Posted by admin on July 5, 2005
About Wealth: Which Comes First?
Which do you think comes first to be comfortably wealthy or to be wealthy and comfortable? It depends!
An alarming new problem seems to be striking Americans: Sudden Wealth Syndrome. Steven R. Pritzker, Ph.D. writes: San Francisco psychologists Mark Goldbart and Joan DiFuria recently identified this neurosis after treating patients who suddenly found themselves millionaires or, even worse, billionaires. Like The Beverly Hillbillies, King Midas and lottery winners, these melancholy magnates have a hard time adjusting to their newfound wealth, exhibiting moodiness, depression and feelings of social inadequacy.
Offering yet another scenario, Harvard's senior philanthropic adviser, Charles W. Collier has had many opportunities to observe the social and psychological dimensions of financial wealth as it relates to the development and functioning of families. In a recent interview he noted: Raising children in the context of substantial financial wealth creates additional challenges in helping to develop competent, responsible citizens. Significant financial wealth (and the messages and modeling around that wealth) has the potential to curb motivation and isolate children from the real world. He believes families with wealth need to think seriously about sending positive messages concerning money to their children and undertake a program of financial education tailored to each family member.
Collier also sees a number of challenges connected with the opportunity of families to govern themselves wisely. First, there is the issue of communication and secrecy. Families are not [often] accustomed to talking with their children about money, its meaning, or its uses for them and succeeding generations. The second challenge is that as families expand and new in-laws marry the next generation, there is often great diversity within the family culture. Thus, it may be hard for families to agree on where they want to go, much less even to meet once or twice a year.
As mentioned in our prior newsletters, we strive to provide articles on various aspects of wealth management to assist your understanding of why planning for the present and for your future has importance. Yes, we also promote our services; yet, you will find that we always seek to present thought provoking topics that are relevant to our wide audience.
With this months letter, Im happy to announce a new addition to the ELF Capital Management team. Dan Elash, Ph.D. (in psychology), is our new V.P. of Client Relations and authors this months newsletter. Im sure you'll find his views on family quite thoughtful and enlightening. Lastly, we will finish with a review of the investing climate for the month past, the current market outlook and our investment performance.
Pursuing a Worthy Purpose
Each and every human organization has a purpose, whether it is a business, a not-for-profit organization or a family. Ones purpose is ones reason for being. It provides guidance in ambiguous times, it creates a powerful focus for channeling energy and resources, and it enables savvy decision-making.
Dig into the backgrounds of the most successful organizations you know and you will find them organized around the pursuit of goals that are important to them. They seldom drift off course. They aren't easily distracted. They have a clear vision of the future they are working to create.
Although every organization has a purpose, not all organizations have articulated their purpose clearly. The clearer the purpose the more proactive they can be toward achieving their mission. Not only are these skills critical for survival, these advantages are often the keys to long-term success. By the same token, every family has a purpose at its core.
Unlike a business endeavor, the fundamental purposes of a family are often assumed rather than clearly stated. Let me repeat this! They are assumed. They operate implicitly.
In order to understand the purposes of a family one has to look at how decisions are made within the family. The pattern of choices often reveals the true purpose or lack thereof. This pattern reflects the lived, as opposed to the espoused, values of the household. When a family learns to channel these values to be focused on working toward a common purpose, there is a logical consistency in the pattern of choices that is clearly discernible. Without a clear purpose, patterns are harder to recognize, decisions are more serendipitous, and the evidence of competing agendas is seen in actions that conflict with each other over time.
Effective Wealth Management for a Family
At its essence, the value of a family's wealth is its ability to create options for them. In order to calculate the best option or choice at a particular time one needs a consistent reference point, a compelling purpose. Otherwise, our choices tend to be short-term and less consistent then they would be otherwise. The greater the wealth, the more options available. The more options available, the more difficult it is to make consistently satisfying choices.
Clarity leads one to exercise options most wisely. So, whats required?
In order to develop the most powerful strategy for managing its wealth a family needs several things. These are:
Articulate a Vision for Your Family
The first step in creating a powerful focus for your family is to clearly articulate a vision of the future you are striving to build. Where are you going as a family moving through time? How will you know when you get there? What will success look like?
Just like a corporate vision statement, this is a conceptual piece. It doesn't need to be lengthy or detailed. It needs to be broad enough to capture your definition of success. It needs to be compelling enough that it stirs the passions of all involved.
This vision serves as a platform for your efforts to manage your wealth. It lets you and your advisors know the goals and measure progress toward them. It enables everyone involved to check priorities, critically evaluate decisions, and assess progress from the same point of reference. It allows everyone involved to recognize the need to shift gears or change course without becoming distracted from the main goal.
The family vision statement also provides the basis for on-going conversations about family values, beliefs and choices. Expect that your vision statement is a living document that will evolve and grow as the family and its circumstances change over time. It also provides a key benchmark for maintaining a powerful family focus and for reducing conflicting agendas.
Many corporate vision statements prove to be useless as little more than wall hangings over time. In these cases it isnt the concept but the execution that has failed. A leaders vision that never captures the imaginations of the organization will not work. Neither will a vision statement that lacks authenticity. This means that the people involved need to believe in the vision enough that they will commit to making it happen. The job of the leader or leaders of the family is to create a vision broad enough to include the aspirations of all involved. Not just their own! They must nurture conversations so that everyone can see themselves benefiting from working to realizing the vision. It is through these on-going conversations that children grow in wisdom as they age and share a common family focus.
