Why most rich families lose their fortunes — and how 5 kinds of ‘capital’ can save them, says a legendary advisor

• Most family fortunes vanish by the third generation, James Hughes says.
• To avoid it, Hughes, a pioneer in family wealth management, says families must grow 5 kinds of capital.
• Families that invest in people, purpose, and learning, he says, outlast those chasing profit.

James E. Hughes Jr. has spent more than five decades inside the world’s wealthiest families.

A pioneer in family wealth management and author of “Family Wealth: Keeping It in the Family,” Hughes is regarded as the father of modern family governance — a man who taught dynasties that the secret to keeping their money isn’t about spreadsheets or tax shelters.

It’s about well-being.

“I fought against [the word wealth] because I didn’t think its financial definition was where wealth actually was in a family,” Hughes told JPMorgan as part of its “Family Legacy” blog series.

“Then one day I discovered that the word wealth is a derivation of well-being. I just didn’t understand the breadth of the term,” he said. “And now I’m living with that wonder that wealth means well-being.”

That insight reshaped an entire industry.

In a world where most family fortunes evaporate by the third generation — a phenomenon sometimes referred to as “shirtsleeves to shirtsleeves” — Hughes believes the problem isn’t poor investing.

It’s bad family design.

The five capitals that determine a family’s fate

Hughes believes that families who focus only on money eventually lose it — not because of bad investments, but because they neglect the other forms of wealth that keep people connected and motivated.

He breaks down true wealth into five kinds of capital, all of which he said must grow together if a family hopes to last for generations.

“The reason a family exists is to enhance the lives of its members,” he said. “When every member is flourishing, the whole system is working.”

The first kind, legacy capital, is the shared purpose that binds the family over time — a sense of why it exists in the first place.

Social capital reflects the family’s ability to make decisions together and manage conflict. Intellectual capital is what the family learns and passes down — the knowledge, traditions, and skills that compound across generations.

Human capital represents the growth and well-being of each individual.

Finally, financial capital should never dominate, Hughes said — its role is to “support and grow those other four qualitative capitals.”

“It’s the growth of the four qualitative capitals that determines your fate,” he adds. “Families that align their financial capital in service to growing those four qualitative capitals become families of affinity.”

From creators of wealth to creators of legacy

Most fortunes crumble, Hughes believes, because the second generation fails to redefine what the first began.

“The first generation creates the wealth and the second generation creates the legacy,” he says. “The great question for them is, can they create family? And can they sustain the dream process for the new family members?”

The answer, in his view, depends on whether the next generation feels “attracted” to stay.

The missing role of elders

Hughes also warned that many modern families underestimate the importance of elders — those who preserve culture, tell stories, and mediate conflict.

“Somewhat sadly in modernity, we have lost connection with the roles of elders and how necessary they are to a flourishing community,” he said.

When elders nurture relationships and reinforce the family’s values, they create what Hughes called “affinity” — the invisible glue that keeps future generations connected.

A shift from money to meaning

After more than half a century of advising global dynasties, Hughes has come to believe that courage — not knowledge — is the rarest form of family capital.

“A family needs courage to really imagine itself 100 or 150 years from now,” he said.

That vision, he added, is what separates those who simply build fortunes from those who build legacies.

“Families understand the quantitative question of their money,” Hughes said.

“But more recently, they’re also interested in qualitative questions of purpose, of human flourishing, and of being a thriving family. And I think these are more important questions.”

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