Tag Archives: family governance

Family Leadership

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2016-02-08 10.36.04I’ve written about the concept of the good-enough parent — a combination of showing up and not retaliating. It is a simple strategy but quite challenging in the face of a disgruntled preschooler!

Seven years in, I’ve managed to make non-retaliation a habit. If you are still working on it then remember to practice all-the-time…

  • Yield in traffic and queues
  • Breathe into tension
  • Slow down

New habits are most easily created when we are capable of self-control — away from the kids, in low stress environments.

I’ve been at it for over 15 years.

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What’s next?

I’ll start by sharing what’s definitely not next.

A habit of constant correction will make you, and everyone in your house, miserable.

An easy way to make this visible… track your positive-to-negative interactions with your kids, spouse and friends.

Another way… ask a close friend… When I talk about myself, what do I say?

If this is an area for improvement then it’s already obvious to everyone around you.

It was shocking when I did this with my oldest. I became so aware of my error in approach that you can get a quick rise out of me by constantly correcting her in my presence.

Correcting less, in ALL areas of my life.

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2016-03-09 15.27.20What about next-level positive habits?

De-escalation – become skillful in draining the energy out of situations.

Most of us didn’t grow up in an environment that taught us these skills.

Becoming an effective family leader will require education, motivation and daily practice.

Two things helped me here:

  1. learning the methods of outstanding preschool teachers – if they can teach preschoolers to de-escalate then they can certainly teach us!
  2. reading the secular writings of spiritual masters

2016-03-12 10.34.52Opening To Experience – the most valuable experiences shared with my family serve no purpose, other than sharing an experience with my family.

Often, my shared experiences are activities that I would not choose for myself. Recent examples, collecting sea shells, swim races, downhill skiing and art shopping.

2016-03-12 10.31.31Most of the leadership we were shown as children was about saying “no.”

Constantly being told what not to do.

Consider becoming the embodiment of what to do.

Is it any wonder many of us rebelled and left as soon as we could?!

Is it any wonder that many of us continue to hold resentments about events, and people, that haven’t existed for 20, 30 or 40 years?

To break this cycle, I say “yes” as much as possible. Yes to beachcombing. Yes to downhill skiing. Yes to painting. Yes to card games.

Stay open to experience.

Stay open to love.

2016-03-10 08.42.33

Buffett and Munger For Familes – My Wife’s Cats

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Two Cool CatsWhat can a family learn from one of the most successful investment partnerships of my lifetime?

Last month, I read Tren Griffin’s book on Munger and re-read Warren Buffett’s Owner’s Manual for Berkshire Hathaway.

I read them NOT to figure out how to make money. I read them for ideas to make myself more useful to my family and make less mistakes in my decision making.

A successful partnership is characterized by:

  • Shared responsibility and shared benefits
  • Trust and open communication
  • Confidentiality, only when necessary, rather than secrecy

The role of the managing partners:

  • Allocate capital
  • Structure incentives
  • Seek to embody shared values
  • Communicate via stories
  • Resist the urge to seek an edge

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Financial Strategy, for capital allocation

This is important. Even financially-sophisticated families get caught up in the noise that constantly surrounds us.

Keep It Simple

  1. Focus on sustainable cash flow divided by capital employed
  2. A fundamental reference point is the 30-year rate on US government securities
  3. Treat deferred tax as a valuable, unsecured, non-recourse loan from the government

My recent article on the Boulder real estate market used the above.

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Understand the value of deferred taxation

If you sold everything you owned (right now) then how much tax would you have to pay?

Many would be proud of a low number. I know that it would make me feel safe.

Buffett and Munger would argue that you want this number as high as possible.

In my family’s case, we would have to pay 6% of family assets, on a portfolio with an average investment age of less than five years.

Historically, we’ve earned ~15% per annum on family capital. I don’t expect that to continue, so let’s assume the family earns 7.5% going forward.

What’s the value of NOT selling and letting the 6% deferred tax asset continue to compound?

7.5% of 6.0% is an extra 0.45% per annum.

Let’s make that number real.

Express it in dollars and compare to your family budget.

  • In our family, it’s equivalent to our federal income tax bill
  • In a friend’s family, it’s equivalent to what they pay for professional advice
  • In another family, it is more than they save each year

If your advisers churn your assets then they are costing you much more than their fees.

View percentages in dollar equivalents.

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Berkshire has bought sub-par business in the past. However, so long as the businesses have decent management, good labor relations and generate a little cash… they stick with them.

