Wealth Concentration Can Be Hazardous

Eran Peleg, CIO June 25, 2018

General Electric (GE), once the world’s most valuable company and the last 19th Century member of the Dow Jones Industrial Average, was just removed from the well-known market index. Wow -- the end of an era!

It is a well-known phenomenon that wealth is significantly reduced or destroyed in the 2nd or 3rd generation of wealth owners. According to a study conducted by Williams Group Wealth Consultancy, 70% of wealthy families lose their wealth by the second generation and 90% by the third.

Wealth concentration is often an important driver of wealth creation -- as the 1st generation entrepreneur builds and grows a business. At a certain point in time, this business may seem strong and sustainable, even invincible. The family then ends up having a significant part of their wealth tied up in the business that has been the main source of their wealth.

However, as we advance from 1st generation entrepreneurs to 2nd and 3rd generation heirs of family fortunes, wealth concentration that has been instrumental in creating the family’s wealth, often becomes the reason for the ultimate destruction of it – as even the most established companies ultimately suffer significant declines in value.

The recent fall of General Electric (GE) serves as a stark reminder of this fact. See other examples from the past 15-20 years of prominent companies that have suffered a similar fate:

Source: Bloomberg

So, from a wealth preservation perspective, especially over multiple generations, wealth concentration can be hazardous.

If 2nd and 3rd generation heirs of family fortunes wish to preserve their wealth, they should seek to diversify their exposures.