Eight Principles of Strategic Wealth Management

Stuart E. Lucas is an unusual financial advisor: a wealthy man who dispenses advice on building wealth. He is a fourth-generation heir to the Carnation fortune; Carnation, which made products like evaporated milk and non-dairy creamers, was a family-owned business before Nestle bought it in 1985. Moreover, Lucas is chairman of Wealth Strategist Network, an organization that helps wealthy families manage their fortunes. In the following excerpt from his book, Wealth: Grow It, Protect It, Spend It and Share It, published by Wharton School Publishing, he summarizes his guiding principles.



Over the last 25 years of managing other people’s money, my personal finances, and our family’s wealth, I have developed what I consider to be a useful set of principles for effective long-term wealth management. They apply equally well whether you’re managing a nest egg of $1 million or $1 billion. They apply regardless of time horizon and family complexity, and they apply whether your ambitions are aggressive or conservative. For anyone concerned about managing wealth, they provide a source of stability and a critical frame of reference.



The Eight Principles of Strategic Wealth Management are at the heart of what I do every day. They are:


1.     Take charge and do it early.


2.     Align family and business interests around wealth-building goals and strategies.


3.     Create a culture of accountability.


4.     Capitalize on your family’s combined resources.


5.     Delegate, empower, and respect independence.


6.     Diversify but focus.


7.     Err on the side of simplicity where possible.


8.     Develop future family leaders with strong wealth management skills.



Every decision I make, whether it involves choosing an investment manager, thinking about tax strategy, or working with my family to set goals for next year, gets filtered through these principles. Let’s examine them now in detail.



Principle #1: Take Charge and Do It Early


The Strategic Wealth Management Framework requires that you, as Wealth Strategist, articulate a set of values that will be the foundation of future wealth management planning. You must educate yourself about your family finances, existing assets, spending patterns, expected rates of return, and current estate plans. And you must decide how to structure long-term family and financial goals so they become integrated and can positively reinforce one another. Without following this first principle, you cannot go further in the wealth management process.



Managing wealth effectively requires that you take charge of the process early. Doing so even before you have many financial assets like stocks, bonds, and excess cash is highly advisable. And, if you have had financial assets for some time, there’s no time like the present to start. You probably sense the costs of not engaging earlier. There are insidious forces such as taxes, fees, and inflation that can accelerate wealth erosion and eat away at your net worth even in upward moving markets. For that reason, wealthy individuals and families need to exercise disciplined leadership of the wealth building process, particularly at certain critical points in time and around key decisions that can have implications for multiple generations.



After you and other members of your family define your values, you’ll have a basic template in place with which to develop a long-term strategy for your wealth. The time horizon you set for this strategy may be a single lifetime, a single generation, or multiple generations. Making a few good decisions early on can have an impact for decades, building a culture of stewardship within your family. If you simply wait for your advisors to guide you, it’s likely that you will get incomplete advice, or advice that tends to fragment rather than coalesce family goals. You may wind up with good products but without an integrated strategy or the resources to implement it over time.



Principle #2: Align Family and Business Interests around Wealth-Building Goals and Strategies


Creating strong alignment of family members around common goals is critical to ensuring successful implementation of wealth management strategies and goals — especially when they are multigenerational. Aligning interests among family members helps define a family’s identity. It helps to reinforce common purposes and creates economies of scale. If a family is united around wealth management goals, for example, it has collectively more power and focus in business, philanthropy, or even politics, than would individual family members alone.



To align family members around wealth management goals, the Wealth Strategist must establish a legitimate rationale for people to want to work together. It helps if he or she is also an adept facilitator who’s able to mediate conflicts, drive consensus, and ensure regular review of wealth management goals and results. The Wealth Strategist will be a lightning rod for vigorous and lively family discourse at times because family members don’t always see eye to eye. The Wealth Strategist must focus constructively on surfacing and resolving contentious issues and highlighting the universal benefits of cooperation, consensus, and unanimity at other times. It’s not easy.



