Wealth Exposed

CHAPTER 1

Welcome! You Are at the Next Level

Who doesn’t love an inspiring “rags-to-riches” story? We’re fascinated when we learn about a Harvard dropout who fails in his first venture but goes on to build one of the most successful computer software companies ever. We’re enamored with the young man who sold Coke bottles to stay in school and ate charity meals before collaborating with another young man in his parents’ garage to create the world’s first personal computer. His creation ultimately built the world’s most valuable company in terms of market capitalization.

Why do we love these stories? Because many of us start off with nothing and aspire to make a success of our lives. They help us believe that anything is possible. But, some people find it’s hard to imagine rich and famous people ever struggling for money. While all success stories are not of the rags-to-riches variety, what is lost on those with that mindset is that the vast majority of successful people began their careers from the same hole in which we all start. It’s difficult for the average person to fully gauge, let alone appreciate, the time and money commitment that goes into building a successful business or career.

A REAL-WORLD SUCCESS STORY

I could blindly pick from the files of my high net worth clients and find story after story of how they began their climb in settings familiar to most people. One in particular, I’ll call John, is the founder of a very successful multinational company with a thousand employees. But John struggled for a long time before he made his first dollar of profit. Married right out of college, he and his wife started a family early, and they both worked at various jobs just to maintain a modest lifestyle while he pursued his entrepreneurial passion.

It was only after he had sunk every dime he had into his venture, paying his employees while denying himself a salary, that it began to generate the kind of profits that could support his modest lifestyle. Ten years later, he took his company public, and his paper net worth rocketed to $100 million. His family now enjoys a wealthy lifestyle. They live in a mansion on 10 acres in upper New York State, with horses, a small vineyard, and a staff of seven. As is typical of many of my wealthy clients, John remains the same decent and grounded person he was when he lived in a two-bedroom apartment 20 years ago.

His will probably never be the rags-to-riches story people will talk about, but John should be an example for anyone who finds himself on the path to success and riches. You see, John didn’t just suddenly wake up one day to find he was a multimillionaire (although that does happen—lottery winners, pro athletes, instant-celebrity performers, etc.—but that’s a different story). He did a lot of planning along the way to get it right.

As the son of very prudent parents who diligently saved their money for his college education, John believed in planning. He also believed in surrounding himself with competent advisors. Even before his business took off, he had devoted time and energy to develop a financial blueprint for his family. A lot would change in his financial life along the way, but he understood the value of staying engaged in planning so he could feel in control of his financial future.

In addition to financial planning, John sought the advice of legal professionals specializing in business. As his business grew, he surrounded himself with business experts who coached and mentored him. John continued to pursue educational opportunities to further his personal and business development (including a Dale Carnegie course at the age of 55). And he eventually formed a team of advisors who would coordinate all of the above with a long-term investment strategy. He accomplished all of this while he spent an inordinate amount of time working on his business. He also gave back to his community with generous amounts of his time and money.

The obvious point here is John’s road to success was not only paved with challenges, it was built with many pieces and a significant investment before he got to the next level. There was just one piece missing, and for someone in John’s position its absence had the potential to take almost everything he had worked for away from him. As he would later learn, the missing piece of the puzzle was a comprehensive personal risk management strategy.

Through all of the years of building his business and climbing the wealth ladder, John continued his relationship with his original property and casualty agent. In fact, he was same agent his father had used more than 30 years ago. John did update his homeowners insurance on a new house he bought; he even bought a million-dollar umbrella policy as his attorney advised. In all, John’s agent helped him to address most of his personal risks, but it was done incrementally through a hodgepodge of insurance policies.

As John’s wealth grew, so did his risk exposure. Nothing was done to assess the risks or determine the true extent of his exposure. John spent most of his time working on his business, which, as you might expect, was pretty well insured against business liabilities. So, as you also might expect, he had little time to consider the personal exposure he was amassing, or, if he did, he felt he had sufficient protection through his existing policies. It wasn’t that John wasn’t thorough in his planning, it’s just that he and his advisors did not understand the personal risk management needs of high net worth individuals.

A Riches-to-Rags Story?

Flash forward to September 2006, when John and his family moved into their new home, a beautiful, expansive colonial replete with a guesthouse and another two-story house to be used as quarters for his growing staff. This was before he took his company public. Still, through a sound investment plan, and the sale of a part of his business to a private equity firm, John’s net worth had grown to $30,000,000, half of which resided in his equity share of the company.

While John and his family were out of town, the housekeeper, Shauna, invited her 10-year-old niece to spend a few days with her. This was a clear violation of John’s rules. The staff quarters were big enough so the temporary addition of little girl would not impose on anyone. Shauna left her niece to play in the staff quarters while she went to the main house to clean. When she went back an hour later to check on her niece, she found her lying in a lifeless heap on the ground outside the quarters, her head bloodied. Looking up, Shauna saw the splintered wood that had been the railing of the second floor widow’s walk. She called 911, and the paramedics arrived 20 minutes later.

Shauna’s niece suffered severe injuries to her brain. She would be unable to lead a normal life, and she would require lifetime, round-the-clock nursing care. A jury awarded the girl’s family $25 million dollars—$5 million for pain and suffering and $20 million for medical care—far more than was covered by John’s $1.3 million personal liability coverage from his homeowners and umbrella liability policies. John was forced to liquidate his equity in the company to pay the judgment. He didn’t lose everything, but his life would change drastically.

Or a Cautionary Tall Tale?

Obviously, there is a lesson in this for everyone, but first I should tell you that the incident with Shauna and her niece never happened. However, I can tell you it’s not unlike the scenario I created for John when I met with him to discuss his personal risk management plan. I actually met John at a community event at about the time in his life described in the beginning of this story—before he became extremely wealthy from his IPO, and when he was considering purchasing the colonial. We were introduced through our wives who worked together on the community event. For that reason, we fell into a comfortable mode as we struck up a conversation.

He mentioned that he and his wife had fallen in love with a beautiful estate-like property upstate. He went on about his plans to build an equestrian center for his daughters, to house his friends in the guesthouse, to eventually build a vineyard, and, in time, to add a garage to house his antique motorcycle collection. I knew he wasn’t bragging. I could tell he was genuinely passionate about his plans and he needed an ear to express them.

I congratulated him on his plans, and mentioned that I was a personal risk management specialist. I then asked him to give me a ballpark figure of what he thought his overall risk exposure would be. That opened the door to a conversation about his understanding, or lack thereof, of homeowners insurance, liability coverage, and, generally, the amount of exposure people in his position have. I shared that I work with a number of high-net-worth individuals who seem to do everything right when they get to the next level, but that most overlook their greater exposure to risks. He asked me what I do differently for these clients that he hasn’t already done, so I told him.

I could see his brain working, and the newly formed sheen across his forehead told me he was growing uncomfortable with the conversation. Being the gentleman he is, he thanked me for my insight and then excused himself with a warm smile and a two-handed handshake. I thought that might be the last time I would see him. Two days later, my cell phone rang and an unknown number popped up. It was John, calling from his car phone to ask if I could visit with him and...