Power Up Wealth podcast – The Paradox of Wealth– Episode 61 transcript:
Sharla Jessop 0:00
We often think of family wealth as something that has been passed down from generation to generation. I’m Sharla Jessop, President of Smedley Financial Services. And today, my guest and wealth management colleague, Mikal Aune, will explain why that might not be the case.
Welcome to the SFS Power Up Wealth podcast, where we provide impactful insight and expert opinions on timeless financial principles and timely investment topics, preparing you to make smarter decisions with your money.
Mikal, helping families define and hold on to wealth has many layers and complexities. Luckily, it’s something that you’re passionate about. Can you tell us about the path of wealth?
Mikal Aune 1:01
Yeah, normally we think about the path of wealth as either a ladder or stair stepping up. And you can see this in normal life where you’re like, well, that person is doing better because their parents were doing good could help them., Give them a leg up on that ladder of life. And so that’s what we kind of picture either ladder or a straight path where there’s steps in it, and people are moving forward in that path.
Sharla Jessop 1:22
But what’s different? Why isn’t it a path?
Mikal Aune 1:25
Well, think about it this way, like, here’s, here’s the different levels, and you can kind of think about it. And we’ll talk through some of the nuances and why maybe a path isn’t the best representation. Because the first level is dependence in that you can think about this, as I’m starting out in life, right? When you’re young, you’re dependent on your parents, you don’t make any money. And so you really need them to help you get ahead in life, how even just for basic things like food, and clothing and shelter, you’re really dependent. Then you move into a survival mode. So this is like, I’m starting out in life, I get my first job, I get my first car. And especially when you become independent, and you’re out on your own, and you have your first house or apartment, and you’re like, I’m just working in trying to keep my head above water, I’m just barely surviving. You start to get a little bit of stability, when you’re like, okay, I’m making more than I’m spending. And I can save just a little bit and I can budget and you know, when you first started budgeting, I don’t know if you felt this, but you’re like, hey, this month, we can save 50 bucks.
Sharla Jessop 2:20
It was a great feeling to know that you could get an ice cream cone.
Mikal Aune 2:23
Exactly, I can go to the store and actually spend not like penny pinch on everything you know. So that’s getting a little more of that stability. You keep moving down that path, and you start being able to save a little more, and maybe you’re in your career, and you’re starting to save for retirement, you starting to pay off some debt. So you’re getting a little more security, as you move down the road. The more debt you pay off, the more secure you are, and you start saving more and more for the future. And you’re like, okay, I feel like I’m in a good place and I start becoming more independent, where it’s like, alright, I don’t, I’m not relying on anybody else. I’m not relying on mom and dad, I can take care of myself, I have enough money for my needs, you know, and we can take care of our family, we can take care of the things that are happening. So we’re becoming a little more independent. You start to move even further, where you’re like, okay, we have some extra money where we can travel and have some of that freedom, that money allows where you can do the things and go on trips and enjoy life and what’s happening. The final step beyond freedom is abundance. And abundance is I have more than enough. I know that what I have is going to be more than enough for me, and I can give to others and I can help others, be it my family or others that are around me. So those are kind of the steps that we see in the normal wealth path. What is the paradox of wealth is we usually think that the rich stay rich, and the poor stay poor, but there’s something entirely different that is happening.
Sharla Jessop 3:49
Why is that? What’s what’s happening? What could be different? I mean, we’ve heard it, the rich get richer, and the poor get poor. I mean, I’ve heard that for generations. Now tell us why that might be different.
Mikal Aune 3:58
Anecdotally we see it, right, we see different people with that get a leg up, or we see people that are in poverty that stay in poverty, and that happens, where people just can’t break the cycle of poverty. And you see other people on the far end that you’re like, well, they live in the Hamptons. And so, you know, they come from money, and so they just know how to make money. But there’s a proverb that is called shirt sleeves to shirt sleeves in three generations. And this isn’t just unique to United States. But what it says is the first generation rolls up their sleeve shirt sleeves and they go to work and they build wealth, the second generation, 80% of them squander that wealth. By the third generation 90% have squandered the wealth and there’s only 10% left that have wealth after three generations.
Sharla Jessop 4:42
Must be incredibly sad for the person who worked so hard to create that.
Mikal Aune 4:46
Oh, incredibly sad. It’s interesting because in Ireland is called clogs to clogs in three generations. In China it’s called rice paddy to rice paddy in three generations. So this is not just in the United States. This is worldwide. And I think it just goes to the deep levels of human behavior. And it can go to expectations, it can go to communication, there’s so many things that could lead to the disintegration of wealth. But that’s what the paradox of wealth is, is I have worked so hard and long to build up this wealth, and it’s going to be gone in a generation or two.
