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There’s nothing that corporations and their executives worry about so often as the bottom line — it’s one metric their boards of directors and stockholders won’t let them forget. Most families, by contrast, don’t take such a business-like approach to their finances, their assets or their choices.
Douglas McCormick, managing partner at MCI Equity Partners, wondered why not. More to the point, in his new book, Family Inc.: Using Business Principles to Maximize Your Family’s Wealth, he explains just how much better off we all might be if we did. He joined the Knowledge@Wharton Show on Sirius XM channel 111 to talk about the biggest asset you probably have forgotten you own and how you can use it more wisely, and how to make family decisions based on long-term returns.
An edited transcript of the interview follows.
Knowledge@Wharton: There are a lot of books out there that tackle what to do with family finances right now. What makes yours different?
Douglas McCormick: First of all, I feel like there’s been a gap in the marketplace. There are a lot of books, as you mentioned, that cover this topic. But my experience has been that some are either very specific and narrow in on a topic like real estate or equity investing and are not very accessible to most of America, and some are very holistic, but not really intellectually rigorous. What I’ve tried to do is take the best of both worlds and give people a framework upon which they can really evaluate all of their decision-making.
Essentially, the premise of the book is that we should all think of ourselves like a business, and every family owns two really big assets: They own their labor, and then they own the financial capital. The financial game of life is about learning to convert that labor into capital to support the family when you’ve exhausted your labor.
Knowledge@Wharton: Labor, as you referred to it, is the key asset in the process of a family right now?
McCormick: It’s certainly the one that is the most underappreciated. It’s interesting that most financial investors myopically focus on financial assets, but you’ve got to acquire wealth before you can manage it. For most of us, our labor is, far and away, our largest asset and underappreciated.
“For most of us, our labor is, far and away, our largest asset and underappreciated.”
Knowledge@Wharton: How many people out there do you think are taking a business approach to family finance?
McCormick: My experience is very few. The industry is organized in a way that people think about solutions through products — insurance products, investment products — and really, what I’m advocating is that financial independence is really a product of better decision-making. There’s been lots of study in business schools across America and in corporate America about best practices in managing finance, and I really think a lot of it is relevant to family decisions, once you’ve defined the framework the way the book does.
Knowledge@Wharton: It sounds from some of the stories we hear out there like a lot of millennials are thinking more about their long-term finances, which is a good sign — that they’re focusing on that even before they get into having families — but they are still carrying a lot of college debt as well.
McCormick: Absolutely. I think that people are starting to catch up with the fact that the game has really changed. And what I mean by that is if you look back at my dad’s generation — my dad’s almost 80 now — that generation likely had one, maybe two, maybe three careers in a lifetime or three jobs. Today’s millennial is likely to have more than 10. So the choices that will result in financial security are very different for millennials than they were for previous generations.
Knowledge@Wharton: People who are in their 20s and 30s and thinking about this obviously have quite a long time ahead of them before retirement. But what about the people who are in their 40s and 50s, some of whom had started to build up nice retirement funds and had a great plans that were really undone by the recession a few years ago?
McCormick: First of all, it’s never too late to start, but the more time people have, obviously, the more flexibility and levers they have to achieve financial independence. Having said that, I think people often underestimate the number of different choices they can make that can really impact their financial security. They also underestimate the likely time period that they’re going to be able to hold these investments. I would argue to even somebody in their late 40s, early 50s — it’s not only that you’re going to hold the investment until you retire, but those investments are going to support you for 20, 30 years after retirement. So your time horizon is still relatively long.
McCormick: I look at Social Security benefits as another key asset. It’s essentially the same as an annuity that you’re forced to purchase.
A lot of the ways that we think about financial analytics for business apply to the family, as well, in terms of an income statement, a balance sheet, thinking about liquidity management. I am also a huge believer in entrepreneurship. I think it’s probably the single most likely path to financial security. My basic premise there is that the financial markets are very competitive, the labor markets are very competitive, but when you combine your own labor with your own capital, I think you can create a more sustainable return.
In this dynamic market, entrepreneurship is perceived to be risky, but I actually think it’s a much lower risk profile than most people assume.
“I am also a huge believer in entrepreneurship. I think it’s probably the single most likely path to financial security.”
Knowledge@Wharton: How do kids and college education fit into this?
McCormick: First, I would say I think a lot of the principles of business apply. It doesn’t necessarily mean that you make the best “business decision.” What I’m proposing is making informed decisions.
Having kids, obviously, is a significant investment and a significant financial obligation, but it’s a personal choice that families make all the time that makes a ton of sense. From an education perspective, the first thing that people have to acknowledge is, “Do my children have the aptitude, the desire and the interest in pursuing a career that requires education?”
