billionaires relative to the enormous wealth that was created during boom times. Their conclusion was, “If the wealthiest families had spent a reasonable fraction of their wealth, paid taxes, invested in the stock market, and passed their wealth down to the next generation, there would be tens of thousands of billionaire heirs to generations-old fortunes today.” In reality, only a few people from the original Forbes 400 list, which was started in 1982, remain on the list today.

Finally, one of the most common (and easiest to avoid) pitfalls is the reluctance to address tax strategies or to fail to adequately plan for estate taxes. I’d be remiss if I didn’t remind readers that the 2017 Tax Cuts and Jobs Act will sunset at the end of 2025. Unless it is extended, waiting until late next year to develop a strategy will be too late. Procrastination could come at a high cost.

Preserving And Growing Your Wealth Into The Future

After watching so many entrepreneurs and business owners grow and lose wealth, my business partner and I wrote a book that summed up three principles that acknowledge the idea that most wealth creators don’t only want to preserve wealth; they want to pass it along to future generations. These principles can be distilled as follows:

1. Don’t confuse wealth with legacy. The most powerful legacies are not about money at all, and knowing what you want your legacy to be can help you achieve higher levels of personal fulfillment.

2. Differentiate between your business and family. Creating business and family dynamics that are separate and distinct is essential to lasting wealth and sustaining legacy.

3. Consider the next generation. Building the bridges of understanding and shared meaning is critical to preparing your successors to be empathetic and effective stewards of your wealth and legacy.

Beyond these lessons, you can consider working with a financial advisor who understands the big picture of what you wish to achieve. This can ease your mind and help you avoid a scenario where having a lot of money becomes a constant source of stress and worry. You can discuss the essentials, such as tax planning and optimization and estate planning, as well as have a sounding board for potential investments, how and when you should bring your children into the conversation and what you envision your legacy to be.

To find an advisor who fits your needs, look for an individual or firm you like and trust and is competent. Evaluate them against a few criteria:

• Business model: Are you hiring a collaborative team or a charismatic individual? Do they meet the fiduciary standard, so they are required to make investments based on your best interests and not their own?

• Follow the money: Understand how your advisor is economically incentivized. Is investment advice objective? Are they incentivized on only new sales, retention or both?

• The stability of the investment team and their client-retention ratio: That should give insight as to whether their investment process is repeatable and how satisfied the firm’s clients might be. You can also ask for client references.

• Whether they have skin in the game: For example, do they invest their own money alongside yours? Or said more colloquially, do they eat their own cooking?

• Fit: You don’t want to be an advisor’s largest client or their smallest client. Does the firm work with clients of a similar profile with similar needs, or is this their first rodeo with someone like you?

The bottom line, so to speak, is “Why wait?” Why wait to develop a long-term and comprehensive strategy to manage the wealth you are creating? Why wait to bring your children into conversations about money and privilege? Why wait to think about what you want the sum of your life to be and what role your wealth might play in your legacy?

The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

‍

‍