The Wealth Strategist must be able to frame family conversations around critical objectives. He or she must ask powerful questions, recognize the psychological and financial positions from which different family members come, and be adept at focusing wealth management discussions not only on a family’s history and values but also on its vision for the future. Sometimes this latter challenge is the hardest task. To shift discussions from a focus on the past (nostalgia, history, memories, heritage, and values) to the opportunities and challenges presented by the future (social and business entrepreneurship, community involvement, legacy building, and a shift from professional success to “personal/life significance”) can be daunting. But families that make this shift, whether they are wealthy or not, go on to be successful for multiple generations because the family and its individual members are able to reinvent themselves.



Alignment, of course, also means structuring professional relationships with advisors so that everyone benefits or suffers proportionately from the financial decisions you make together. Wealth managers and their firms are usually smart, aggressive, and ambitious, and have their own internal measures of success that may or may not include customer service and high rates of return for clients. As you go about selecting advisors and money managers, you’ll want to make “alignment of interests” a key element of the hiring process and a key filter through which you negotiate and configure working relationships. The more closely advisor interests are aligned with yours, the more likely the relationship is to succeed long term.



Principle #3: Create a Culture of Accountability


While family dynamics are always intertwined in family wealth management activities, the wealth management process itself is fundamentally a business activity. To successfully implement your strategies, you need to put accountability systems and performance metrics in place. Doing so helps to reinforce objective business goals and performance expectations. It also helps drive implementation of wealth-creation strategies and provides a reliable benchmark by which to judge the performance of the Wealth Strategist and his or her team of wealth management advisors, including accountants, lawyers, investment managers, and others.



Individuals and families should measure financial performance on the basis of overall investment return. Most financial advisors are measured by the performance of individual products and by the profits they contribute to their firms. Because these metrics are very different and sometimes in opposition, the roles and responsibilities of the Wealth Strategist and key advisors need to be clearly defined. It’s also important to establish a timeline for regular review of the Wealth Strategist’s and advisors’ job performance as well as the financial performance of investment portfolios, trusts, and other components of the family’s financial portfolio. Achieving good accountability is tough to do. Even highly sophisticated family offices that manage hundreds of millions of dollars complain about the inadequacy of the available performance measurement systems.



Creating a “culture of accountability” within the family becomes increasingly important as the number of family members involved in the wealth building process grows. Using objective performance measures can help depersonalize criticism of individuals in cases where family members are not performing. In other words, a good system of accountability makes the message, “I love you, but you are not performing,” more palatable for all parties involved.



Principle #4: Capitalize on Your Family’s Combined Resources


In science, one of the basic laws of thermodynamics is the Law of Entropy. It states that there is a strong tendency in our universe to move toward randomness. I sometimes think that families are subject to entropy because, so often, they seem to fly apart, much as parts of our family did decades ago. But families can overcome this tendency toward randomness.



In families of any size, resources become distributed across the membership with the passage of time. The challenge is to figure out how — and how much — to reassemble these distributed resources so they function more effectively. The tools for reversing entropy are capitalizing on the family’s financial scale and the combined strength of family members’ personalities, experience, skills, affiliations, and networks, all within a meritocratic culture. In order to mobilize these weapons, empathic but disciplined family leadership is key.



Principle #5: Delegate, Empower, and Respect Independence


Members of a healthy family group learn how to row together and row separately. I have already touched on some of the advantages of working together, but it is also important to respect the individual ambitions and values of each family member and, over generations, each family unit. The challenge for the Wealth Strategist and for other family members is to balance the two and reinforce the strengths of each.



Supporting family members to identify and pursue challenges that they can call their own, away from the family’s immediate influence, encourages self-reliance and risk-taking. This is an excellent way to encourage the personal growth of young adults, who, if supported by their family in their personal interests or business pursuits, learn to embrace responsibility for their life choices and to develop a sturdy sense of self-confidence. Supporting the exploration of passions by one’s children (whether as young people or adults) is more than sharing in successes. Importantly, support strategies should leave room for failure: It is through failure that a person develops resilience and often learns the most. Independence, resolve, periods of trial, and ultimate success within the youngest generation can be of tremendous benefit to the family later on, especially if these individuals take on responsible positions of leadership within the family.