Working toward a compelling purpose provides a rational context for people to make sacrifices for something worthwhile, to develop and maintain discipline, and to strive to fulfill their potentials. These challenges are often difficult for wealthy families to master. When there is enough wealth to indulge those we love, people can lose perspective and children can fail to develop the inner strength necessary to ensure their psychological satisfaction throughout their lifetimes. Growing in the context of a family purpose worthy of self-denial and commitment to goals bigger than ones self is particularly valuable for families with great wealth. It fosters genuine self-esteem and self-respect in people.
Family leaders can use their clear purpose to guide the family's decisions on a day-to-day basis. It establishes the game plan for how family members need to relate to each other and to their resources in the rush of daily living. They can also then use that game plan to guide their advisors and ensure that the advice they receive serves their core purposes.
People tend to fall into comfortable ruts and routines. Without constructive provocation we tend to become self-absorbed. We make assumptions and think that we know each other better than we do. Families can use their vision statement as the vehicle for discussing their needs, their relationships and their values in a pragmatic manner. It provides a context for periodic reflection and realignment with each other and their shared goals.
Families are often wracked by the conflicting agendas of their members as people grow and evolve over time. Without a common purpose fissures emerge and people often grow at odds with each other. The dynamics are too complex to detail here, but suffice it to say that the more families are built around a common definition of success the stronger they are at managing these natural conflicts. They are also better positioned to use their wealth to create the conditions that lead to success for everyone. Great wealth doesn't have to be the source of conflicts, resentments and frustration that it often becomes. However, if its value is to be optimized, it must be viewed in the context of the family's purpose.
Knowledge and Skills
Great wealth has the ability to help the family aggregate the knowledge and skills required to thrive over time. It can enable the family to gain the information and operational intelligence to make shrewd decisions. It can be used to build the skills of its members as they grow and evolve. It can be used to hire the skills that family members lack. It is the clear vision of the future that the family is striving to create that allows family leaders to be wise in the decisions they make and the advisors they choose. The better the knowledge and skills at the family's disposal are aligned around a common purpose the more valuable they become.
To start off my contribution to our firms monthly newsletter, I sought to open conversation toward considering goals for managing your wealth. At first blush, people often say their goal is to preserve or to grow their wealth. However, to build a productive plan to serve your needs, either of these answers is insufficient. I look at them as only partial answers because they beg the real question, in order to accomplish what? Without addressing the rest of this question, plans can never be as productive as they could be. Without a clear, compelling purpose to anchor your plan there is too much room for ambiguity, inadequate decisions, and ultimately, disappointment.
The implications are clear. Wealth managed for a compelling purpose will be better managed than it will be when the family's goals are vague and amorphous. Preserving and/or growing wealth is important. However, these efforts will be more productive for the family when they occur in the context of in order to accomplish what?
I'm here to help.
ELF Capital Management Investment Performance Update
The greatest puzzle about the current US economic scene is why long-term interest rates are so low and why they have been falling recently. The bond market seems to be much more worried about faltering growth than inflation. However, the data suggest that these priorities may be wrong. Our US economy seems to grow at a rate of around 3.8%, oil prices continue to reach new highs, and core inflation has been moving upward. Little has been done to address the large budget deficit and the dollar is expected to fall further over the next few years. Yet, investors in long-term Treasuries seem unconcerned.
This relaxed view of the outlook is not shared by the Fed, which seems more worried about inflation than the bond market and is not particularly concerned about signs of weakness in the economy. Moreover, some Fed governors and regional bank presidents have recently expressed concerns about the pace of price growth in the housing market.
Any confirmation of faltering growth over the next few months could send long-bond yields much lower. Ironically, this will exacerbate the housing bubbles in the United States, Europe and Australia where even faster rises in house prices have occurred over the past few years.
If the Fed is right about inflation being a bigger threat than a more pronounced deceleration, then the bond market is in for a nasty surprise. Early evidence of such a scenario would include further rises in core inflation and renewed strength in key sectors of the economy, especially manufacturing. This could lead to a sharp rise in long-term bond yields over the next year. This could bring about an abrupt slowdown in the housing market and hurt growth prospects.
For the month ended June 30, 2005, our one-month performance is down 0.82%, our three-month return is up 0.49% and our one-year return is up 1.66%.
For disclosure purposes, past performance is not necessarily indicative of future results and ELF Capital Management LLC (ELF), formerly Hoffman White & Kaelber Financial Services LLC, cannot guarantee the success of its services. There is a chance that investments managed by ELF may lose a substantial amount of their initial value.
ELF is an independent discretionary investment management firm established in February 2003. ELF manages a strategic allocation of primarily exchange-traded index funds (ETFs), and may invest in other carefully selected securities. ELF may also employ hedging techniques, through the use of short positions and options. ELF manages individual portfolio accounts for both individual and business clients.
The ELF ETF Strategy returns presented herein represents a composite of actual results from all client portfolios managed by ELF. Currently, it is the only composite presented by ELF and separate client account portfolio positions are substantially similar, except as may be modified for retirement plan accounts and accounts with net equity of $60,000 or less. There is no minimum account size for inclusion into ELFs ETF Strategy composite and accounts with net equity of $60,000 or less have a tendency to downwardly skew the combined results.
The performance data presented herein includes the reinvestment of dividends and capital gains; as well, ELFs ETF Strategy composite returns are presented after deducting actual management fees, transaction costs or other expenses, if any. ELF charges an annual investment management fee as follows: 1.25% on the first $250,000; 1.00% on the next $750,000; 0.95% on the next $4,000,000; and, 0.75% thereafter.
Copyright 2005 ELF Capital Management, LLC. All rights reserved.