It’s like my wife’s cats.

  • When she goes out of town, they pee on our bedding and furniture.
  • Most weeks, they barf a few times around the house.
  • However, the kids love them and are aware of their faults.

By sticking with the cats, despite their faults, I demonstrate loyalty to the entire family.

That said, I’ve made the point…

We’re not replacing the cats.

 

 

 

 

Teaching Up The Tree

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cottonwoodLast spring, a friend asked for my advice.

He felt his elders were making mistakes and wanted to get through to them.

I drew a blank on his question and have been considering it for some time!

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2015-10-05 16.05.12I saw two components…

  1. a desire to help others
  2. an opinion that someone else is wrong

For the first component, I asked myself, “What is the most powerful form of teaching that I can bring to my family?”

If I’m looking to maximize my impact then nothing beats sharing stories about how I repeated one of my family’s most common mistakes.

So… I pay attention to what needs fixing in the elders, notice when it needs fixing in myself and share a funny story about my error with my kids.

My kids love hearing about my mistakes.

Adults hearing about their own mistakes?

Less so.

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IMG_4860The second component of my friend’s desire to teach…

I asked myself, “Am I sure?”

  1. Am I sure that my way is correct?
  2. Are there circumstances that would make my way incorrect?

My buddy and I were discussing long-term financial security. At the time, we were 100% certain that “our way” was the right way. I agreed that his elders were mismanaging their affairs.

As fate would have it, a few months later I heard a story about a pensioner.

An elderly woman had most of her life savings sitting in a local credit union (earning 0.1% per annum). Instead of telling her that she had to change, her family initiated a discussion to understand why that decision made sense to their mother.

It turns out the lady had thought through her rationale in detail. Her strategy recognized a personal lack of knowledge, a lack of trust in financial advisors, fear of loss and zero personal upside from positive investment returns.

Sometimes it is my lack of understanding that needs to change.

 

Family Financial Review

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2015-09-10 11.53.28August/September is the time of year when I do my life review. I’ll be writing about the various components over the next few months.

2015-09-04 19.00.49Fear Impairs Judgement – you’ve certainly felt financial fear in the last three weeks. However, the lesson runs deeper than short-term volatility.

The financial media tempts me to:

  • frequently tweak strategy
  • aim for the perfect asset allocation
  • act impulsively to avoid future losses
  • seek superior returns

Strategically, I want to avoid all of the above.

Tactically, I want to manage family expenditure and execute a reasonable long-term financial strategy to the best of my ability.

Being good enough is good enough.

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Sell Illiquid Assets Into Late Bull Markets – in 2014, I decided to sell land, art and jewelry.

Our illiquid assets cost money to hold and I realized that the cash would be better spent on childcare and pre-K education.

Despite selling for less than expected, the net result has cut the family’s core cost of living by 4% and enabled my wife (and me) to work less.

The question to ask yourself is not “is this my best price?”

The question to ask yourself is “are we in a late bull market?” If the answer is “yes” then it’s a good time to sell illiquid assets.

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2015-09-06 17.06.43-1Asset Allocation is often a distraction from what matters – with good wealth habits, you can ignore the small stuff.

Here’s a post from December 2010 on asset allocation. Five years along, I’m making progress at following my own advice.

This post from April 2012 (about my future asset allocation) reminds me of the folly of forecasting.

For the benefit of my future self, here’s a snapshot from 2015.

  • 30% – investment real estate
  • 25% – low-cost, diversified equity funds
  • 25% – fixed income in home currency
  • 15% – family home
  • 5% – cash and other

There are historical and family-specific reasons for the above. Not a recommendation to your family.

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2015-09-06 20.04.16Time and Health – Am I acting in harmony with my mortality? with my values?

If you find that a self-serving bias isn’t generating satisfaction then consider shifting your focus towards taking better care of your health.

The shift towards health will surface conflicts between your values and how you allocate your time.

No step is too small with regard to positive self change.

 

Alpha Child

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If you have a high-energy youngster living under your roof then this might prove helpful.

The first thing I remind myself is there’s nothing, and no one, to fix. My kids are happy and the feedback from the outside world is positive.

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I ask myself, “With this child, what’s my role?”

My role is to avoid becoming the problem.

Which implies…

  • taking care of my sleep, my body, my mind and my habits
  • ensuring that I get enough silent time (alone and in nature)
  • steering away from the urge for revenge, aggression and anger

Ideas!