Sharla Jessop 5:20
You had mentioned that a lot of people believe that the wealth is the wealthy, you know, they’ve got it made.
Mikal Aune 5:25
Yeah.
Sharla Jessop 5:25
And you’re saying that might not be the truth that that could change. But what about the people who are just starting out, they’re rolling up their sleeves, and they’re the ones who are going to create that wealth?
Mikal Aune 5:35
You know, it’s interesting, because research would show that, that the vast majority of affluent clients are new money and not old money. So approximately 80% of individuals have come to their wealth during their lifetime, not having been born and raised with wealth. So if you’re that first generation feeling like you’re the one rolling up your shirt sleeves, there’s a lot of positive and opportunity out there for you to be like, I can do this, America is a land of opportunity, there is a lot of abundance, and we can grow things in amazing ways. If you’re the last generation, or if you’re the one that has built the wealth, it’s a little more stark and scary to think that your hard earned nest egg is going to be blown up by your kids or your grandkids.
Sharla Jessop 6:18
I can understand that. And you know wealth means so many different things. You know, we’re not putting a number on this. That’s something I’ve noticed in your discussion, you’re not really putting a number on this, because wealth means something different to every family.
Mikal Aune 6:29
One irony is that nobody feels wealthy. Everybody along the path sees their neighbor, and they’re like, I’m not wealthy. Well, that guy next to me is wealthy. And I’ve heard that same discussion from somebody that has $100,000 and somebody that has $10 million. Well, I’m not wealthy, that person next to me has a lot more. So that’s part of why we call that last step abundance and abundance is I have enough. And so I have seen people that don’t have very much money, that they have abundance, they have enough. And I’ve seen people on the far end that don’t have abundance, and it’s going to be gone.
Sharla Jessop 6:30
It’s your perspective of money. It’s the way you use moneyt’s the way you use wealth to improve your situation. And those of your family, I would say.
Mikal Aune 7:09
Yeah, and I think that’s a lot of it is when you have money, you need to look at it as can it do good. That’s the the final generation or I shouldn’t call them the final generation, because hopefully you are part of the 10% that can make it last more than three generations, right. And there’s a lot of things that you can do. And there’s some fundament fundamental keys to it, that we won’t get into all of it here. But some of the keys are, you need to have good communication in the family, because 60% of wealth is destroyed because of poor communication in the family. So it’s not because of investments, decisions, and everything else. I mean, that can be a part of it. But the biggest reason is lack of communication. So keys are communication, education, and a change in mindset. But that’s just the tip of the iceberg. There’s so much more that we can dive into. And we will dive into in the future.
Sharla Jessop 7:59
I can see how that can be. Communication is everything. It’s easy when you start, you’re the one building the wealth, it’s just your children. Now you have in-laws, and you go out a few generations, and you have difficulty controlling the thought process. We all know when our kids flew fly the nest, we have difficulty in maintaining our perspective of wealth and in transferring those values, making sure that they leave having the same values.
Mikal Aune 8:26
Right.
Sharla Jessop 8:26
To be successful.
Mikal Aune 8:27
Right. So it’s really difficult. And like you said, as you expand the generations and add in in laws and grandchildren and great grandchildren, it becomes unsustainable in some situations, especially if there’s no communication amongst the generations. So there are keys that you really need to do to avoid the paradox of wealth. Because again, if you don’t do anything, money is probably going to be gone, or 80% of wealth is gone within two generations and 90% within three. So as we look at this, really, we should look at this as a circle of wealth, and not as a ladder or as as stages that you walk through down the path. Because if you don’t do anything to help your family, the next generation, from your abundance, they’re going to go back into dependents, and they’re going to be dependent on others to help them and they’re going to have to roll their shirtsleeves back up again, to go back to work to build wealth.
Sharla Jessop 9:23
Have to teach them the value of managing wealth and hard work.
Mikal Aune 9:28
Yeah.
Sharla Jessop 9:28
That’s for accumulation. So what are families doing that have success in keeping wealth for generations? What are they doing?
Mikal Aune 9:35
There seven different steps that we focus on to help families learn and grow so that they can maintain the wealth beyond three generations?
Sharla Jessop 9:44
What are families doing that have success in keeping wealth for generations?
Mikal Aune 9:48
Well, it’s really big and in depth and there’s seven steps. The first one is that you really have to change your mentality. So wealth is not just money or just financial capital because if you just focus on money is money. People use it for all the wrong purposes, right. A new car is purchased within 72 hours of receiving inheritance. Is that what you want your money to go to, if you believe it to your kids or your to your grandkids. If there’s no helm on the ship, right, the ship is gonna go wherever it wants, you’re not going to go in the right direction. So the first step is to redefine wealth to not just mean financial capital, but also mean human and intellectual capital. So human capital is just your physical and emotional well being. Intellectual capital is your knowledge, skills and experience. So if you use money, it should be used to improve your human and intellectual capital. So that’s the first step is just redefining and changing that mindset.
