Assets That Matter

Missed Fortune 101: A Starter Kit to Becoming a Millionaire
by Douglas R. Andrew

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Imagine these three categories-financial, human, and intellectual assets-on a "family balance sheet." Say you had to leave one category behind, but you could keep and transfer the others to future generations.

I have asked this question of a wide variety of individuals who have had financial net worths ranging from $10,000 to $2,500,000,000, and the answer is the same. They would choose to give up their financial assets.

Why? Because we can rebuild the financial assets with our human and intellectual assets. Most religions of the world believe that we come into the world possessing the human and intellectual assets to one degree or another. While we live our life, we enhance these assets.

Then when we leave this mortal existence, we take the enhanced human and intellectual assets with us to the next life.

Most people would not trade their human and intellectual assets for more money. When people spend their health trying to create more financial wealth, they usually end up spending their wealth trying to regain their health. If we trade our morals and ethics for more money, we soon become bankrupt in the human asset category. George Bernard Shaw said, "There are two sources of unhappiness in life. One is not getting what you want; the other is getting it." Money does not cause happiness or misery; but your relationship with money can.

It's unfortunate that traditional estate planning focuses on the least important category on the family balance sheet: the financial assets. Regardless of its complexity, traditional estate planning has become a process of four Ds: divide up the estate, defer the distribution, dump the financial assets on ill-prepared heirs, and eventually it dissipates. In other words, wealth is transferred without responsibility or accountability. Lee Brower, president of Empowered Wealth, LLC, states, "Traditional estate planning has done more to destroy American families than the federal estate tax could ever do!" Why?

• It encourages extraordinary consumption.
• It discourages savings.
• It takes families from "we" to "me."

Before I explain possible solutions, let's explore one final category of assets. There is an element of financial assets that is as important as the return on those assets, if not more important. That element is choice and control. There are certain financial assets over which we give up, for all practical purposes, choice and control. These assets are our civic, or social, assets. When most people think of civic assets, they usually think of taxes. Throughout the world, most governmental systems require the citizens of their country, state, and municipality to give back to society in the form of taxes. Hence, most people think of taxes as a liability; but, as Lee Brower explains, taxes are actually an asset. For example, a road or highway-paid for by taxes-is a public asset.

In America, the government has provided ways for us to take a certain amount of control over how we allocate our social dollars. However, if we choose not to take control, the government will! One way you can regain choice and control over civic assets is to redirect some of your financial assets that would otherwise be paid in tax to charitable causes, preferably through your own family foundation. Another way is to redirect otherwise payable income tax to investments that stimulate the economy while enhancing your own net worth. This book will teach you how to redirect otherwise payable income tax to causes you support, including your retirement and financial security for your family.

THE NEED FOR THE RIGHT P.L.A.N.

How does one create a Perpetual Life of Asset Nurturance?? I urge everyone to identify the method that best meets individual needs-but beware of relying on traditional wisdom. Marshall Thurber, attorney and internationally renowned systems analyst, states that "94 percent of all failures are a result of the system." The typical system for accumulating wealth and transferring that wealth to future generations almost assures failure.

According to the Family Firm Institute of Brookline, Massachusetts, "only a little more than 3 percent of all family enterprises survive to the fourth generation and beyond." Throughout the world, financial assets have dissipated by the end of the third generation following the wealth creation. Hence the saying "shirtsleeves to shirtsleeves in three generations." Robert Frost said, "Every affluent father wishes he knew how to give his sons the hardships that made him rich." Cornelius Vanderbilt (1794-1877) was the most powerful and successful American businessman (the Bill Gates) of his time. He made his fortune in steamship lines and railroads. He helped build the nation's transportation system. Vanderbilt did not support charities, but late in life, he gave $1 million to Central University in Nashville, Tennessee, now known as Vanderbilt University. At his death, Vanderbilt left an estate valued at $105 million-the largest in American history up to that time. According to Arthur T. Vanderbilt II, author of Fortune's Children: The Fall of the House of Vanderbilt, when 120 of Cornelius Vanderbilt's descendants gathered together in a reunion in 1973, there was not a millionaire among them. The wealth had dissipated. It had been transferred without responsibility or accountability. William K. Vanderbilt, grandson of Cornelius, said, "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."

In contrast, let's consider the Rothschild family-one of the few families who perpetuated their family wealth for several generations. Mayer Amschel Rothschild (1743-1812) opened a bank in Frankfurt, Germany, where he made profitable investments for the royal families of several European countries and founded a banking dynasty. He taught his five sons conservative money management by making investments that produced reasonable profits rather than aggressive returns. His methods made him a tremendous fortune. Nathan Rothschild, the third son, became a financial agent of the English government. He stated, "It requires a great deal of boldness and a great deal of caution to make a great fortune; and when you have got it, it requires ten times as much wit to keep it."

Basically, the Rothschilds established the following system:

• They loaned their heirs money or entered into joint ventures with them.

• The loans had to be paid back to the "family bank."

• The knowledge and experiences those heirs gained had to be shared with other family members.

• The family gathered at least once a year to reaffirm its virtues and intentions, or they couldn't participate in the family bank.