All Day Engagement – a bored alpha child makes everyone miserable, including herself. While some kids can putter and amuse themselves (see below), our oldest does best with a structured day with unstructured breaks.

Ritual & Routine – from birth, my wife has done an excellent job of conditioning the kids to relax when their heads are wrapped in a soft cotton blanket. It works so well that our oldest will resist when she doesn’t want to relax. Ritual and routine are soothing to an anxious child.

Parent Like Dora – if you’ve watched Dora the Explorer then you’ll know that each show features three steps.

To give my kids something to latch onto, I’m always explaining the next three steps…

  • Dinner, Bike, Shower
  • Bath, Pajamas, Story
  • Socks, Shoes, Car

2015-08-23 18.51.51Spread The Energy – I use high chairs, assigned seating, cold drinks and air conditioning to reduce stress when we’re packed together.

  • For drives, my Sienna is set up with staggered seating so the kids can’t whack each other. Throwing things in the car is highly frowned upon!
  • As they develop, we find that different kids push our buttons. To dial down the house, I’ll take a little “disrupter” on a trip. The trips last anywhere from an an afternoon to a week. Sometimes I take more than one kid.

2015-08-21 09.53.08Do you know your parenting preference?

Mine is a shared activity with one person – I sign up for that a lot.

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It’s proven much easier to change my attitude, habits and approach than the core personality traits of my children.

Be Skillful.

Wealth Habits: Are we there yet?

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2015-07-09 11.30.50A question I ask athletes is, “Why did you start?”

When sitting down with a family, I change the question slightly, “What is living well?”

Write down detailed answers.

Answering these questions honestly will surface your values and help you make better choices.

The answers will also help you understand when you’ve achieved victory, and you might discover something rather strange about winning.

You feel just the same.

Because you feel the same, you’ll be tempted to change your strategy. You will forget why you started and lose sight of what it takes to live well. You’ll strive for more.

The exact nature of your “more” will be influenced by your peers. Unsure? They will be happy to tell you. Just ask a room full of buddies… “What’s your proudest accomplishment?”

Look inside and see if you’re tempted to strive towards their goals.

With my academic, financial and athletic friends – I can feel the temptation to strive.

Striving towards another person’s answers might not fulfill you, especially as only a minority bother to consider the “why” behind their daily choices.

You may find that it takes a surprising amount of faith to stay the course. My list is exercise, write, read, love, help others and sleep.

It’s important to remember your answers. They are an effective antidote against the temptation to strive. In my case, striving is a result of desire: to buy assets, to make money, to compete against others, to go shopping and other variations of more more more.

  • In a family
  • In a marriage
  • In a company
  • In your life

How will you recognize success?

It might feel different than you expect.

 

When To Review Strategy

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dad_axI’ll start with my answer… now is not the time to change strategy because I know…

  • The more often I change, the greater my opportunity for error and increased costs
  • The more changes I make, the worse I’ll do

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Q2-2015 marked the completion of the five-year plan that I put together at the end of 2008.

When to consider change?

A major life event is a good time to consider change.

  • In 2008, I was faced with unemployment.
  • In 2000, it was a divorce.
  • I’ve seen friends face criminal charges, bankruptcies, health emergencies and deaths.

A crisis can be a sign that, absent change, things are likely to deteriorate. It can also provide a nudge to endure the discomfort of change.

In my case, a high-spending rate combined with unemployment to tip me off that I was heading towards a major problem.

The plan required us to move (twice), establish new careers, achieve a dramatic reduction in spending and change the allocation of 95% of our balance sheet.

I expected the changes to be costly and forecast our balance sheet to decline by 20%. I was wrong. In reality, the balance sheet increased by 2% per annum.

Why?

  • I’m good at cost control – we made changes early, and severely.
  • We maintained exposure to favorable events – things like promotions, bonuses, babies, cheap mortgages, new friends, equity options.
  • Despite my fears, the world tends to improve.

I was also wrong about the price that we would achieve for the assets we sold. On average, we sold 10% under my estimate of “fair value.”

The Endowment Effect shows that we overvalue what we own. It’s valuable knowledge to be reminded that I’m prone to the standard forms of human misjudgment.

These two lessons are important to remember:

  • Things are likely to turn out better than I expect
  • I overvalue what I possess (jobs, assets, habits, the status quo)

I paid close attention to my “good days” since 2008. They were nothing like I expected and have influenced my thinking in how best to spend the next 1,000 days.