Sharla Jessop 10:45
And can we do that by just talking with our children? Or how do we implement that and change that value, or carry that value to the next generation?
Mikal Aune 10:53
Yeah, like you said, a lot of it’s communication, right? If you can just start there, some families do not like to talk about wealth at all, they’re just kind of like, I don’t want them to know what I have, because I think they’re just gonna feel entitled. And really, it’s more about being open and honest and be like, we have this money so that we can take care of ourselves. And we’re independent, when we pass or sometime, we hope to give some to you, there may or may not be money left over. But we hope to be able to provide some to us so that you can have a leg up and you can move ahead. But then you need to also have a seventh generation mentality of I have received this abundance, and I need to pass it on to the next generation. So the next generation has more wealth than we do. But again, wealth is defined as human and intellectual capital.
Sharla Jessop 11:37
I’ve actually seen this in action with clients who have received inheritance, maybe a stock or something from a grandparent, or a great grandparent, and the stock has continued to be held and used specifically for education. And that’s been passed down from generation and has actually been used for education for families so that these young people can come out of college or university without a debt and get started on the right foot. And I think that they’ve they’ve cemented that idea in that family and really impressed with how that’s going to continue from generation to generation and the importance of education.
Mikal Aune 12:14
And I would say that a lot because some people are on the far side, like I don’t want to give any money to my kids, because I’m afraid it’s just going to enable them. And I’m like, No, I’ve seen it on the good side, where it’s used as a tool to say, hey, this is a way to help you improve your human and intellectual capital, we want to help you get ahead, and you have an obligation to help the future generations get ahead. And so you can start saving, and so they start to receive some education, right, a lot of the kids as you’re like, hey, we were saving some money into here, we want you to put money in there, any money you put into this pot of money for your future we’ll match. So it helps to give them some training as they start to move along the path, right. And one question we get from people all the time is how young is too young to start teaching kids? Well, I would say it’s never too young, you’re going to change what the topic is based on their age, right? You’re not going to teach a three year old about stocks and bonds. It doesn’t work very well. But the education needs to start as young as you can and start with simple things, regardless of the wealth that you have. And I would say that it’s much more about communication, because I’ve seen the other side where people like, okay, I don’t want to communicate about it, because I don’t want them to be entitled, but then all of a sudden, the parents pass away, and the kids inherit a huge sum of money, and they don’t know how to handle it. So we want people to teach their kids to be independent. So whether they receive money or not, that they’re fine that if they don’t receive any money, they’ve been able to be independent enough on their own, that they can survive. And if they do receive money, that they know how to handle it, and not just destroy it.
Sharla Jessop 13:44
That seems to be like having open, honest communication about what your wealth is not giving them the money or entitling them to the money but more sharing your ideas about how the money should be used, or the importance and purpose of the money.
Mikal Aune 13:58
The importance and the purpose. Like this is why we have it. Money is a tool money is not the end game.
Sharla Jessop 14:04
Mikal, I look forward to hearing more. I know you’ve just scratched the surface of this.
Mikal Aune 14:08
Just barely.
Sharla Jessop 14:09
Complex topic, but I look forward to hearing more.
Mikal Aune 14:12
I look forward to sharing more about this as something that I’m passionate about. And I love seeing it when when the family is able to pass on wealth and future generations are as successful or even more successful than the first.
Sharla Jessop 14:24
Mikal, thank you for joining us today.
Shane Thomas 14:30
Thank you for joining the Power Up Wealth podcast. Smedley Financial is located at 102 S 200 E Ste 100 in Salt Lake City, UT 84111. Call us today at 800-748-4788. You can also find us on the web at Smedleyfinancial.com, Facebook, Instagram, Twitter, and LinkedIn. The views expressed are Smedley Financials and should not be construed directly or indirectly as an offer to buy or sell any securities or services mentioned herein. Investing is subject to risks, including loss of principal invested. Past performance is not a guarantee of future results. No strategy can assure a profit nor protect against loss. Please note that individual situations can vary. Therefore, the information should only be relied upon when coordinated with individual professional advice. Securities offered through Securities America. Inc., Member FlNRA/SIPC. Roger M. Smedley, Sharla J. Jessop, James R. Derrick, Shane P. Thomas, Mikal B. Aune, Jordan R. Hadfield, Registered Representatives. Investment Advisor Representatives of Smedley Financial Services, Inc.®. Advisory services offered through Smedley Financial Services, Inc.® Smedley Financial Services, Inc.®, and Securities America, Inc. are separate entities.
