Introduction Question: What's the best way to make a small fortune? Answer: Start with a big one. This book focuses on what an individual like you and families like yours can do to protect and grow your wealth, share it with others, and build lasting personal and family legacies based on it. The lessons learned and shared here come from my many years as a wealth industry professional combined with the experience of representing my family as long-time clients of the industry. There is value in having sat on both sides of the table, and I want to share that value with you. Whether you are building your wealth over time or acquired it suddenly, whether you have a few hundred thousand in assets or a few hundred million, whether your family situation is simple or complex, the principles discussed in this book will help you sustain, grow, and, most importantly, enjoy your wealth. Everyone dreams of striking it rich--by selling a business, scoring a great investment, receiving an inheritance, or winning the lottery. In fact, most people generate their wealth, small or large, by patiently accumulating and nurturing their asset base. Either way, integrating all of the components of wealth management into a coherent, satisfying whole is the challenge we have before us. I was one of the lucky ones because I was born into a wealthy family. For me, the dream began with $25,000 and the founding of what became the Carnation Company by my great-grandfather E.A. Stuart in 1899. Eighty-six years later, the company was sold to the Nestlé Corporation for $3 billion, and I am a beneficiary of that wealth. But I am even luckier because I've drawn perspective from a thoughtful family legacy and a quarter century of working in financial services. I've used this perspective to build a flexible framework that can be customized to the unique circumstances of anyone who cares about managing their wealth. That's what this book is about. My hope is that you'll use this framework to protect and grow your own wealth, share it constructively with those you love, enjoy financial security, and build a lasting personal and family legacy. But first, I will share a little personal and family history so you can see firsthand where I'm coming from. Good Idea, Bad Start The story of Carnation's founding and of E.A. Stuart's pluck and grit in revolutionizing the production of fresh, safe milk products at the turn of the 20thcentury is the stuff of American history. So too is the fortune he amassed in bringing these products to your grandparents, parents, and now your kitchen table. Back in the late 19thcentury, E.A. Stuart had a dream of making wholesome, good-tasting milk as available to the Americans of his day as sugar and salt. So in 1899, he co-founded the Pacific Coast Condensed Milk Company and spent $25,000 to buy the rights to a process for producing evaporated milk. The circumstances surrounding E.A. Stuart's purchase of his new milk production process were hardly auspicious. In fact, in the beginning, they had all the markings of a business disaster. At first, poorly sealed cans of evaporated milk spoiled by the wagonload after leaving Stuart's plant near modern-day Seattle, Washington. Making matters worse, local customers in those days weren't convinced they needed his product anyway, not in a region where cows dotted the lush local countryside and fresh milk flowed as plentifully from local pastures as cold, clear water did from local mountain streams. But my great-grandfather persisted. "Pluck wins. It always wins," he used to say in those challenging and sometimes dark early days. Showing flinty resolve, he perfected his milk evaporation process and improved his canning procedures. When Opportunity Comes Face to Face with Hard Work and Preparation Then luck struck. Or as some might say, "Opportunity came face to face with hard work and a lot of preparation." Just as Stuart perfected his production techniques, demand for evaporated milk skyrocketed as gold prospectors swept through Seattle on their way to Alaska to join the great Klondike Gold Rush. Prospectors started buying it off the shelves as fast as my great-grandfather produced it. By 1909, Carnation had grown from one plant to seven, and sales had gone from nothing to over $4 million a year. At 10 cents a can, that meant 40 million cans of evaporated milk were being produced each year. Stuart's production process was extraordinary because it took about 60% of the water content out of dairy milk, thus making it easy to transport and store without refrigeration. Stuart, it seems, was in the right place at the right time. His perseverance, discipline, hard work, and faith--plus a little luck--launched the Carnation Company on the path to becoming a multi-billion dollar global food company. Three generations later, the Stuart family hit pay dirt again. In 1985, international food giant Nestlé bought Carnation for $83 a share, or about $3 billion in cash. That price was nearly double the stated value of the company just a few years earlier and, at the time, was the highest price ever paid for a food company. Our extended family, which had much of its wealth tied up in the nearly 27 percent of Carnation stock it controlled at that time, suddenly