Why great fortunes dwindle over time and how to keep it

A Chinese saying that goes “Wealth does not last beyond three generations”, for example, is essentially stating the same belief as to the American expression, “Shirtsleeves to shirtsleeves in three generations”.

One of the reason is a lack of corporate governance. Corporate governance has a substantial impact on value through its impact on cash. According to a study by Amy Dittmar, $1.00 of cash in a poorly governed firm is valued at only $0.42 to $0.88. Good governance approximately doubles this value. Furthermore, the study show that firms with poor corporate governance dissipate cash quickly in ways that significantly reduce operating performance. This negative impact of large cash holdings on future operating performance is cancelled out if the firm is well governed.

A track record of wealth dissipation

In some cases, family disagreements can negatively impact family fortune. That’s how Yeo Hiap Seng – the company that started the popular Yeo’s brand of drinks in Singapore – fell into the hands of the competition. When descendants of the founder, Yeo Keng Lian, fought over the business and family properties, the ensuing court cases caused the company’s share price to drop. This allowed a rival family to acquire majority share ownership and subsequent control of the company.

In other occasions, it boils down to sheer extravagance. Jocelyn Wildenstein was rumored to spend $1 million a month on lavish purchases and $5,000 a month on her phone bill. In May 2018, the socialite declared total bankruptcy, saying she had $0 in her checking account. This was despite her receiving more than $2.5 billion in her divorce settlement. Wildenstein even told the New York Post that she was promised much more. She was given two paintings in the settlement, one by Diego Velázquez that turned out to be a forgery and another by Paul Cézanne that sold for a fraction of what it was originally appraised at.

How to beat the curse

Buffett's rule number one is to Never Lose Money. And his rule number wo is never forget rule number one. He's referring to the mindset of a sensible investor. Don't be frivolous. Don't gamble. Don't go into an investment with a cavalier attitude that it's okay to lose. Be informed. Do your homework. Buffett invests only in companies he thoroughly researches and understands. He doesn't go into an investment prepared to lose, and neither should you.

Corporates usually have other worries such as creditors. And they will need to protect their assets with proper planning and knowledge, which can be provided by a qualified wealth manager. These wealth managers are armed with the expertise to carry out asset protection and succession planning, which is extremely crucial for those in the high or ultra-high net worth space.

“For people with a lot of wealth, typically the first thing to note is that they are not going to outlive their wealth. It’s more about how to protect that wealth, and pass it on to those they love,” says Assistant Professor Mandy Tham, the Academic Director of the Master of Science in Wealth Management (MWM) at the Singapore Management University Lee Kong Chian School of Business (SMU LKCSB).

There are easy solutions

One simple solution would just be setting up of a holding company, a trust fund or a family office. The last two options are more sophisticated. A holding company is simply a Pte Ltd entity that you own, which has other ultimate beneficial owners (UBOs) that you have nominated to own them in case anything happens to you. It can hold assets such as cash, stocks and shares, properties, intangible assets such as trademarks and source codes and even digital assets like crypto. A holding company can appoint a board of directors to manage the assets, so that they fulfil the financial purpose, such as preserving assets and generating secured income against those assets, in accordance with the risk profile set upon the directors by the owners of the holding company.

Looking at examples of wealth that has lasted beyond three generations can offer illuminating lessons as well. International food conglomerate Cargill Inc., for instance, was founded in 1865 by American business executive William Wallace Cargill. It has stayed in his family for four generations, and remains one of the largest private companies in the world, with nearly US$120 billion in revenue in 2018 and over 160,000 employees in 66 countries.

Leveraging Singapore's property ownership rankings and pro-business environment, kimbocorp's holding company plans is especially packaged to pass on all of Singapore's corporate images virtually to for the benefit of owners sitting outside Singapore. It comes complete with all financial accounts, brokerage accounts, intangible asset protection rights, in-built board of directors and even curated stakeholders and consultants. It is an all-in-one package for anyone outside Singapore to preserve wealth, overcome currency fluctuations and high inflationary pressures at home, so it guarantees that asset value would always remain stable and less volatile.

These days in corporate wealth protection, directors and officers of businesses have a larger role to play. We also include wealth management solutions, provided for by directors of holding companies that we create, so that they can identify the professional and personal needs of clients who own these holding companies, and collaborate across other consultatns to provide holistic solutions to our clients,' says Johnson Koh, founder of kimbocorp.com

Ultimately, Johnson Koh believes value protection is the key to preserving wealth. This means they cannot lose if their value always remains fairly stable. With this foundation in-place, and coupled with the right executive board and strategy, wealth can be attained for any individual outside of Singapore even if their economic environment is often volatile.