#58 - Richard Orlando: Wealth Psychology & Legacy

27:21I understand that's important. I said, but what's the purpose of your assets? And they were worth about 150 million. And immediately they said, we never thought about it. And I said, okay, just be spontaneous. The wife immediately went to philanthropy, giving it to others. And the husband went immediately to entrepreneurship. He said, if people in my family wanted to pursue, you know, what a business plan, I didn't get into the details with them, but what is the purpose of the assets? Just knowing that will help guide what you do with them. So that it going back to that metaphor of the son is the family and the money is revolving around the family serving what it's trying to accomplish.

28:01We're doing everything we can to serve the money. That would be one piece, making sure that the family is built on their shared values. They don't always have the same exact values and build on principles of a happy and meaningful life. We also strongly recommend having some kind of family meeting or family retreat once a year, which focuses a combination of things on if there's an operating entity, you might have some portion of the agenda educating or updating non-employed family members on the operating entity. It could be a bit of what we call the business of being family. Who are we as a family?

28:39What's our family vision? What's our mission? Are we preparing the next generation? And then some fun. So being able to build that amongst the life of busy family members or students that are in multiple states or multiple countries, being able to anchor the family once or twice a year and a vacation and a family retreat or a family meeting would be really helpful. And then the family members, especially in the next set of generations, as they become adults or young adults, getting to know the advisors of the family. So a lot of family members that we work with when we're coaching the next generation, they're not sure that the family's advisors are for them too.

29:15Since we get to work with advisors and families, the advisors are like totally, the firm wants to do whatever they can to serve the family. So sometimes we're helping connect those dots so that they're becoming educated, informed, but they also know who to go to if mom and dad are not there. So those are some of the things that I think will help minimize the challenges of wealth and keep the family more aligned with what they're trying to accomplish. A lot of what you're describing is being intentional about the human capital side, the soft side of this. I'm curious if you have some insights to share about, let's say you don't do that and you just let nature run its course.

29:53What typically happens with wealthy families as they transition from G1 to G2 to G3 to get a sense of what it's like if you just let it naturally progress on its own? If the family is fortunate enough to be one that naturally is communicative, close, cohesive, that helps. There are families like that, but too often the wealth complicates as part of implied in your question. So what probably happens is from an estate planning perspective, there's a minimum amount you would need, but you could perpetuate wealth by itself with enough restrictions on it. You could keep it moving across the generations through generation skipping trust to making sure a minimum of the income comes out.

30:38There's ways to perpetuate the assets. Or if it's operating entities or real estate, you could put non-family members as executives running it, even though it's owned and controlled by family. So you could perpetuate assets. But I think part of your question is asking, well, what happens to the family? And I would say, in my experience for the last 20 years, you could probably run the family wealth and the family business for two to three generations without that intentionality, without what we're doing every day with the families we serve, professionalizing the family and the governance and the preparation, but you're not going to get much further than generation three.

31:22Ideally, it's sooner, but I'm going to just say we're seeing consistently now, if a family hasn't done something through generation or begun to be intentional between two and three, the family's dissipated. It has no sense of legacy. No one's been prepared for wealth. So we have been strongly recommending when we're introduced to families and we're serving families that are in that one, two, or three, that they have to start putting in not only intentionality, but actual what we call scaffolding. Some level of governance. We talked about the family a month before this call. There's no boards, advisory or fiduciary.

32:01There's no committees. It's what we call a more of a mom and pop culture. Well, they're now going into generation three, that's not going to work because you could say generation two is in the manufacturing location and seeing how things get done. But once generation three and generation four, they're removed from that, it's now almost all wealth that they're responsible for. So I think some scaffolding. Otherwise, I think the family, without some natural benefits in their favor will lose the momentum. It may be even worse than that. The assets will dissipate. The legacy or the operating entities will not continue in the family.

32:43And if that's what they wanted, fine. But if that's not what they wanted, they're going to need to be intentional about it. So a lot of what you're describing is the family history and the legacy persisting through time. Why is maintaining a positive legacy so challenging for wealthy families? I love that you added the word positive because everyone, even if they're not acknowledging it, is creating a legacy. One might be creating a lovely positive legacy, even if they're not using the language you and I are using. But I think when we add this wealth wrapper, significant wealth around it, as we talked about, it provides those benefits, but it also provides those burdens, those challenges, that if we're not intentional about creating a positive legacy, then the wealth could, that gravity pull, take us off our core values or our North Star, then we will not have the positive legacy we intended.