A Valuable Legacy

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bike_dadWhen I think of the word legacy, I might see tangible assets being left to my children, family and community. This type of thinking flows from my background in finance, where success is measured in dollar bills.

As a father, I’ve come to see that many of my successes are hidden.

  • The conflict not engaged in
  • The harsh word not spoken
  • The anger not acted upon

Might the absence of certain experiences be a valuable legacy to leave my children?

  • The absent father not indulged
  • The distant mother not reinforced
  • The angry parent not encouraged
  • Keeping myself from becoming a casualty in my later years

In working on the above, I might make my kids aware of my faults, my failings and the techniques that helped me manage them.

A different, but valuable, inheritance.

Effective Wealth – Legal and Strategic Considerations

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alvinIn my first piece on effective wealth, I laid out…

  • Individual wealth => 5 to 10 years cost of living
  • Generational wealth => 10 to 25 years cost of living
  • Multi-generational wealth => 25 to 40 years cost of living
  • Surplus (excess?) wealth => beyond 40 years cost of living

We hold our individual wealth in Living Trusts – these have the benefit of being fully revocable (assets in and out easily) and transparent to the IRS (easy for taxes and administration).

TIP – five years cost of living in a debt-free balance sheet will change your life and make you far less susceptible to corruption and influence. Once you hit ten years cost of living (in a debt free balance sheet) then you should consider cutting expenses and working part time. At a minimum, 5-10 years worth of wealth should trigger a sabbatical to consider personal wellness and how you allocate time.

Generational wealth is held in an irrevocable Grantor Trust that benefits my spouse and kids. I can’t get the assets back nor can any creditor or petitioner. In my lifetime, I retain the obligation to pay taxes on the trust as well as the ability to swap assets in/out for fair consideration. Admin is about the same as managing a partnership/LLC with similar assets/earnings.

TIP – once you are nearing 20 years cost of living in a debt-free balance sheet you are close to the breakout point where you can stop working, forever. Now is the time to shift towards personal wellness!

Multi-generational wealth – this is small part of my family balance sheet, because I followed my advice at each of the above segments. We use a Private Trust Company (in a state without income tax) that oversees a trust that benefits my descendants. We also use 529 (college) accounts.

TIP – the first time you realize that you might be making money for your adult children STOP and undertake a life review that focuses on how you allocate time and personal wellness.

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What does all this cost? Charging market rates for my work, I oversee the structure for less than $5,000 per annum. Living Trusts/Will were $5,000 to set up. Grantor Trust was $5,000. Private Trust Company and Family Trust was $10,000. These are Boulder, not New York, rates.

How does this give you peace of mind? My personal assets are the smallest of any adult in my family tree. By value, I own less than 1% of the above structure. I am free to give my family the gift of service.

I’ve said what needs to be said.

I’ve done what needs to be done.

I’m free to focus on loving those that love me.

 

The legal and tax consequences of an error in your family structure can be severe. Take expert, local advice. Nothing on this site should ever be considered professional advice.

Effective Wealth – Due Diligence Results

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tulipsThis series started with a definition of effective wealth and a due diligence exercise for your family.

I’ll share the best tips that I received from my due diligence work:

A general liability umbrella policy can be an effective way to insure against ruin – in my life, hosting events (where athletes might die) was the source of my greatest liability. Due to my other insurance coverages, $5,000 per annum bought me $5,000,000 of coverage.

Have an expert read your insurance contract to ensure you’re covered for your key risks. I’ve reviewed draft policy documents that specifically ruled out the only reason I was buying the policy!

Paying $5,000 per annum got me thinking that there might be a better way to structure my life. There is a better way and I’ll share my family legal structure in a future post.

Hosting athletes is a low-margin business and my need for multiple insurance policies greatly reduced the profitability of the events. So I handed the events off and removed myself from their promotion and management.

In speaking with successful families, three things stood out.

#1 – the advice to share information widely and control the structure narrowly. As much as possible the family is involved and consulted on family matters. However, not more than two individuals from each generation are involved in governance. Write out the process for a family member to become a fiduciary, or trustee.

#2 – each generation must decide their own values. It’s impossible for elders of the past to influence third and fourth generation family members. The best tip here is a reminder that no matter what you do, what you decide, what you structure… there will be aspects of life that you find disappointing – in yourself, in your spouse and in your kids.

#3 – young family members should be given the opportunity to learn from mistakes early in life. No family member should be given the opportunity to bring down the entire family and individuals should experience the impact of their poor decisions.