landed on the Forbes 400 list of the wealthiest families in America, with close to $1 billion in collective assets! It was an exciting time for us. We had achieved the American dream. In one fell swoop, we became wealthy beyond our wildest hopes and expectations. But therein lay the seeds of a problem. Since Carnation's founding in 1899, members of my family had always identified closely with the company and all it stood for. The company had five presidents, three of whom were Stuarts. And even though H. Everett Olson, Carnation's CEO and the Chairman at the time of the sale, wasn't a family member, Wall Street and the business press always described the Carnation Company as "a tight-knit family enterprise." End of an Era The day that company executives sold Carnation to Nestlé, all of that changed. Our family's wealth, most of which was tied up for almost a century in Carnation stock, suddenly became liquid. And the family's ties to Carnation, the company that for years prided itself on giving Americans "better milk from contented cows," were suddenly severed. The aftermath of Carnation's sale to Nestlé offered my family a unique opportunity to decide how its members would relate to one another now that they no longer had a day-to-day business to run. But that also posed some unique challenges: challenges of identity, purpose, leadership, and family legacy. Carnation had been my family's life and work for 86 years. Now that it was gone, what would we do with ourselves? In the early 1900s, when my great-grandfather had first thought about selling Carnation, his son, E.H. Stuart, Carnation's second president, pleaded with him not to. "If you do, I won't know what to do with myself," he said. Now that reality had come to pass. And we, E.A's descendants, had to deal with it. No Strategic Approach to Wealth Management Carnation's sale to Nestlé precipitated a crisis for our family in three ways. First, our family never anticipated the sale of Carnation. So, our family never adopted a coordinated approach to managing our wealth, should that eventuality arise. Thus, in early 1985, when Carnation's sale was consummated, assets of nearly $1 billion suddenly got divided up among a large number of Stuart family members. Less than a decade later, there were at least seven different Stuart family branches, each pursuing its own investment goals and strategies--with widely varied results. Second, after the company's sale, our family no longer had a single focal point for its identity. So, our common family heritage and history began to slip away. My great-grandfather and Carnation's founder, E.A. Stuart, died in 1940. His son, E.H. Stuart (my mother's father), passed away in the early 1970s. Within a year of the company's sale, not a single Stuart family member worked for Nestlé. The last family member who worked there quipped to me that "The Stuart family connection went from being an asset to a liability." Third, after Carnation was sold, our family's wealth was reinvested in mixed stock/bond portfolios that yielded yearly dividends. But these new investment funds couldn't begin to match the average annual growth rate of 13% that Carnation stock had enjoyed from 1899 to 1985. In fact, income distributions to Stuart family beneficiaries started to decline in the early 1990s. Soon, some members of my family, who were dependent on investment income for their lifestyles, began to emphasize fixed income investments more than in years past--a move that was destined to further erode our wealth if we weren't careful. All of this caused me to look at the Lucas branch of the family--my parents, my siblings, and our children--with a great deal of concern. By this time, I had spent more than 10 years in the investment and wealth management industries. After graduating from Dartmouth in 1981, I had gone to work for Wellington Management Company, an investment management firm that manages hundreds of billions of dollars in assets. Over the years, I also became deeply involved in our family's financial and investment affairs as part of the Lucas family office. My experience at Wellington Management gave me superb on-the-job training as an investment analyst, and as I looked over the state of our investments, I didn't like what I saw. The performance of our funds under the trustee who oversaw our family's assets was mediocre at best--to the limited extent I could measure it. Alarm Bells Between 1987 and 1994, the U.S. stock market grew a whopping 133% while the bond market grew 92.4% in value. That meant that a portfolio of 60% stocks and 40% bonds like ours should have grown 117% over that same seven-year period. But to my shock, my family's portfolio had not. In fact, my research showed that during the roaring bull market from the late eighties into the mid nineties, the value of our main portfolio grew only 31%. Taking inflation into account, this meant we hadn't really increased the value of our wealth at all . It's Hard to Grow Assets AND Enjoy the Fruits of Success at the Same Time! So where was the problem? First, I discovered that there were significant "costs" associated with our wealth that were continuously dragging down the value of our assets. To maintain the existing value of our assets--after