from stone age to digital: the key commandments of wealth

A Wells Fargo Business

A N E S T A B L I S H E D P A R T N E R

From Stone Age to Digital:The Key Commandments of Wealth June 12, 2017

Abbot Downing

Jim Steiner, President

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• From Stone Age to Digital: How do we store wealth?─ We Trust an Intangible System

─ The Gap Between Rich and Poor

• Where Do We Get Our Wealth?─ The Gender Gap

─ Can We Ever Retire?

─ The Incredible Shrinking Stock Market

• Going Beyond the Numbers─ What Is Cultural Wealth?

─ Why Do We Fail at Passing Wealth to the Next Generation?

─ The Land of Immigrants: Hard-working or Entitled?

─ What Makes a Good Investor?

─ Commandments of Wealth

Imagine that a distant relative passed away earlier this year

and in the reading of the will this morning has left you with

$50 million.

What are you going to think about over the next week?

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T H E I S L A N D O F S TO N E M O N E Y

• On Yap wealth was

stored centuries ago in

a currency called “Fei”

– a large donut-

shaped stone up to 12

feet in diameter.

• The island only had

three commodities –

fish, coconuts, and

sea cucumber – all

highly perishable.

• Only the “Fei” could

store wealth and

enable families to

gather wealth and

obtain credit.

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Used with permission: Alamay DEFCGG

W H AT I S W E A LT H ?

• The stones are still used for traditional

or ceremonial exchange.

• Today we store wealth in a complex

credit system with capital stock and

currencies typically in digital form.

• Wealth storage must be trustworthy,

dependable, and durable.

• We remain heavily dependent upon

our institutions to maintain wealth

vehicles.

The Island of Yap

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Used with permission: Alamay G9RF7W

-4.7%

0.4%

1.2%

2.0%

2.8%

3.0%

3.3%

3.9%

4.4%

5.2%

9.4%

9.6%

10.5%

16.3%

32.2%

Unsecured liabilities

Educational savings accounts

Other interest-earning assets

Other financial investments

Cash value of life insurance policies

Annuities & trusts

Motor vehicles

Other real estate

Rental property

Business or profession

Asset at financial institutions

Stocks and mutual funds

IRA & Keogh accounts

401(k) & Thrift Savings accounts

Equity in own home

Composition of Net Worth by Asset per U.S. Household

W E T R U S T A N I N TA N G I B L E S Y S T E M

1Excludes households in top one percent of net worth

Source: Smith, Adam, Rebecca Chenevert, and Jonathan Eggleston. Improvements to Measuring Net Worth of Households: 2013. Rep. no. P70BR-143. United States Census Bureau, March 2017.

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B I L L I O N A I R E S A N D M I L L I O N A I R E S B Y H O U S E H O L D

Source: "Net Worth in the United States: Zooming in on the Top Centiles." DQYDJ. May 2017. Web.

U.S. household breakdown by net worth

540 5000 150,000

1.26 million

9.38 million

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

$1+ billion $100 million -$1 billion

$25 - $100million

$5 - $25 million $1 - $5 million

Nu

mb

er

of

Ho

us

eh

old

s(i

n m

illi

on

s)

Household Net Worth

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T H E G A P B E T W E E N R I C H A N D P O O R

Source: 2013 Survey of Consumer Finance

Avera

ge N

et

Wo

rth

(in

mil

lio

ns

)

Percentile

-$2,000 $80,000$1.9 million

$11.9 million

$30.6 million

$0

$5

$10

$15

$20

$25

$30

$35

10% 50% 95% 99.5% 99.9%

Average U.S. household net worth by percentile

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From Stone Age to Digital: How do we store wealth?─ We Trust an Intangible System


Where Do We Get Our Wealth?─ The Gender Gap



Going Beyond the Numbers─ What Is Cultural Wealth?





H O W D O W E G E T W E A LT H Y ?

Men -- 87%

• Average age of 59

• 68% made their own wealth

• 19% inherited some and created some

• 13% inherited their wealth

• Men tend to inherit wealth as heirs

• 24% finance, banking, and investment

• 7% real estate

• 7% industrial Conglomerates

• 5% non-profit and social organizations

• 5% manufacturing

Women -- 13%

• Average age of 57

• 34% made their own wealth

• 18% inherited some and created some

• 48% inherited their wealth

• Women tend to inherit wealth as widows

• 19% non-profit and social organizations

• 13% finance, banking, and investment

• 7% textiles, apparel, and luxury goods

• 6% industrial Conglomerates

• 6% real estate

Characteristics of High Net Worth*

Source: Williams, Terri. "Characteristics of the Ultra Wealthy." Investopedia. January 2016. Web.

*Households with $1+ million in net worth: 10.8 million households (DQYDJ.com)

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C A N W E E V E R R E T I R E ?

Source: Kirkham, Elyssa. "1 in 3 Americans Have $0 Saved for Retirement." GOBankingRates. December 2016. Web.

28.0% 17.3% 8.7% 7.1% 10.3% 6.2% 22.4%

Don't have retirement savings Have saved less than $10,000Have saved $10,000 - $49,000 Have saved $50,000 - $99,000Have saved $100,000 - $199,000 Have saved $200,000 - $299,000Have saved $300,000 or more

29.8% 21.9% 11.2% 10.3% 8.8% 5.8% 12.1%

Retirement savings across age groups

42.2% 29.8% 11.2% 6.3%

3.5%

2.2%

4.9%

Millennials

(Age18-34)

Gen X

(Age 35-54)

Boomers

(Age 55+)

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T H E I N C R E D I B L E S H R I N K I N G S TO C K M A R K E T

• Significant drop in the number of listed stocks in the United States over the past 20 years

• The US has witnessed a 50 percent reduction in listed securities while other developed countries have experienced a 50 percent increase over this time frame, thus resulting in a listing gap of nearly 6,000 companies

• Companies typically delist due to mergers and acquisitions (M&A) while IPOs are the most common source for new listings, and over the past ten years M&A activity has prospered while IPOs have plummeted

• Regulations have made new listings more expensive while enabling significant M&A

• This trend has resulted in more concentrated industries with larger, older, more lucrative companies who pay out cash to shareholders (dividends)

• Exchange-traded funds (ETFs) have filled some of this listing gap

Source: Mauboussin, Michael J., Dan Callahan, CFA, and Darius Majd. The Incredible Shrinking Universe of Stocks. Rep. Credit Suisse, March 2017.

