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A Tale of Two Families

Welcome to the second issue of Family Wealth and Well-Being.

Family Wealth and Well-Being is a combination of my professional interest in investment and wealth management along with my personal passion for establishing and engaging in rewarding personal relationships with individuals who want to ensure they live life to the fullest.

One of the rewarding aspects of my profession is hearing and seeing stories of individuals who through hard work, good business acumen, and, in some cases, a little good luck, have created successful businesses along with an inspiring family story.  There are children who have taken over their small family manufacturing business and grew it into a respected national enterprise, there are individuals who have taken over a small family farm and grew it into a large multi-faceted agricultural business.  Some companies have even started in the family garage and grew it over the years into a multi-million dollar enterprise. Each of these families has a compelling story of ambition, vision, and sacrifices they have endured to build their business.  In Jim Collins book, Good to Great, he states; to build a great company the entrepreneur must possess three traits 1.) a real talent for what they want to do, 2.)  a genuine passion for what they want to do, and 3.) their idea must have a viable economic engine (it must be profitable). If all three of these traits are present there is a legitimate chance they will be very successful. Now success in a family business is not just measured in dollars, it is also measured by the family relationships that have been preserved and enhanced over the years.  The challenge once a great business (or the wealth it has created) has been built is how do you instill your values and your goals on the next generation so they will not squander the wealth you have created.  You want to ensure that your values encourage and inspire your children to lead a life of purpose and not just entitlement, to make a difference.  Would that not be a great legacy to leave them?

“Life isn’t how you survive the storm, but how you dance in the rain.” – Adam Young

A Tale of Two Families

Cornelius Vanderbilt (1794 – 1877) created one of the greatest fortunes in world history, valued at his death (in 2007 dollars) at $167 billion.  He left 95% of his estate to one son, and divided the rest among his eight daughters and his wife, leaving a tiny portion to charity.  Four of his children contested the will, and one ultimately killed himself over the escalating feud about the financial inheritance.

Economist John Kenneth Galbraith said that the Vanderbilts showed “both the talent for acquiring money and the dispensing of it in unmatched volume,” adding that, “they dispensed their wealth for frequent and unparalleled self-gratification and very often did it with downright stupidity.”

Confirmation of that view came only forty-eight years after Cornelius’ death: one of his direct descendants died penniless.  And, within seventy years of his passing, the last of the ten great Vanderbilt Fifth Avenue mansions in New York City was torn down.

So great was the destruction of the Vanderbilt family and its wealth that for decades through the mid 1900’s the press referred to it as “The Fall of the House of Vanderbilt.”  The family became known more for its palatial estates, lavish parties, and romantic scandals than for it business interests.

William K. Vanderbilt, grandson of Cornelius, said of his inheritance:  “It has left me with nothing to hope for, with nothing definite to seek or strive for.  Inherited wealth is a real handicap to happiness.  It is as certain death to ambition as cocaine is to morality”

Cornelius employed a legion of attorneys and accountants.  In fact, his planning was based completely upon the “two-legged stool” of estate and financial planning that dominate the planning arena to this day.  He did not consciously prepare his children to receive their inheritances, create a pattern of communication amongst the family, or organize them for ongoing success.  Simply stated, he did not prepare his heirs for their inheritance before dropping one of the world’s great fortunes into their laps.

The result:  when the Vanderbilt family held a reunion in 1973. There were no millionaires left among them.

Sir Nathan Mayer Rothschild, 1st Baron Rothschild (1840-1915)

The rise to prominence of Europe’s Rothschild family is far more than a tale of banking or politics.  It is also an example of how any family can intentionally prepare and organize their children to be independent, successful individuals as well as members of a unified family, no matter their financial status.

By the time Sir Nathan Rothschild came to lead the family’s enterprises at the turn of the 20th century, the name Rothschild was synonymous with banking and finance.  So great was their power that on several occasions the House of Rothschild, as it came to be known, actually bailed Germany and England out of economic catastrophes that threatened their very existence.