Subsequently, the Rothschilds' wealth compounded and grew as it passed to future generations.

GETTING YOUR FAMILY INVESTED IN THE P.L.A.N.

Abraham Lincoln once said, "The worst thing you can do for those you love is the things they could do for themselves." To help your family become invested in your legacy of true wealth, it is important they see the value of capitalizing all four categories of assets.

Lee Brower, president of Empowered Wealth, emphasizes that the best way to capitalize an asset is to give it a new life by sharing it or giving it away. We ought to focus on the four Ps: preserve the assets, protect true wealth, perpetuate it to future generations, and empower family members with stewardship and accountability of more than just financial assets.

When we have a reservoir located in the mountains above us, it can be used as a water source and especially comes in handy during times of drought. It can also be used as a recreational resource. If we install some turbines at the base of the dam, tremendous power can be generated that gives new life to an entire city, without giving up the use of water for consumption and recreation. In much the same way, human, intellectual, financial, and civic assets can be capitalized on to give them a new life.

Since discovering this, my passion has been to assist families in identifying their stewardship to true wealth by creating systems, strategies, and structure for family and financial empowerment, with ongoing accountability, while retaining choice and control.

It would be well for families to develop and use some type of a system designed to:

• Enhance the individual health, happiness, and well-being of each family member

• Support and encourage family leadership

• Capture family virtues, memories, and wisdom

• Protect, optimize, and empower the family's intellectual and financial capital

By now, you may be wondering why I am pursuing all these tangents on family empowerment, happiness, and human, intellectual, and civic assets. Isn't this supposed to be a book on maximizing financial assets?

It's simple. It is highly important to get a handle on values before learning how to handle and value assets. And people-including you and your family-will generally pay far more for something they perceive has the greatest value. How is value created? Just one more tangent.

CREATING VALUE-A PERSONAL STORY

Until recently our family had owned and operated a purified drinking water business in northern Utah. Drinking water in the simplest commodity form had a value of about 1 cent per eight ounces. We had approximately $1 million of equipment at our plant that took water through a six-step purification process. When we amortized the cost of equipment through the production process, the cost of water doubled to 2 cents per eight ounces. We packaged water in a unique eightounce plastic pouch rather than a bottle, which added 2 cents to the cost.

We then packaged the pouches in convenient ten-pack tote boxes, which increased the per-unit cost to 7 cents. Four tote boxes were shipped in a corrugated box, increasing the unit cost to 8 cents. (Packaging often costs far more than the commodity.) Labor and overhead for our production plant averaged about 4 cents per unit, thus increasing the cost to 12 cents. Shipping a heavy commodity such as water from Salt Lake City to our customers on the East Coast added another 4 cents to our cost. If we marked up our price 25 percent from our cost of 16 cents, our wholesale price became 20 cents. So we sold 2 cents' worth of water for 20 cents, or ten times as much, because we had taken a commodity and converted it into a unique product.

When our unique product was sold at the grocery store, sometimes it retailed for as much as 35 to 40 cents per pouch. When it entered the convenience sector such as a travel/fuel station, it retailed for 60 to 75 cents. When my parents heard this, they exclaimed, "No way-just for a drink of water!" But hold on, I'm not finished.

A few years ago my wife and I joined a group of friends for three wonderful days in Orlando, Florida, attending the various amusement parks. It was one of the hottest months of May on record. One day we stopped three different times at a convenience cart filled with ice and shelled out $2.50 for a twenty-ounce bottle of chilled drinking water.

You do the math. There are 6.4 twenty-ounce portions in a gallon-6.4 times $2.50 equals $16 per gallon of water! As we left the park the next day, we stopped to fill our vehicles with gasoline costing us $1.60 per gallon. Twenty-five years ago, if anyone would have told me that someday people would pay as much for a drink of water as they do for a gallon of gas, I would have laughed at them. But ten times as much? And we even discarded a remaining half bottle of warm water at the end of the day without hesitation!

Why are people willing to do this? It's because of the unique experience they are having. Authors B. Joseph Pine II and James H. Gilmore explain this concept in their book The Experience Economy. We value a unique product more than just the commodity. We value convenience more than a unique product. We value a unique experience more than we value convenience.

REALIZING VALUE-YOUR FUTURE STORY

There is one level that exceeds them all: a meaningful transformation. When we can experience a meaningful transformation in our life that will benefit all of our family members, we consider it of greatest value. My goal is to create a meaningful transformation in your life through the concepts, truths, and strategies contained in this book.

Most educational books are information-based. This book, on the other hand, will provide an insight-based experience for you. When a person experiences personal epiphanies, he or she is motivated to change. As you continue to read, it is my sincere desire that a meaningful transformation will take place as you learn to give new life to your human, intellectual, financial, and civic assets.

Copyright © 2005 by Douglas Andrew

About the Author

Douglas Andrew is currently the owner and president of Paramount Financial Services, Inc., a comprehensive personal and business financial planning firm with several divisions.In addition to his successful practice with individual clients, Doug also runs numerous investing seminars for professional financial planners. It is in these seminars that Doug sells thousands of copies of his book.