33:37I wrote a book called Legacy, but I also speak to a lot of groups like the YPO forums about what we talk about is living your legacy. And to make people more aware of, because I think when wealth is created, a lot of the term legacy tends to suggest end of life. End of life planning, what happens with our assets when we're not there. Yes, that's part of it. But I think it's so much more about, and this is what I, in essence, preach to advisors. is you're helping and we're helping families live their legacies. And that's the mission of Legacy Capitals. And if we can help them live their intended legacies, almost everyone wants to live a positive legacy.

34:18And so if you're clear on your purpose of your assets, you're clear on your core values, then you're much more aligned with having the outcome of the legacy when you're no longer here. My mom just passed away, not to be dramatic, literally a couple of weeks ago. And I only bring that up because I'm emotionally in the place of, I literally don't have my mom anymore. So what remains? Yes, there was a few bucks, but it's the memories, her impact on us, how she treated my kids. It's all of this other human capital stuff that most individuals when I work with them or I speak to YPO groups say that's the most important stuff.

35:04So being intentional and why I love, Alex, this opportunity that you've asked me to do this podcast. I think the challenge is if we get busy as entrepreneurs creating wealth or only maintaining wealth, then we're not going to have the positive legacy at the end. One of the biggest concerns I've heard wealthy families raise is, how do I not screw up my kids? Richard, how should they think about keeping their children motivated without negatively impacting them? This is one of those questions that really keeps parents up at night. And it's an important one because when families and parents and entrepreneurs have significant wealth, they can take care of a lot of things in their kids' lives.

35:46And so how do you keep them motivated when you could have the resources to take care of something? So a few things, and it's also related to some of what we've talked about regarding the attributes of a happy and meaningful life. But to keep motivated is things like help them, give them opportunities to be challenged and to overcome and to achieve. The achievement piece keeps the motivation. Another guiding principle as a parent is that just because we can take care of things, it doesn't mean we should. Or I have this expression, do we love our children enough not to give them everything we can?

36:25And so the idea there is, imagine in some ways that your parenting is you don't have access to the resources you do. How would you then guide your kid? What would you expect from them? What would be your counsel to them when they're in a tough situation and they want to back out. Part of that practically is having them work and earn. A lot of parents may not do that, for example, if their children are at the age of university or college, but sometimes they will. Or I've even worked with one or two families where they said to their children, even though they could have paid for everything, they said, we're going to pay for 90 % of school.

37:03You're going to pay for 10%. And as long as you maintain a B or higher, we'll pay for the 90%. But if it's anything lower than the B, it goes into your 10%. Most parents don't do that, but I would say that motivation piece is to help them identify their passions, their strengths, their goals, encourage, challenge, support, but help them achieve it as best they can within their own efforts. And I think that helps a lot. What we find over time, because what you do for a seven-year-old is not what you might do for a 17-year-old or a 37-year-old. But the general principle, and it's related to some of our conversation already, is this idea of if there are significant family resources, and that is the concern that how do we make sure these are used to serve our kids and help them flourish, not make them entitled or lose their work ethic, as some parents might say, is that you almost move towards transparency and even terms of access.

38:03So maybe there's a payment for school that's fully covered. But now after that, maybe there's a co-down payment on a house, not a buying of the house. Or some of our clients will help make sure that there's enough of a down payment on a house so that their children live in a community that's safe and maybe even near them. But then the children have to be able to have enough income to maintain the lifestyle and expenses to carry the home. So you just keep moving towards that progression over time. And then usually parents will see the readiness, the maturity of their children when they can either make access more because the children have proven their own determination and work ethic.

38:48And when they might still want to do it a little bit more experimenting. I think the hard part is when you go from G1 to G2. So G1 creates the wealth. They started with nothing. They built an empire and they don't want their kids to go through the same struggles that they went through. So they want to give them what their parents weren't able to give them. It seems like there's a natural inclination to want to do better for your kids. I think one of the challenges in that is that unless there's an intention about, if I do that, here are the consequences and I don't fully understand that, there's a risk that you overdo it.

39:23I think part of what you're talking about is figuring out the right balance. If you overdo it and then you have other consequences. And then you're not going to know that until it's too late. And so it's helpful to talk to people who've had the reps that have seen action A leads to outcome B. Do you like outcome B? If you don't, then maybe you should deviate. I think a lot of it is just better insight. You nailed it. And especially as you said, with that newer significant wealth is what it took for us to get here. I want my kids to have some benefit from that. And the chapter in my book, Legacy, that's focused on preparing the next generation.