Listed stocks have dropped precipitously

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From Stone Age to Digital: How do we store wealth?─ We Trust an Intangible System


Where Do We Get Our Wealth?─ The Gender Gap



Going Beyond the Numbers─ What Is Cultural Wealth?





W H AT I S “ C U LT U R A L ” W E A LT H ?

Culture: How we do things around here

Families have a unique culture and wealth creates challenges

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M A N A G I N G T H E I M PA C T O F W E A LT H

The Abbot Downing Clarity

and Family Insights

processes provide a

thorough understanding of

family history, values, and

vision which is foundational

in developing actionable

plans and solutions that

align with the client’s goals.

This knowledge is used to

help clients retain family

wealth across multiple

generations.

Aligning your Plans and Goals

History | Values | Vision

inform

Education Governance Transitions

applied to

Family Office Family Trusts Rising Generation

Family Business Family Philanthropy

Silent Spouse/Partner Foundations & Endowments

Communication

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W H Y D O W E FA I L TO PA S S W E A LT H O N TO T H E N E X T G E N E R AT I O N ?

Studies consistently show only one-third of family-owned businesses successfully transition

to the next generation, regardless of country, culture, industry or economic environment.*

Shirtsleeves to Shirtsleeves in Three Generations

1) Poor Communication

Breakdown of trust and communication within the family unit (60% of failures)

2) Readiness of Heirs

Inadequately prepared heirs (25% or failures)

3) Lack of Vision

Absence of a clear vision or mission to align family members (12% of failures)

4) Poor Advice

Failure by professional advisors to correctly interpret (or anticipate) taxation, governance and wealth preservation issues (less than 3% of failures)

Focus of the Study**

While the Williams and Preisser study focused on transition of family wealth generally, these four identified factors are no less relevant when applied to family businesses

Four Factors Leading to Failed Family Business Transitions**

* Joseph Astrachan, Ph.D., Editor, Family Business Review, 1999

**Based on a 20-year study of 3,500 families by Roy Williams and Vic Preisser, Preparing Heirs (San Francisco,

Robert D. Reed Publishers, 2003) 16

T H E L A N D O F I M M I G R A N T S : H A R D - W O R K I N G O R E N T I T L E D ?

The majority of Abbot Downing clients are 1st generation wealth creators

Often have ascended from low or middle class upbringings

Want their children to have a better lifestyle than they did

At the same time they desire their children to be hard-working and very much want to

avoid entitlement

Frustrating catch-22

“Bleachers vs. Box Seats”

*

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T H E W E A LT H D I L E M M A

First generation often experiences and thrives with successful business mind set

They do not want to give up control

Wealth inevitably flows to either the next generation, government, or philanthropy

Challenges arise because wealth is “shared” in families and it requires work to share

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W H AT D O Y O U WA N T F O R Y O U R C H I L D R E N ?

Famous

Successful

Beautiful

Happy

Good

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S O LV I N G T H E D I L E M M A

Some Key Elements of Managing the Issues of Wealth

Compassion

Process

Shared Values

Trust

Communication

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W H Y D O W E T R U S T ?

Integrity

Ability

Benevolence

Consistency

The Trust Project – Kellogg School, Northwestern University21

T H E B A S I C S O F I N V E S T I N G

Solve your investment problem, not your neighbor’s

Have a clear and consistent investment objective

Spend time understanding your risk parameters

Diversification or “diworsification”

Diversification does not guarantee a profit or protect against losses.22

W H AT A M A K E S A G O O D I N V E S TO R ?

Manage risk rather than return

Understand the long-term compounding of money

Know what a commodity looks like

Seek niches, scale advantages and inefficiency in active investments

Challenge assumptions and be a contrarian

Look for change at the margin

Think in probabilities and consequences

If you do not know what you are doing, seek professional help

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A B B O T D O W N I N G ’ S H O L I S T I C P R O C E S S

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KEY COMMANDMENTS OF WEALTH

Values and Legacy

• What is your cultural wealth?

• Who can you trust?

• How do you want to invest? How long do you want your investments to last?

• Will you leave wealth to your children, a cause you care about or the government?

Risk and Reward

• What are your liabilities (charity, family, retirement, health care, life style)?

• When will you need the money?

• What is your risk profile for each liability stream and the consequences associated with the risk?

• What are your investment strategies for each liability stream after considering all of the above factors?

• What could change that would adjust your perspective?

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‘THE GOSPEL OF WEALTH’

“The problem of our age is

the proper administration of

wealth, so that the ties of the

brotherhood may still band

together the rich and the poor

in a harmonious relationship.”

-Andrew Carnegie

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Used with permission: Alamay Copyright to be

added here

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Abbot Downing provides products and services through Wells Fargo Bank, N.A., and its various affiliates and

subsidiaries. The implementation and maintenance of certain strategies and techniques in this presentation may

require the advice of consultants or professional advisors, other than Abbot Downing.

from stone age to digital: the key commandments of wealth

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