In a recent post on his Forbes.com blog, Steve Parrish of the Principal Financial Group mentioned a discussion with a financial advisor in which the advisor used the expression, “concentrate to create; diversify to protect.”

Steve had recently met with a successful friend (by the name of Ted in the post) who, when talking to his advisors, made it clear that he was not interested in financial planning.  He had been successful with his business and was not interested in alternative investment possibilities.  All he wanted to know was how to pass his wealth on – apparently in concentrated form.

Steve reflected on the conversation and responded, to himself:

I wish, at the time, I had the insight to say, “I agree Ted. Concentrating on real estate has created a financial empire for you. It’s just that as you look at risk and retirement, you should consider diversification to protect you and your family.”  Perhaps, stated this way, he’d see that it’s not an all or nothing proposition to generate wealth by focusing on what you do best; you still need to direct some of the fruits of your success to protection. Insurance, qualified plans, and savings plans don’t necessarily have to drain the corporate coffers. They can protect them.

I met Steve in person last week at the Annual Conference of the Exit Planning Institute in Cleveland.  We had previously met by telephone and had talked about my idea of The One Percent Solution.  It was great to meet him in person.

Steve went on in his post by offering a suggestion to Ted and to other business owners and their advisers:

I have a suggestion for accomplishing this task. Chris Mercer, a well-known business valuation expert and author, has a concept he calls the “One Percent Solution.” If you boil it down to its basics, this is his point. A managed investment typically has a management charge. It can range from a double to triple basis point charge, but it’s the cost of managing the asset. A closely held business interest is an equity interest that is typically fairly illiquid. Doesn’t it make sense to allocate some of the return from the business interest to manage this asset the same as you would manage an investment?  The “One Percent Solution” proposes allocating a percentage of the value for the business to provide the assets necessary to manage wealth. As a rough guide, that budget might be one percent of assets under management.

Steve went on to say that the idea of The One Percent Solution represents a “solid beginning toward wealth management” for illiquid wealth in closely held and family businesses.  At the very least, the concept of The One Percent Solution provides an excellent framework to begin discussions of the appropriate balance between concentration and diversification. I thank Steve for the mention of the idea.

Check out Steve Parrish and his interesting blog on Forbes.com.  You will enjoy his perspective.

If you want to continue to monitor the progress of my new book expanding on the original The One Percent Solution (complimentary download), sign up for email notifications of this blog’s postings.  You will see Managing Private Wealth: The One Percent Solution develop over the next two months.

What do you think of the phrase, “concentrate to create; diversify to protect”?  Comment below or call me (901-685-2120) or email me with your questions or thoughts.