40:00To your point, I actually start with the first steps to prepare the next generation is to prepare yourself. Because if you're not aware of what you just said, some of those good instincts like, hey, I want to provide, I want to take care of, I want to make it easy, I want them to have better experiences. I don't want them to experience what I experienced. If we're not aware of those natural inclinations as parents, and we don't properly channel that, we actually could create the opposite outcome of what we want. So well said. So a lot of these wealthy families have a significant family business that helped create the wealth in the first place.

40:37How do you balance the importance of business skills versus family history and trust in managing a family enterprise? We work with a lot of family enterprises where there is a very large operating company and sometimes multiple. The short answer is when we're in a consulting engagement, what is a scenario like that? It's very important to know and have, for example, what does the business need to do? What does the enterprise need if the vision is to keep this moving through the generations? It's almost like take off your mom, dad, brother, sister hat and say, what does the business need? And then on the other side of it is what does the family need to continue to grow as a family?

41:21because in most cases, in my experience, not everyone in the next generation or subsequent generations, especially when you move to the cousins level of generation, is everyone actively or equally operating in the family enterprise. So you need to know what the business needs, the enterprise needs, and you need to know what the family needs to maintain. I just got off a call yesterday with a woman who created a great business and she's very savvy, but partly why she's reaching out. She says, I know a lot of this, but I feel like a third party helping us walk through this so that the business continues forward, which is the vision.

41:58But I don't want it to unintentionally hurt my family because not everyone's in that business. And now we got to talk about who's going to own the business, who's going to get paid for the business. I think both are needed. And then when you come together, when we find that Venn diagram where the business and the family overlaps because family members are either an owner or an operator, then those business skills are very important. And it's business skills, but you also still need the trust. It's both and especially the parts of the family that are going to be responsible for stewarding and leading that family enterprise forward.

42:34Earlier, you mentioned the notion of a family charter or constitution. Would you explain the process and importance of codifying a family charter and its core elements? There is family charters, family constitutions. They're basically different names describing the same purpose, which is a process and ultimately a product, a document of some kind, digital, obviously, at least, where the family and what's typically in a charter and what's typically in a Constitution ranges from what's the vision and values and mission of the family and or family enterprise, what's the governance structure, what are family policies, what's the family heritage, who are we, what do we represent, what's our intended legacy.

43:23We also include parts like we'll have the family take various assessment tools like the Clifton Strings or the Myers-Briggs, you fill in the blank and put that in there so you also understand the wiring, how people make decisions, what their natural strengths are, their philanthropy, if they're involved in philanthropy together, maybe their investment philosophy. The charter has all those components. And sometimes the families we engage will come with some of those pieces and other times they'll have none of those pieces. And we're helping the family as you would do, Alex, and your firm does, is help them build in and fill in those pieces.

44:01And the why behind that is because it helps anchor and navigate the generations forward. So it means that here's what we all agreed to. We've all signed off on. And in some cases, some of the people on my team that I work with come from very successful family enterprises. When they hit a certain age, they get invited in to read the charter and then they have to literally sign off on it. So it's a way to anchor and navigate the family through the generations about who they are, what's important to them, what are they trying to accomplish in their enterprise and in who they are as a larger family.

44:39And it also will evolve. It's organic because subsequent generations, whether it's the market changing for the enterprise, or maybe there's a liquidity event. Now there's more married ins, there's more cousins, there's grandchildren, there's great-grandchildren. It continues to evolve, but it's an anchoring to move the family forward. When we're engaged, We have three families right now where part of the engagement is we're literally helping them create their family charter. We call it the 100-year legacy blueprint. And the families really latch onto that more so. It has that kind of emotional connection.

45:12Here's what we're creating and here's what we're leaving behind. And then there's something magic about putting things in writing. I've written a couple books and I noticed when I'm writing, I'm putting it on paper and it's permanent. I know you can change it, but there's a record. And when you're writing it, you say, do I really believe this? And it makes you really think through everything that you're writing. And then it forces you to structure it in your mind and have that conversation and the process that goes into putting it on paper. And now you created a structure, you've created accountability and something that people can read and challenge and change.

45:48And it just puts it at a different level than just talking about it and hoping for the best. 100%. And you hit on a number of important things. But yeah, the very process of bringing a set of family members, even if it's just a set of them or a few representatives that start the process and then ultimately bring in other people over time, you've just created a high-functioning system that can create together and make decisions together. And you're right. Once it's in writing, it's more real. One of the big topics is financial literacy, particularly for later generations. What strategies do you recommend for fostering financial literacy and responsibility in younger family members?