The worst investment is pursuing an education for four years and then not taking advantage of that skill set. But once you’ve crossed that decision point, I believe that education is very likely one of the best investments that folks can make today. I know there’s a lot of debate around the cost of education, and that’s all very true, but think about the return on that investment over a 50-year period. People often underestimate how education allows you to extend your working career. If you’re doing manual labor, by age 60, that may be very difficult to continue. But we see in the marketplace today folks in their 70s being very effective in the labor force when they’re contributing their intellectual skills.
Knowledge@Wharton: Should there be within the family one person who is laying out a lot of what happens, or is it better it it’s a real partnership where that is concerned?
McCormick: Yes, I find that generally in a family, there is one person who has the interest and the aptitude and the time to play a more prominent role in thinking through these issues. But I think the decisions ultimately end up being ones of a partnership. I happen, because of my interest, to spend a lot of time thinking about these issues in my household, but it’s certainly a family decision when we make big financial commitments and decisions.
Knowledge@Wharton: Even though we’re seeing more and more millennials wait until their late 20s, early 30s and even mid-30s before they think about marriage and buying a home, this is a plan that an individual ought to think about before they even get to the family part, correct?
McCormick: Totally agree. In many cases, what your family business is going to look like, the die is cast relatively early in your professional choices. So the later people get married, the more they are bringing to the table, not just in terms of attitudes and patterns of behavior, but also, in terms of resources and liabilities.
“Education is very likely one of the best investments that folks can make today.”
Knowledge@Wharton: You also talk about inheritance in this book.
McCormick: Yes. What I’ve observed is a lot of people spend a lifetime accumulating wealth, and because of the fact that it can be difficult to have conversations about it, there’s not likely to be good sharing of information in families. In many cases, while they have made great financial decisions throughout a lifetime, they have poorly positioned the next generation to be good stewards of the family business. I’m an advocate of bringing all of the family together to think about Family Inc. periodically. That serves first to educate the next generation and help them to begin to develop skills, and also sets things up such that when something happens, there’s a succession plan in place for them to be able to be responsible with the assets that you’re leaving.
Knowledge@Wharton: I guess the frequency that you’d have those types of meetings within the family would vary. Obviously, when you’re talking about younger kids, you’re not going to have those types of meetings as frequently. But as they get into their teenage years, it becomes an important piece for them to understand something. And it does a little bit go to a topic that we’ve talked about on this show: teaching better financial understanding to teenagers going into college so that they are prepared to be out in the real world.
McCormick: Yes. I think a lot of these conversations do not have to happen frequently. I think children are very observant of how parents make decisions. They’re learning all the time. But if you did this the way a company would think about an annual meeting — if once annually, you sat down and kind of took inventory of where the family sits financially, I think that’s valuable.
I am also a big believer that, especially for young folks, there’s real value in making mistakes. To give your kids an opportunity to fail on a small scale — whether it be by making poor choices with an allowance or a credit card — is valuable, and I would much rather have them do it then than with much bigger numbers at a later point.
Knowledge@Wharton: Getting back to your belief in, and love of, entrepreneurship — we see it quite a bit here at the University of Pennsylvania at the Wharton School, so many kids are coming out of college already having an understanding that they want to start a company, or even starting one before they even get to college. The process of being an entrepreneur can be — I don’t want to say a simple one, but it doesn’t have to be all-consuming or viewed as impossible.
“Don’t focus on next year’s compensation; focus on acquiring skills that will be desirable in the economy for a long period of time.”
McCormick: The biggest impediment to entrepreneurship is probably just getting started. A lot of times, many of the things that you would like to know are simply unknown until you get out there and begin to pursue it.
Knowledge@Wharton: If you were sitting in front of a group of recent graduates from college, what are a couple of the things that you would likely tell them?
McCormick: First of all, I say, congratulations for making this significant investment in your education. Now, it’s time to start thinking about how to monetize that investment. For that age group, it’s really about maximizing the long-term labor value. There are a couple key themes there. The first is, again, don’t focus on next year’s compensation; focus on acquiring skills that will be desirable in the economy for a long period of time.
Find a company that offers good growth prospects, not only because the company’s growing, but good growth for you to develop your skillset. For young folks, finding a company that offers a great brand that they can be part of is valuable as they think about where they are going to go after that first job.
Then, I’m big fan of finding situations that offer a lot of flexibility. What I mean by that is, this market is changing rapidly and you want to be able to port the skills that you’ve acquired in your current job into other industries and other markets. In many cases, that ends up leading me to believe that functional skill sets, like finance, like marketing, like human resources, like operations management are attractive because you’re not necessarily married to an industry, but you’re married to a skillset that can go across many industries.