distributing roughly 4% a year to family members, paying taxes, paying our investment advisor, paying brokerage fees, and adjusting for inflation--we had to generate roughly 9.5% a year in asset value growth. But because 40% of our assets were invested in bonds, the value of our stock holdings actually had to grow at an annual rate closer to 12%; almost the same 13% average annual growth rate that Carnation stock enjoyed year after year, decade after decade! But that wasn't all. Over time, to enjoy the same level of investment income from family trusts that my parents enjoyed, I realized it wouldn't be enough for us just to maintain the value of our assets. We had to increase their value because our family was getting bigger. I have three siblings, and among us we have nine children. If we wanted to live as well as my parents, we would have to generate not 12%, but nearly 17% growth in our stock portfolio year after year for the next 50 years. That's impressive even for someone like Warren Buffett to achieve! My fellow family members and I always assumed that there would be plenty of money to pass on to our children and grandchildren. But that assumption, I realized, wasn't accurate. Even if we maintained our family's assets in the coming years, spending what we earned net of fees, taxes, and inflation, it became clear that each of my children would have nearly 90% less wealth than my parents simply because the family was increasing in numbers. Growing up, I'd often heard the expression, "from shirtsleeves to shirtsleeves in three generations." Now, I realized what that expression really meant. And I didn't like its implications. Clearly, none of us was about to starve or see a significant near-term change in our lifestyle. But with an eye toward the future, and on what each of us wanted to do next in our lives, my family and I realized that the fortune my great-grandfather and grandfather built, which had been lovingly preserved in family trusts, wouldn't last another 86 years. My generation would have to work just as hard and be just as entrepreneurial to build our family's assets for the future as our forebears had done in the past if we didn't want to preside over a crumbling legacy. Our Wealth Represented More than Cash I realized something else, too. Our family's money represented more than just cash. It represented hard work, history, love, and legacy--a tangible gift from past generations of Stuarts to my own. It was meant to last a long time and to be used in ways that would benefit not just my family and me, but also society and generations of Stuarts yet unborn. We Needed to Get a Handle on Our Investment Portfolio My family and I needed to get a handle on the long-term management of our wealth. Otherwise, we wouldn't have a family fortune anymore--only the memory of it. What could we do to reverse the tide of our financial fortunes? Crafting a solution demanded the use of all the financial and business training I was fortunate to get at the Harvard Business School and in the volatile business of investment management. When I understood the extent of our family's long-term asset erosion problems, I presented the facts of our situation to my family. Talk about breaking a family taboo! Can you imagine convening a meeting of your family members to discuss the family's financial health? I can and did, and by reading this book, you'll be able to do it as well. Introducing Strategic Wealth Management I persuaded my family that we needed to take a disciplined and coordinated approach to what I call "strategic wealth management." Strategic wealth management is a philosophy and approach to wealth building that involves a number of key components--defining values; setting investment goals; deciding on a time horizon for wealth management planning (your lifetime or multiple generations); asset, liability, and cash flow management; control of spending; wealth transfer; and, tax and risk mitigation--all coordinated in a strategic, synchronized way that results in the whole being worth more than the sum of the parts. Strategic wealth management is a comprehensive approach to managing wealth productively where synergies come from careful planning and from leveraging a family's assets in purposeful ways not just for a lifetime, but, in our case, for multiple generations. As a group, we focused on the values that we thought should drive the future management of our wealth. We talked about our family's shared heritage--a heritage built on hard work, persistence, personal flint, and private Quaker faith. We also discussed our tolerance for entrepreneurial risk-taking, expectations for earned income, our desire for investment income, and our long-term goals for the future, both as individuals and as a family. The overriding questions in all these discussions were these: did we want to go broke--slowly and with certainty? Or did we want to take measured and educated risks with the potential benefit of growing our wealth and that of our children? We Are Stewards, Not Owners, of Our Wealth As we wrestled with these questions, several things happened: We began to see ourselves not as owners of our wealth, but as stewards of it . We spoke of the drifting apart of various branches of