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August 2015
Generations, Environment, and Genetics
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As a fundraiser, I am often reading about high net worth individuals (HNWI). As a researcher—and very curious person—I often want to understand how someone becomes an HNWI. The transfer of intergenerational wealth and the subject of HNWI are both well-worn fundraising topics. Recently, however, I read several articles and a book on these topics that, afterwards, led me to an A-ha moment.
First, let me offer up a few take-aways from the articles and book that I read, beginning with the unique study, a July 2015 National Bureau of Economic Research (NBER) working paper titled, "Poor Little Rich Kids? The Determinants of the Intergenerational Transmission of Wealth," by Sandra E. Black, et al. In it, the authors examined the adult net worth of adopted children born in the 1950s, '60s, and '70s in Sweden and compared the childrens' net worth with that of their adoptive and biological parents. It was unique in that Sweden's adoptions were handled by the state and the state maintained information on the placements. Sweden also has a wealth register—so both biology and wealth can be tracked.
Does being born into a wealthy family mean you will be wealthy, too? The researchers found that there is, indeed, a correlation between environmental factors and economic outcomes. The correlation between a parent's wealth and a child's adult wealth is 0.33 (0 would indicate that there is no correlation and 1 would indicate that the two are identical). All three scenarios—adopted child/adoptive parents, adopted child/biological parents, and biological child/biological parents—have a positive correlation suggesting that children who grow up in wealthy households are more likely to be wealthy themselves.
Aside from wealthy parents providing networks and good schools, the researchers also postulated that it matters significantly that wealthy parents teach their children to save money. There are some flaws to the research, though, as Joe Pinsker points out in a related article, "How Rich People Raise Rich Kids," in The Atlantic: the study does not take into consideration the income disparity between adoptive and birth parents. Pinsker also points out that while the study examines the outcomes of when a baby from a poorer family is raised by a wealthier one, the researchers didn’t study the reverse scenario of a baby from a wealthier family being raised by a poorer family.
I also read "Family, Education, and Sources of Wealth Among the Richest Americans, 1982-2012," by Steven N. Kaplan, of the University of Chicago Booth School of Business and NBER, and Joshua D. Rauh, of the Stanford University Graduate School of Business, NBER, and the Hoover Institution. In their study, the researchers, Steven Kaplan and Joshua Rauh, examined the Forbes 400, Forbes magazine's list of the 400 wealthiest Americans, from 1982 through 2012.
From their research, Kaplan and Rauh found that the number of people on the list who are the first generation to run a business in their family has risen sharply from 40 percent (1982) to 69 percent (2012). At the same time, the number of people on the list who grew up in wealthy families has significantly declined from 60 percent (1982) to 32 percent (2012), while the number of people who grew up poor remained about the same, roughly 20 percent. The people who were raised with some wealth grew in numbers, which suggests there has been an increase in wealth mobility. In their article, Kaplan and Rauh refer to earlier research they conducted which examined global billionaires and showed that the number of non-U.S. billionaires who grew up poor had risen from about 30 percent (1987) to over 50 percent (2012). From the research findings, it can be inferred that wealth mobility, worldwide, seems to be on the rise.
Kaplan and Rauh also examined the education level of the same group of people in the Forbes 400 and found that the number of Forbes 400 people who graduated college rose from 77 percent (1982) to 87 percent (2012). Kaplan and Rauh postulate that education level is likely to correlate with the rise in the number of Forbes 400 people who grew up with some wealth; that is, having some wealth afforded them an education.
Following up on the entrepreneurial spirit of those listed in Forbes 400, I read "Entrepreneurs Don’t Have a Special Gene for Risk—They Come From Families With Money," by Aimee Groth, published in Quartz, a self-proclaimed "digitally native news outlet." Discussing entrepreneurship in America, Groth cites research that, in some ways, contradicts Kaplan and Rauh's research while reporting on a few well-researched statistics. In her article, Groth refers to research by the Global Entrepreneurship Monitor which has found that more than 80 percent of start-up capital comes from the entrepreneur's own savings and that of friends and family. From The Kauffman Foundation, well-known for its research in entrepreneurialism, Groth also cites the following interesting statistic: in 2009, it cost an estimated $30,000 to start a business. That's a sizeable chunk of change to obtain from friends and family.
And now, some insights from the book I read: Money: Master the Game: Seven Steps to Financial Freedom, by Tony Robbins. Dubious as Robbins may seem to some, I read his book because, for it, he interviewed fifty HNWI and then distilled their advice. The first point Robbins makes (Step 1 of his Seven Steps) is this: the wealthy understand the principle of compounding interest, and thus invest and save money. In an effort to not give away too much of his book, we'll jump to the last two steps. In Step 6, Robbins encourages his readers to invest like the ultra-wealthy. According to Robbins, the ultra-wealthy often don’t lose on investments because they avoid reckless investments; they will only risk a little to gain a lot; and they have diversified investments. In Step 7, Robbins instructs his readers to not only enjoy the money they have amassed, but to also share it. Be philanthropic, he says. Good news for us fundraisers.
So, what fundraising insights do all these readings give us?
- Many of the HNWI are self-made millionaires/billionaires; they have likely founded a business that was successful. Most businesses are started with an entrepreneur's own savings; indeed, growing up in an environment where saving money is important gives them a step up.
- Most HNWI are conservative with their investments (savings accounts, low risk investments, etc.) and will likely be conservative with their philanthropic investments, as well.
- Despite popular beliefs, wealth is not genetic but rather environmental. We learn how to become wealthy by practicing conservative investing and saving. (Of course, there has to be money left over after all one's needs—food, clothing, shelter—are met before one can save or invest.)
And, what about my A-ha moment? It is this: While our philanthropic donors may have liberal political and socioeconomic philosophies and tendencies, our donors are almost certainly conservative with their investments. Taking the above three points into consideration, fundraisers, before meeting with a funder to ask for a gift, should know the outcomes, where the uncertainty lies, and where the risk is for each project presented to a funder. HNWI make conservative investments; fundraisers should be able to present their organization's projects in ways that illustrate to donors the risk is low enough and the rewards (outcomes) are high enough for their investment.
I'd welcome your thoughts. Really. Send me an email.
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Margaret King
President, InfoRich Group, Inc.
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