Charles Lowenhaupt, chairman and CEO of Lowenhaupt Global Advisors, discusses the route to “harmony” within wealthy families.

Editor's Note: Here, Charles Lowenhaupt, chairman and CEO of Lowenhaupt Global Advisors, and a financial advisor whose family has been managing significant wealth for more than 100 years, shares his experience.

In conversations with patriarchs and matriarchs of wealthy families around the world, we find a desire for “harmony” within the family. Even with their wealth, the patriarchs and matriarchs often worry that harmony may be elusive – that somehow wealth and harmony have trouble co-existing. To these senior members of the family, issues of risk tolerance, due diligence, asset allocation, and investment return pale compared to the challenge of how to keep everyone “together”.

One solution being applied over and over is the “family charter”. We see those increasingly as we travel around the world. The idea is to engage in a process, often focusing on the “next generation”, in which the rules for their engagement in the family wealth are defined. Often those are rules for the future, coming into effect when ownership passes to their generation. The “family charter” is often where the wealth creator or wealth holder sees a process for harmony for future generations and forever more.

In fact, family charters should not be seen as the ultimate tool for institutionalizing family harmony, but rather as one possible step in building family harmony. First, family members must understand actual ownership and understand the individual needs and aspirations of each family member. Family charters work only when they are part of a larger process that starts by building understanding of the actual facts related to ownership and continues with consideration of the needs of individual family members. When seen as the first and only step in creating harmony, family charters frequently frustrate the self-actualization of each individual.

Creating a charter

The creation of a charter can be a tool to open communication between siblings and cousins, but only when everyone is clear on the context and meaning of the words.

Consider a US family whose patriarch, the wealth creator, thought it was a good idea to draft a family charter, (or “constitution” as sometimes called in the US). Under the guidance of an expert in family charters, his children spent months responding to questionnaires and produced a 30-page “charter” to be used when the patriarch died. The charter set out terms to limit transfer of ownership and direct voting and governance rules when the children ultimately got ownership of company stock. The charter also stated that it was not legally binding on anyone, but “merely reflects our intent to stay together as a family in harmony.”

Within months of executing the charter, family members could not remember what was in it. Writing his will, one of the sons told his lawyer that a charter existed, but there was no need to consider it. He would simply give his interests wherever he wanted. Indeed, the son did not remember that the charter said interests should be owned only by those in bloodline (excluding adopted children). Another child said: “Oh yes, we wrote that charter by consensus but, as usual, no one really listened to me. I was ignored.” When the patriarch dies, it is likely that one or more of the children will not abide by the “terms” of the charter. That will frustrate the others, who saw the charter as a good faith statement of intent.

Now consider the similar experience of a wealthy Asian family. The “family charter” set out in great detail how the children of the wealth creator would engage in the “family wealth”. Once the charter was signed, the children started to execute the actions permitted by the family charter after their parents’ deaths. They disagreed over and over again. “Family council” meetings were acrimonious, as the children fought over how to manage the money and whether the money should be invested in their businesses. That they had absolutely no ownership interest while their parents were still alive was the “fine print” none of them read. The patriarch and matriarch found themselves embroiled in discussions about the “family wealth” to the point that the patriarch and matriarch finally had to state firmly that the wealth did not belong to the family – that it all belonged to the patriarch and matriarch. Clarity returned only with the recognition of that fact. With that understanding, each of the children quit bickering over money and went back to figuring out what they wanted to do with their lives.

It takes more than a charter

It’s critical to understand that charters alone cannot generate harmony. These documents strive for consensus and focus on the family, rather than the individual. Family harmony must be built on individual happiness, which only occurs when each individual self-actualizes and is free to be all he or she can be. How can individuals work together to encourage their individual goals and ideals? What freedom must each family member have to self-actualize? How do you ensure freedom from a burdensome family construct? Only by answering these questions can a family build the foundation of harmony.

It’s useful to draw on history to see how a charter can work. Consider a sound government. It starts with a bill of rights or a Magna Carta. That document sets out individual rights and freedoms. Only after recognizing individual rights and needs can there be a liberating governance structure. So it is with groups of individuals in a family.

Each individual must examine what the wealth will be for and how to live life productively. Successful charters also must anticipate that individuals change and membership in the family unit changes. They recognize that there can be perpetually recognized individual rights, but that a “perpetual” charter is unlikely. Harmony comes when everyone feels free to live life fully and everyone respects the rights of the others to live life fully. Any time a consensus dictates how one must live, unhappiness follows. We’ve seen it over and over.

The only sure route to family harmony is to start by considering each individual. This is the gift of great wealth: it affords individuals and families the opportunity to examine without financial pressure. They can take time to choose the most appropriate path and then use that wealth to pursue life on their own terms. To create a plan that can facilitate a life well-led requires one-on-one conversations with every member of the family. Each conversation should be about what the individual wants from life and should help develop an understanding of what guidelines, if any, make sense for the family and for each individual to satisfy his or her needs. No one should be asked to sacrifice self-actualization for “family harmony”.

Experience shows us that there is rarely a quick fix, such as a family charter. The process in arriving at family harmony can be a journey. However, it is this process that identifies the points of friction, the aspirations of the individuals and the rules that individuals are prepared to commit to in their interaction with the family. In fact, there is a place for a family charter in some families, but not in all.

Ultimately, the family in which every member is fully engaged in life and community lives in harmony.