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Four capital sources are the key to lasting wealth


Families with wealth that lasts for generations tend to focus on personal values, not just financial assets, according to behavioural finance experts and family wealth dynamics leaders at Merrill Lynch’s Private Banking and Investment Group.

In a new paper entitled: “Creating Meaning from Money,” Merrill Lynch expands on the fundamental idea that building family wealth that lasts requires focus on four sources of capital. They are:
• Human capital: Each person’s distinct talents, skills, knowledge, interests and experiences, and the extent to which their actions and path in life align with core values, strengths and purpose.
• Intellectual capital: The principles, policies and practices in a family that create structure to develop a shared vision of family money and sense of accountability that influences the actions and decisions family members make every day.
• Social capital: The contributions that each person makes in the world through motivation to make a positive difference in the world and give back with a sense of gratitude.
• Financial capital: The meaning created from money when it is used to grow other capital sources and fulfil one’s own purpose and potential. It is a means to an end, but not the end goal.
“The idea that meaning and fulfilment will come from building financial wealth alone is an outdated way of looking at capital. It sets up the rising generation for failure by making family members reliant on family money rather than investing in their own strengths,” says Michael Liersch (pictured), head of behavioural finance and goals-based development at Merrill Lynch Wealth Management. “A more comprehensive, multi-dimensional view of wealth helps reframe priorities and is the difference between families that create active stewards or passive inheritors of family wealth.”
The paper points out that the rising generation is more likely to feel empowered by family wealth when they understand that financial capital can be used to build greater human, intellectual and social capital.
“When wealth is equated solely with monetary value, the rising generation often grows up overly focused on consumption or feels pressure to gain financial assets – with those areas taking precedence over finding their own priorities and direction in life. Either way, they can end up missing the advantages and opportunities that come with family money,” said Stacy Allred, a managing director and wealth strategist in the Merrill Lynch Private Banking and Investment Group and leader of Merrill Lynch’s Center for Family Wealth Dynamics and Governance.
“True wealth is about more than dollars. Money is simply a tool to achieve some other meaning or purpose,” she says. “In that regard, every dollar is a blank slate that defines and records our values through everyday choices about earning, spending, sharing and saving.”
“Creating Meaning from Money” is the fourth in a series of papers on sustaining family wealth by the Private Banking and Investment Group. Drawing from client insights and in-depth analysis of proprietary and third-party research, the series explores behavioural, psychological and social dynamics of family wealth and their effect on the outcome of intergenerational wealth transfer.

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