The Rothschild philosophy on passing inheritances from one generation to the next is very different than the Vanderbilt’s.  They actively mentor the children.  For example, they establish “family banks” to lend money to those children who wish to start businesses or pursue other careers, and they monitor and advise the ventures in which the children participate.

At the annual family gatherings (which have been held for over 200 years), the values which have sustained the family for generations are affirmed even as their vision for the future is sharpened and clarified.  (And, if a family member fails to attend the annual family gathering, they are locked out of the family bank!)  As part of that vision, the family supports a program of philanthropy in the arts, medicine, science, and education.

Vanderbilt did Financial Planning, which grows and protects the money, and Estate Planning, which prepares the money for the heirs.  The Rothschild’s added a third “leg” to that model: They used Heritage Planning, which prepares the heirs to receive their inheritance.  Building upon that more stable platform has helped to keep them unified, strong, and prosperous for generations, no matter what is happening in the world.  By putting individual achievement and family ahead of the money, this three-legged planning model takes  money out of the “requirements for success” equation altogether.

“It requires a great deal of boldness and a great deal of caution to make a great fortune; and when you got it, it requires 10 times more wit to keep it.”  – Nathan Rothschild

This Time it’s Different

“This time it’s different”, John Templeton (who passed away at the age of 95) once said were the four most dangerous words in the investment dictionary.  Having lived through numerous “this time it’s different” events his words resonated from experience and success in the industry, not from a marketing or sensationalism perspective we are living with today.  The legendary manager had been investing since the mid 1950’s so his exposure to worldwide crises had been numerous.

I am not for a moment saying that the current events are not unnerving and on some days even scary.  I will ask you for a moment to look at things from a different perspective.  Let’s assume for a moment that there was no news about the Greece, Italy, France (Europe) debt crisis, that there was no news on the U.S. political ineptness and the politicians attempting to develop and implement a strategic debt reduction plan.  Would you feel better (even a little better) about the world?  Be truthful, I think you would, and therein lies the irony in the whole process.

If the debt crisis could be swept under the carpet we might have a better feeling today, only to face a further, harsher reality in the future.  The events of 2008 resulted in a public outcry for governments to get their houses in order. To accomplish this, countries have to eliminate debt and that may mean some countries will have to incur sizeable losses and other countries may have to default.  It all sounds devastating and the media no doubt will sensationalize this fact but the reality is it is a natural part of the rebuilding and improvement process.  If these events did not occur then we would be fooling ourselves that the world is improving economically.  The old adage, no pain, no gain is definitely applicable in the current environment.

Two days prior to the 1987 stock market crash my car was struck by an impaired driver.  I was flipped upside down and landed in a ditch on the other side of the road. Windows were shattered, metal was twisted, deep cuts were incurred, not life threatening but potentially life impairing.  In the hospital the doctors could have just stitched my ear up and sent me on my way.  I would have thought nothing of it.  Instead the doctor informed me I was going to incur

some pain then proceeded to clean all the glass from my partially severed ear followed by a thorough washing of the area.  They were very accurate, it was painful, and not something I would have enthusiastically voted for, however now 24 years later it has healed, without any complications except a few faint scars that are a reminder of the event.  The truth is, the world will heal and so will we from this “it’s different this time” event.  Politicians may wait until their backs are against the wall, the media will continue to pound away on our emotional censors from multiple directions but we will heal.  Even though this may be hard to believe, we will even prosper in the future because the truth is embodied in the four following points:

  1. This time is not different; crises have happened before and will happen again.
  2. Our reactions are not different; they are the same as every major crisis that has occurred in the past. (fear, anxiety)
  3. Media sensationalism on any topic will continue to be a major emotional distraction for us all and will only increase.
  4. Entrepreneurs will continue to build great businesses which will prosper and create economic value for their founders and individuals who continue to invest in these businesses like you and I.
  5. It’s not about naively sitting around doing nothing; it is about having the discipline to stay the course with your wealth plan.

So really as we progress through life, in some ways things change and in other ways things stay the same but one thing is for certain the words “this time it’s different” are just as dangerous for you to believe today as they were when John Templeton said them many years ago.

All the best,

Mike