the Stuart family after Carnation's sale and agreed we didn't want our family to fracture further. So, we decided to reverse the splintering of the Lucas family assets and, together, manage our inherited wealth so that the bulk of it is passed on to future generations. We decided to base future wealth management decisions and strategies on core family and individual values. Why focus on values first? Values establish a framework for defining your wealth management priorities. We decided to dramatically restructure our investments and the way we interact with our wealth advisors so that our wealth could help us meet our goals, not someone else's idea of what they should be . If successful, we'd be able to generate new wealth and pass it on to future generations while still enjoying its benefits in this generation. We realized it was critical to foster family harmony, strong communications, and wealth management leadership . Wealth management and wealth creation are difficult tasks. They require high-order management and leadership competencies, especially when issues of diversified wealth and multigenerational wealth building and transfer are involved. We recognized that this was critical to the successful long-term management of our family's assets, and you will also. Taking Control for the First Time As a result of our discussions, my family and I pulled our family trusts out of the Midwestern bank that managed them for years--a rare event in the clubby world of trust fund management. In an ironic twist, however, the bank didn't try to retaliate for this move or hold a grudge against our family. Instead, the bank hired me in 2001 to manage its high-net worth business and to implement for its clients many of the strategic wealth management practices and approaches that my family and I decided to put in place. The decision my family and I made to give up our existing trustee and to take proactive control of our family's wealth management activities had profoundly powerful effects that I want to share with you throughout the book. You will also learn how to enhance your own financial success, given your own circumstances and objectives. Philanthropy Has Emerged as a Shared Interest Among Many Family Members Besides strengthening our bottom-line financial results, improved family communication and financial coordination has yielded other benefits. As our extended family has reconnected in recent years, we've rediscovered much about the wonderful Stuart family legacy and have come to appreciate our common family roots. We found that many of us share a common interest in philanthropy. E.A. Stuart first set up a foundation back in 1937, and additional foundations have been established by virtually every generation of Stuarts since then. Today, these foundations focus the attention of family members on the needs of disadvantaged children, the elderly, at-risk inner city youth, schools, and other social issues. Stuart family members quietly give millions away each year in their capacities as foundation trustees and directors. Following in E.A. Stuart's footsteps, many of us also give substantial sums to charity from our own pockets and spend countless hours working with nonprofit organizations both large and small. Some of these causes are well known and prestigious, while others are small and support some of society's neediest people. I'll have much more to say about philanthropy as a family bonding agent and component of wealth management in subsequent chapters. Closer Family Ties Finally, because members of my immediate family today coordinate their wealth management activities, it has brought my siblings, parents, and me closer together emotionally than in years past. You should know that growing diversified wealth is not easy. It requires cutting-edge investment knowledge, a competitive spirit, and a particular personality. It also requires a commitment to communicating openly, honestly, and respectfully with other family members--even when you don't always agree with them. In the Lucas clan today, that's not always easy to do. As our family continues to grow, we must consider the concerns and interests of all family members in setting wealth management goals and making other critical wealth management decisions. The Wealth-Building Legacy of E.A. Stuart Growing up, my siblings and I were raised on stories of E.A. Stuart's persistence in the face of repeated setbacks in starting the Carnation Company. Those lessons resonate in us to this day, and I hope that our family stories make this discussion of wealth management less academic and more tangible to you, regardless of your financial or familial situation. There's a delivery drop box from one of E.A.'s notable business failures--a dry goods business that flopped before he founded Carnation--which we keep in the kitchen of our Cape Cod summerhouse. We keep this drop box around for an important and symbolic reason: to emphasize that wealth isn't to be taken for granted and isn't easily attained. "You may have inherited wealth, but in this family you are expected to work hard," is the message my siblings and I got from our parents growing up. The story of how E.A. Stuart ran Carnation in its early years contains important lessons--not