It is also important for family members to understand and experience the benefits of working together to reinforce the connection with the family core. The person(s) who serves as Wealth Strategist must create and make the case for encouraging other family members to willingly work together. Ideally, especially in families that manage wealth across generations, all family members can be involved to one degree or another, including in-laws. Sometimes involvement means a day-to-day commitment to the family business. But this is clearly not the correct recipe for every family member. For many, the responsibility is to remain informed, respond promptly to administrative requirements, and to participate constructively in family discussions and meetings. As the arbiter and facilitator of family discussions about wealth, the Wealth Strategist must listen, broker, offer incentives, and encourage family members to collaborate on common goals.



The principle of “Delegate, Empower, and Respect Independence” applies not only to family members, but also to members of your wealth management advisory team. After you establish clear performance expectations for your team and an accountability system that aligns their interests with your own, it’s important to step back and delegate many day-to-day functions of wealth management to these competent professionals. Doing so creates highly productive client-advisor relationships because your professional team is now empowered to act on your behalf!



Principle #6: Diversify but Focus


Diversification and focus combine the best of both worlds. With diversification you achieve risk mitigation, and with focus comes the laser intensity that most people need to succeed in life. Diversifying your investments is fundamental to prudent risk control. Why, you ask? Interestingly, wealth is created most quickly and most often through success in a single business. (If you can do it, birthright, marriage, and adoption are even quicker!) However, wealth is also most quickly lost by concentrating it on only one or a few investments. So, in order to protect your wealth, it’s best to diversify it. Later in this book, I describe the Lucas family office’s approach to wealth management, which includes diversification in a wide range of areas, including real estate, emerging markets, oil and gas, bonds/mortgages, private equity, and other alternative investments.



The principle of diversification applies in other ways as well. Most individuals have both taxable and tax-deferred (retirement and deferred compensation plans) investment portfolios. Some have life insurance savings plans that are tax exempt to the beneficiary. A few people also control corporations. Each of these entity types receives different tax treatment. Because tax rates don’t all rise and fall at the same time, it makes sense to diversify the tax treatment of your assets.



You can also think about diversification in terms of your human resources strategy. Periodically ask yourself, “What would happen if key partners on my wealth management team left unexpectedly?” Would you be able to replace their talent and specific knowledge readily? If possible, have a backup plan in place for all your key people, including yourself.



Although investment and asset diversification are prudent, my experience is that my family and I reap the most benefits — success, personal satisfaction, competitive advantage, and in business, outsized financial returns — when we struggle over specific challenges with a great deal of focused energy.


Focus and energy are also integral to the pursuit of investment management, and they “enliven the pursuit of the game.” In this country, and increasingly around the world, capital markets are more and more competitive. Achieving competitive advantage in the deployment of capital — a critical component to growing diversified wealth — is very difficult to achieve. Without the focus to develop investment skills that are superior to most professionals, you won’t add value to your investment portfolio.



Focus and experience also improve judgment. While you should make important decisions based on fact, there are also times when you have to go with your gut (when you are adept at wealth management) and go with your values because you rarely have all the facts you need at your disposal. To this end, Wealth Strategists should always be on the lookout for ways to stimulate and pursue their own focused interests and those of their children so that they learn to trust their gut when they need to rely on it.



Principle #7: Err on the Side of Simplicity When Possible


Inevitably, advisors will present you with many fancy options for doing great things with your money. Some of these are terrific ideas, but I recommend to most people that they stick to simple wealth management strategies and products. Even if you’re wealthy, it might be best for you to peg most of your investments to financial indices or to other simple, low-cost, and proven wealth management products.



Before choosing complex solutions to wealth management issues, evaluate the simple ones. Simple solutions (such as indexing) may offer you most of the benefits of more complicated plans, a higher degree of certainty, easier implementation, and greater flexibility in the face of changing personal or financial circumstances. If you evaluate the simple solutions first, at the very least you can quantify the relative benefit and costs associated with more complex approaches.



