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| First Person |
Overcoming Entropy
Stuart Lucas
08/01/06
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Stuart Lucas is chairman of Chicago-based Wealth Strategist Network and
author
of the book Wealth: Grow It, Protect It, Spend It and Share It
(Wharton School
Publishing, 2006). He is a fourth-generation heir of
E.A. Stuart, founder of
Carnation. In partnership with several family
members, he manages the family’s
financial resources.
Before Carnation Company—maker of Carnation Evaporated Milk, Coffee-Mate and
Friskies cat food—was sold in 1985, it was a family business: my family’s
business. After the sale, we were left with lots of wealth, but without a shared
focus. Soon, the insidious effects of entropy set in. We didn’t realize that our
liquidity event presented us with a great opportunity to recast our wealth
strategy, blending the best aspects of business and family management. So, as
happens time and again in such situations, the descendents of the company’s
founder, E.A. Stuart, became more and more dispersed—financially, professionally
and personally. One might even have said we were estranged.
 Ten years later,
I saw the tug of entropy start to affect my branch of the family specifically.
In many ways, our financial advisors encouraged this behavior, because this is
what they are unwittingly trained to do. It is less time-consuming—and regularly
advised in trust documents—to serve the individual needs of each client within a
family, rather than to help them negotiate their common ground. This is true,
even though in our case entropy was actually increasing the speed at which our
wealth would dissipate. We were not accountable to each other for spending, and
investment performance was being obscured by the growing complexity of the
assets and the splintering of their oversight.
Fortunately, within a year or
so we realized what was happening and committed ourselves to pursuing a
different path. It took us another year to figure out what that path would look
like and to gain consensus that it was the right one. But all the hard work has
paid off. As a result, we now get much better investment performance.
Previously, we perpetually underperformed our benchmarks by half a percent here,
a percent there. In contrast, over the past 10 years, we have consistently
beaten a tougher bogey by an average of more than 2 percent per year. This may
not sound like much, but Einstein didn’t call compound interest the eighth
wonder of the world for nothing. We have also tapped into the family’s skill
sets for everyone’s benefit, and we communicate much more effectively than we
ever would have otherwise. It took a while, but what had been a family food
business transformed into the business of managing our family’s wealth.
The Upside of Groupthink
Today, the Lucas family has one shared financial
objective. Our goal is to maintain the real, per capita value of our assets in
each generation, and everyone has agreed to the same spending rate on those
assets. We have also pooled our resources. What are the benefits of this
approach? First, the process of consensus-building encourages us to communicate
and share our aspirations. We each have to think about and articulate our
strategic wealth management objectives. We identify our common ground and the
family resources—human business, social and financial—best suited to achieving
our goals.
There are numerous benefits that come from a coordinated strategy.
Most financial managers have sliding fee scales, under which clients with more
assets pay lower fees and/or receive higher levels of service. Even if one uses
only low-cost index mutual funds and exchange traded funds—a strategy I
recommend for most people—that don’t carry sliding scales, you still need to
decide what products to use and what firm to execute through. The whole family
can benefit by sharing due diligence and selecting one principle advisor to
coordinate and administer all financial assets. As a group, you are much more
important to that advisor than any one or two of you would be.
For advisors,
there are also benefits to having client families with shared financial
objectives and to being that family’s financial administrator: You can have
fewer, larger clients; spend less time on administration and more on
relationships; and spend less time selling financial products and more time
understanding them. Also, a change in strategy or manager for one is a change
for all.
By having the right financial administrator, as I call him or her,
you will be able to measure your financial progress much more accurately and
effectively. Having a shared wealth management strategy means you are business
partners and have a responsibility to keep your partners informed. Using one
financial administrator makes this much easier.
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