“Any fool can make a fortune; it takes a man of brains to hold onto it” Cornelius Vanderbilt
We have seen those who started with nothing and prospered, those who had much but now nothing to show for it, those that have taken their lot to the highest levels and everything in between. It is true across all these scenarios that there are three different stages to building wealth:
Making the money (Doing the work)
Multiplying the money (Learning and continual development)
Keeping the money (Financial discipline)
You must master all three if you want to achieve true wealth. Then you must teach it to your kin.
Studies have found that 68% of those with a net worth of $30 million or more made it themselves. Another study found that 88% of all millionaires are self-made meaning they did not inherit their wealth.
It is common that the first generation builds the wealth, the second generation maintains it and the third generation ruins it. Sometimes, it does not make it to the third generation. You are in rare company if it extends beyond 4 generations.
We explore some case studies of families which have built wealth and the different outcomes.
Case Study 1 – Cornelius Vanderbilt
Cornelius Vanderbilt borrowed $100 from his mother when he was 16 and turned it into over $100 million dollars ($200 billion adjusted for inflation in today’s money) by building businesses in shipping before branching out into railroads.
He was a tough and clever man who didn’t trust anybody with his businesses and wealth. He had 13 children of which only 1 he entrusted to handle his empire.
When Cornelius died, his son took over his fortune and doubled it to $200 million by the time of his own death. ($400 billion adjusted for inflation in today’s money).
Unfortunately, within 50 years of Cornelius’s death, the fortune was completely gone due to the third and fourth generations not changing with the times and spending their fortunes extravagantly on luxury mansions, holidays, and parties.
Lessons:
Excellent work ethic from Cornelius to take $100 to $200 billion dollars in his lifetime and his son to doubling it. (Making the money and Multiplying it)
Most of his family were not involved in his businesses nor were they taught the lessons which made Cornelius successful. (Learning and continual development)
Poor financial understanding and discipline by the next generations led to mismanagement of wealth by wasting it on extravagant lifestyles. (Keeping the money - Financial discipline)
Case Study 2 – Henry Ford
Henry Ford started the Ford Motor Company in 1903 and became the largest automotive manufacturer in the world.
Henrys personal wealth peaked at around $200 billion dollars adjusted for inflation in today’s money.
Henry involved the next generation of Fords into the business to continue his legacy. Some argue nepotism does not work and leads ambitious and intelligent people to leave the organisation. This example proves otherwise if done correctly.
When Henry passed away, most of his wealth was structured for his family to continue controlling the company and they each understood their roles.
The Ford Family are worth about $2 billion dollars today and the 5th generation of Ford’s still own 40% of the voting power of Ford.
Lessons:
Henry Fords excellent work ethic took him from humble beginnings to success in one generation. (Making the money and Multiplying it)
Preparation and planning by Henry prior to his death allowed the family to keep the company in family hands. He setup structures prior to death to transfer wealth effectively and protect most of the wealth from excess taxes.
More importantly, Henrys business and wealth habits were taught to the next generation through training and education which allowed future generations to continue his legacy successfully. (Keeping the money)
The Ford wealth has dropped from $200 billion dollars at it's peak to $2 billion dollars today. (Keeping the money)
Case Study 3 – John D Rockerfeller
John D Rockefeller started out as an assistant bookkeeper making 50c a day.
He started the Standard Oil Company in 1870 and grew to control 90% of oil production in the United States.
His personal wealth peaked at around $418 billion dollars (adjusted for inflation in today’s money)
John structured his affairs to maintain the wealth within the family and prepared them to take over, they hold around $8.4 billion dollars in today’s money.
The Rockefeller family has grown so large with over 150 descendants that the 5th and 6th generations most likely won’t benefit as there is not enough for everybody.
The businesses that grew the family fortune were sold off and all the family wealth is held via investments which earn passive income. Note that businesses generate larger returns but are riskier, less risk is required with greater sums of capital.
Lessons:
John started on a very low wage to end up being worth $418 billion dollars in one generation. (Making the money and Multiplying it)
John prepared and planned for the transfer of wealth to his descendants by having appropriate structures in place at his death. (Keeping the money)
The family developed a system of ethics, values and habits which were passed on to each generation to help the family maintain the wealth with regular family meetings to enforce them. (Learning and continual development).
Johns wealth has shrunk from $418 billion dollars peak to $8.4 billion dollars today. (Keeping the money)
Analysis
As you can see from the above case studies, the skills required to build wealth are different to the skills and attributes that are required to multiply and maintain it.
Statistics show that 70% of lottery winners end up broke and almost 33% declare bankruptcy.
This is because lottery winners have not learnt the necessary skills required to keep it.
If the wealthiest men in the world at one point are unable to maintain vast levels of capital, why would this be any different for anyone that generates or inherits wealth suddenly and are not prepared for it?
Fortunately, success leaves clues. We have identified some of those traits, habits and patterns which contribute towards success and what should be avoided:
Wealth Preservation
Try to keep their family together.
Are very strategic about investments and choose wisely.
Invest in appreciating assets.
Avoid excessive risk.
Take on very minimal debt.
Have effective tax structures in place.
Spend considerable time planning for the future (1, 3, 5, 10, 50, 100 years)
Undertake on the job training from the bottom to learn the skills and values required.
Start education early.
Stay away from trouble.
Leadership is based on merit and work ethic.
Changes with the times.
Build strong networks.
Capitalise on changes in laws.
Have proper insurance in place.
Good financial and legal counsel
Strong understanding of finances
Pass down family history and lessons.
Wealth Destruction
Wrong Relationships (the person you marry, the people you do business with, the advisors you surround yourself with are very important)
Bankruptcy, drugs, alcohol, or gambling addictions.
No understanding of basic accounting principles, finances, cashflow, fees and taxes.
No understanding of various laws.
Live beyond their means.
Not preparing the next generation to take over.
Complacency.
The above is not an exhaustive list but covers many of the positive and negative factors that lead to achieving great wealth or not. If you are fortunate enough to be on the right path, note the average time span it takes to build wealth is 40 years. Don’t leave it to chance of being lost.
We work closely with families on estate planning and succession matters. Please feel free to contact us for a confidential discussion.
Disclaimer
No person should rely on the contents of this publication without first obtaining advice from a qualified professional person. This publication is for discussion and education purposes only and the editor is not responsible for the results of actions taken on the basis of information in this publication, nor for any error or omission from this publication. This editor expressly disclaims all and any liability to any person, including reader for any part of this publication.