In my professional opinion, you should view complex wealth management strategies with a skeptical eye. These schemes, often highly remunerative for advisors at the time of sale, can subject clients to long-term risks. For example, recommendations that solve short-term problems or show lots of promise may not pan out as expected months or years in the future. Execution or assumptions may be faulty. Or solutions may work well under certain conditions, but unravel if market conditions change unexpectedly. The more complex the wealth management strategy, the more variables you have to worry about managing, and the more difficult it is to reverse course. Don’t buy into complex wealth management schemes because they seem sophisticated. Instead, question why an advisor is proposing a particular course of action and why it is sufficiently better than simpler alternatives. Because many complex strategies are quite remunerative to advisors, be sure you understand how such complex strategies will also be remunerative to you!



There are occasions when a simple approach to wealth management isn’t appropriate. Some families actively manage complexity to gain competitive advantage, which I will discuss in greater depth in later chapters. In such cases, a “keep-it-simple” philosophy doesn’t make sense. I suggest a corollary in these instances: Err on the side of transparency. Because wealth management discussions are likely to be both complex and lengthy, not every family member will need or want to be involved in every conversation. However, you’ll still need to communicate regularly with everyone about what is happening and gather input and ideas from people as appropriate.



Above all, avoid secrecy! Keeping secrets from responsible family members, advisors, or the government has a propensity to backfire. I’ve made my biggest mistakes in the last ten years by trying to keep secrets from family members. I did so in an attempt to avoid disagreements that I thought might ensue among family members. Inevitably, the secret leaked, and the problems ended up being much bigger than if I had just faced up to them in the first place. Secrecy is just one more variable you need to manage, and it flies in the face of healthy family culture!



Principle #8: Develop Future Family Leaders with Strong Wealth Management Skills


As a prerequisite to successfully building wealth over multiple generations, the Wealth Strategist must develop future family leaders. Every family has a potential reservoir of talent, energy, contacts, and business experience that can be tapped into to lay the groundwork for the future. For example, the Wealth Strategist can nurture individuals within the family who demonstrate specific interests and aptitudes, giving them progressively more responsible positions of informal leadership for wealth building activities. The Wealth Strategist should also expose such individuals to substantive family discussions of wealth-building goals and strategies, as well as to the corrosive power (and hollow rewards) of excessive spending. Doing so helps to instill values of accountability and financial stewardship in young family members, instead of attitudes of arrogance or entitlement. Involvement in such discussions, which can begin at a relatively early age, can provide a powerful learning ground for those members of a family who will eventually bear key responsibilities for ongoing wealth stewardship. It affords them the opportunity to see the wealth management process upfront, to become comfortable and conversant with wealth management issues, and to observe how family members and wealth management professionals should interact with one another to achieve specific goals.



It’s my strong personal belief that no person in the next generation should come into the family business without spending at least a decade succeeding outside the family business, and preferably in a related field. When the time comes to return to the family business, that person will have so much more to offer than if he or she hadn’t had the outside experience. Of course, this approach will lead the next generation to challenge and possibly threaten existing management practices and even the authority of the senior generation. But wouldn’t you rather have the family benefit from innovative leadership through the inevitable generational transitions? Also, if you are trying to send a message that you want to encourage excellence in your business, shouldn’t it start at home?



In my particular case, my father encouraged me to go into the investment business rather than the food business after I graduated from college in 1981. The nearly 15 years that I spent working away from the family business taught me so much that I was later able to usefully employ on the family’s behalf, thanks in no small part to my father’s willingness to let me do so. My brother, William, also spent a number of years in the aerospace industry and then at an investment bank before joining the family office. He used his experience to build our investment reporting, tax, legal, and communications capabilities. It was particularly fortuitous that he married Melissa, my sister-in-law, who had many years of investment experience at a third firm, looking at different kinds of investment opportunities before sharing the investment responsibilities for the Lucas family with me. As investors, we both relish the give and take of constructive debate. Now the three of us have to find the interest and talent in the next generation.


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