How wealthy families lose their fortunes

And what you can do to protect it.

Creating wealth and preserving wealth require very different skills.

Entrepreneurs can spend decades building a successful business and accumulating substantial assets, only to discover that the risks which threaten that wealth have very little to do with how well their investment portfolio performs.

I have spent much of my professional life advising wealthy families and have seen fortunes threatened, diminished and sometimes destroyed in many different ways. Litigation, divorce, family disputes, fraud, inappropriate advice, badly structured ownership, reputational damage and simple failure to anticipate what might go wrong can all have devastating consequences.

The lesson is simple: you cannot protect wealth until you understand what you are protecting it from.

The risk you never expected

Some risks are external and relatively easy to recognise.

A valuable property can burn down or flood. The obvious protection is appropriate insurance. A business may face claims from customers, employees or competitors, requiring both insurance and appropriate corporate structures.

Other risks are much harder to anticipate.

Gerald Ratner provides one of the most memorable examples. In 1991, at the height of his success, Ratner made his now infamous speech to the Institute of Directors in which he joked disparagingly about some of the jewellery sold by his own company. The consequences were extraordinary. Around £500 million was wiped from the value of the business and Ratner ultimately left the company.

It is a dramatic reminder that one of a family's most valuable assets may be something that does not appear on its balance sheet at all: reputation.

Today that risk is greater. A careless remark, social-media post or family scandal can travel around the world in hours.

When the threat comes from within

Some of the greatest risks to family wealth arise much closer to home.

Divorce is an obvious example. Where significant family or inherited wealth is involved, a properly prepared pre-nuptial agreement can be an important part of the protection strategy. In England and Wales, pre-nuptial agreements are not automatically binding in every circumstance, but the courts can give substantial weight to agreements that have been properly and fairly entered into.

Then there is the risk of families themselves going to war.

Anyone who has worked with wealthy families for long enough knows that money can magnify existing tensions. Sibling rivalries, second marriages, disputes between generations, disagreements over the family business and competing expectations of inheritance can turn relationships into litigation.

In appropriate circumstances, putting family wealth into trust can help separate ownership and control, preserve assets for future generations and provide an independent framework within which wealth is managed. But a trust is not a magic shield. Its effectiveness depends upon its purpose, terms, jurisdiction, trustees, tax treatment and the circumstances in which it was established. Trust structures themselves can be challenged, including in matrimonial proceedings.

Different risks require different protection

This is the point too often overlooked.

There is no single product called “asset protection”.

If the risk is fire or flood, the answer may be insurance.

If the risk is divorce, it may be a pre-nuptial agreement combined with appropriate ownership structures.

If the risk is family conflict, it may involve trusts, independent trustees and family governance.

If the risk is litigation, it may require examining how assets and businesses are owned, where liabilities sit and whether insurance is adequate.

If the risk is incapacity or death, the protection may involve wills, powers of attorney, succession arrangements and appropriate trust structures.

If the risk is reputation, the solution may have very little to do with lawyers or investment managers and much more to do with governance, privacy and crisis planning.

And if the risk is poor advice, the answer is not necessarily another adviser. It may be someone capable of looking across all the advice the family is receiving and asking whether the pieces actually fit together.

Who is looking at the whole picture?

This is where wealthy families can be surprisingly vulnerable.

The lawyer considers the legal structure. The accountant considers tax. The investment manager manages the portfolio. The insurance broker considers insurable risks. The trustee administers the trust.

Each may be doing an excellent job.

But who is asking the family the bigger question:

What could cause you to lose this fortune?

That question should come before the products, structures and professional disciplines.

Protecting substantial family wealth begins with understanding the family, its assets, its businesses, its relationships and its vulnerabilities. Only then should advisers determine which risks can be eliminated, which can be reduced, which can be insured and which simply have to be understood and managed.

Wealth is often created by taking risks.

Preserving it requires knowing which risks are no longer worth taking.