46:29In my legacy book, I talk about the importance of not only financial literacy or raising the financial IQ of family members, but also we call it life IQ or the intelligence of practical living and flourishing like we've been talking about. So the topic of money, not the family's wealth, but just the topic of money should be in some way in age appropriate ways, talked about from, let's call it kindergarten onward. And what I mean by that is practically, I think the Bear Steen Bears, they have a book for parents to read to their kids, which just starts playing with the concepts of money. Two, there's digital money games for the gamers.

47:08They go online and actually play really cool 3D settings, soccer, European football, but US soccer. And as they're playing the game, they have to stop at different points and ask and answer questions about financial matters. I'm just naming a few resources. There's a website called Napkin Finance, which is free, lots of short videos on various money topics. For the young children, you want to obviously think age appropriate, but you also want to give them some experiences of money. So when they get a little older, depending on the philosophy of your family, you might give an allowance. So here's another idea in terms of educating the younger generation of a family is this idea of a piggy bank, which is something I did with my family when my children were younger.

47:55And these piggy banks are divided up into, you could see through them and they're labeled in these four categories of saving, investing, spending, and donating. So you have these four broad, but very foundational pillars to the idea of money, what you could do with it. And so you use it in age appropriate ways. What we would do is if there was an allowance or maybe some gifts from Christmas or Hanukkah or birthday, that we would help them think through why you're going to put it in spend versus donate versus invest, or maybe time to save it. So that's just another really practical way to teach and educate the values of money, but also the principles of money as part of the larger educating of the next generation, especially the younger generation.

48:40Are there any approaches to philanthropy that can engage multiple generations of a family? I know that's typically a big priority for families. It's one of those places that the family does begin to wrap around and very much related to the prior question. It might be the first glimpse into some money that the family has that might be in a private foundation, might be a donor advised fund, it might just be writing checks where you're absolutely right. The family wraps itself around and there are innovative ways that families are really thinking through their philanthropy. And I'm thinking one of our families.

49:17He's really passionate about it. He doesn't want to just give money. He wants to give money to organizations that know how to then take that money and multiply it to have a greater impact. Or some families will create a junior board for younger family members, maybe young teenagers, to almost run parallel to the actual foundation board to learn. So they start practicing. So there are some really creative ways and innovative ways that are advancing philanthropy. But most of the families I find, unless they're pretty seasoned already and they're doing this for multiple generations like the Rockefellers, most families who are, especially the newer wealth, one, two, three generations in, are still at the basics.

49:58Like, all right, how do we organize ourselves around giving? When do we include our children? Do they have a voice? Do they have a vote? Do we match their giving? Do we put a certain amount of assets aside for the family to give as a whole? I'm working with a family right now that has two charitable funds, one for the parents, one for the next generation. There's another family we're working with that runs a very global company that we would all know. And what he decided to do is they created guardrails for their giving, who they're anchoring their giving to and who they're not meant to be giving to in terms of causes and things like that.

50:36But in this case, the family I'm referring to is adult children were in three different states. So they agreed that there would be something that was horizontal in the giving for that, in this case, a private foundation. But then they did set money aside for each of the children, much smaller amount, but to give in their local communities. But before they actually signed off on that giving, the adults in the next generation would do some homework, come back and report in the family philanthropy meeting. Here's what I learned. Here's what I'm thinking of giving to. Here's why. And then the family would discuss it and then they would sign off on it.

51:10And then the donation would be made in this case in the name of that child. So the child had the social connections to that community. So some of that foundational piece is bringing the family together. It's also a chance to learn. It's another version of education. There's traditional personal finance and investing, which is where a lot of people start. There's also all the language that goes with philanthropy and the tax implications and benefits of donating. And then there's also that other category, we'll just call it family law or estate planning, just the basic language of what's an heir, what's a grantor, what's a trust, what's a generation skipping trust, what's a revocable trust.

51:51This is stuff that you're experts in you and your firm, but not everyone in families, even the wealth creators, understand it all. We've had some clients say, can you just help translate this for us? Well, that's not what we do. But they're just like, help me make sense of this because I know that what they're trying to do is this, but what do they mean when they say this? So it's another opportunity, the philanthropy question you're asking for a family to come together, anchor around a set of shared values, start creating some leadership and education and some discipline. And it's also a chance to feed their family cohesion and its legacy.

52:27Richard, this has been fascinating. The soft side of wealth management often goes without as much focus as the money side and managing the money and all of that. So I appreciate you sharing that insight with our audience. I hope they learn from this experience and hopefully we'll keep the conversation going. Thank you. Thank you for this opportunity, Alex. And like you said, I hope those who are going to listen to this will find some value for their own family situation. So thank you so much. Thanks for listening. We hope you enjoyed this episode. Please visit our website at insightfulinvestor.org to access past shows and learn more about our podcast.

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