just for running a business, but also for managing the wealth that a business creates. Many of his ideas, in fact, form the core principles espoused in this book. Consistent profits are critical to successful growth . In its 86 years as an independent company, through two world wars and the Great Depression, Carnation only lost money in three years. The key to this remarkable track record was prudent diversification, empowerment of people, and careful measurement of results. Take measured and informed risks . The entrepreneurial risks he took and his well-honed intuition were always grounded in his deep knowledge of his business. Align your interests with customers and suppliers. E.A. Stuart was always looking to partner with people, not to gain the upper hand as an adversary. Conserve your wealth. He worked hard and was frugal. To this day, my mother takes real pride in describing her family as "understated people." Be useful . This was EA Stuart's ultimate measure of success. How My Dad Taught Me the Value of Money A quick story from my childhood illustrates just how large a role prudence and "financial modesty" played in my family's household when I was growing up. In 1965, when my family and I moved back to the U.S. following a three-year job stint for my father in Europe, Dad bought a brand new red Plymouth Valiant. Over the next 17 years, as he rose through job ranks at Carnation, ultimately to become President of the International Division, this car remained his preferred form of transportation for virtually all business and family activities. Even when the presidents of overseas divisions turned up in Los Angeles to meet with Dad to conduct business, they always drove to company dinners, not in some shiny Lincoln Continental or Cadillac, but in my father's red Valiant! My father so loved this Valiant that for its 25th anniversary in 1990, we bought a vanity license plate for it that read, "65 JUNK." When 65 JUNK finally gave up the ghost, my father pulled the Mercedes that my Grandmother had bequeathed him years before out of storage and began to drive it. By then, it was only 20 years old. "Still has many years of useful service in it," he told us. The lesson my father taught us by keeping that less-than-fashionable Plymouth Valiant around for so long was clear: "Image isn't everything. Don't squander your assets. Preserve your wealth and use it for worthwhile pursuits no matter how much of it you might have." The message he sent to his division presidents was equally clear: "Cost control is important, and I lead by example." A Book About Strategic Wealth Management Today, my family's value system regarding money is based both on personal prudence and on an aggressive and shrewd approach to the long-term strategic stewardship and growth of wealth. You'll read a lot about these values--and others--throughout the pages of this book. But I don't assume that my values are your values. I've learned many lessons about wealth management, both as a member of a wealthy family and as an industry professional advising others. One of the most important things I've learned is that each individual and each family has its own values and unique circumstances relating to managing wealth. This book discusses many roads to effective wealth management, not just the ones used by my family. You can explore the options and then decide which ones are right for you. This book deals with how you can manage your wealth, be it for your lifetime or for multiple generations, using proven wealth management principles to do so. What I say here is directed to anyone concerned about wealth creation, wealth management, families with wealth, retirement planning, and multi-generational estate management. The book will also be of value to wealth industry professionals who are interested in providing their clients with fresh investment insights. It will also help upwardly affluent professionals and successful entrepreneurs who are interested in adopting a strategic, focused, and disciplined approach to growing and diversifying their financial assets. With an insider's perspective, I wrote this book to share the lessons that my family and I have learned, and hopefully to spare you from some of our mistakes. Most of these lessons apply whether you are worth a few hundred thousand dollars or a few hundred million. As you turn to Chapter 1, "Protecting and Growing Your Wealth," remember this: Wealth management isn't just about money. It's also about people, relationships, values, doing well by doing good, and, of course, family. Enjoy this book for the tools and insights it provides you. Use it as a guide to more strategic and insightful stewardship of your personal and family wealth and to the achievement of a more fulfilling life. Wealth is a gift you should safeguard, nurture, and share productively with others. This book will show you how. Stuart Lucas July 2005 (c) Copyright Pearson Education. All rights reserved. Excerpted from Wealth: Grow It, Protect It, Spend It, and Share It by Stuart E. Lucas All rights reserved by the original copyright owners. Excerpts are provided for display purposes only and may not be reproduced, reprinted or distributed without the written permission of the publisher.
