How the Superwealthy Plan to Make Sure Their Kids Stay Superwealthy
Passing on a fortune isn’t as easy as it seems.
By Peter Robison Bloomberg Businessweek
The first clue that this is no ordinary crowd of sulky teenagers comes when the instructor asks those who’ve invested in the market to raise their hands. Most hands go up. As a financial planner explains the benefits of investing, one boy interrupts.
“What do you suggest investing in right now?” asks Liam Whitfield, 18, a senior at a private Seattle high school, with swooping bangs and a shaggy sweater. The speaker, from a local investment firm, suggests a standard mix of 60 percent stocks and 40 percent bonds. Whitfield looks disappointed. He already owns shares of Apple, Facebook, and Starbucks. “I was kind of looking for an actual stock tip,” he says.
It’s a Saturday morning in March, and Whitfield is sitting with two dozen teens in an antiseptic meeting room for a lesson on money management arranged by their well-to-do parents. The lecturers have broken the ice with a Saturday Night Live ad for a book of financial advice called Don’t Buy Stuff You Cannot Afford. (It’s one page long.)
They show photos of cars that go from humble to glamorous and ask the kids to pick one—but only after calculating how long it would take to afford by saving $2,000 a year. An instructor praises a girl who chooses a Volkswagen Jetta over a $90,000 Range Rover. “You followed all the rules—it’s exciting, guys, right?” says John Gage, a 6-foot-9-inch recent Stanford graduate who roams the front of the room.
Gage works for Cornerstone Advisors, a wealth management firm in Bellevue, Wash., that’s hosting the class for children of clients and prospects. During an exercise in monthly budgeting drawn from real-life salaries, someone notes how difficult it can be. “Especially if you’re a teacher,” one kid cracks.
This is the most gilded age since the Gilded Age, with 5 percent of American households controlling 63 percent of the country’s wealth. Decades of stagnant income growth for the middle class contrasts with family dynasties such as the Waltons of Wal-Mart, wealthier than the poorest 40 percent of households combined.
Some $59 trillion—the largest intergenerational transfer of wealth in U.S. history—will flow down from estates through 2061, according to Boston College’s Center on Wealth and Philanthropy.
None of that’s made the rich any less anxious, at least when it comes to keeping their money. The number of family offices for the ultrawealthy has doubled since 1998, branching into areas far beyond portfolio and tax planning.
The advisory firms reach deep into their clients’ family lives, aiming to prevent squabbles among heirs and head off early signs of wastrelism. Some teach classes like this one near Seattle or organize family retreats.
Others use board games and flashcards to drill sound money concepts into children as young as 5. One firm, Ascent Private Capital Management, employs an historian and two psychologists to help clients put their fortunes and family dynamics into perspective. “We didn’t just want to help clients manage wealth, we wanted to help clients manage the impact of wealth,” says Michael Cole, the firm’s president.
Not a real game. Inspired by Shirtsleeves to Shirtsleeves.
Like others in the business, he brings up an adage—shirtsleeves to shirtsleeves in three generations—and says, “It’s real.” Thought to be a variation on a saying from Lancashire, England, about families going from clogs to clogs, the idea resonates in many cultures. Japan’s version is rice bowl to rice bowl. In Italy, from stars to stall.
Or, as the striving executive Jack Donaghy put it on 30 Rock: “The first generation works their fingers to the bone making things; the next generation goes to college and innovates new ideas; the third generation snowboards and takes improv classes.”
Adviser Roy Williams says he was recently approached by a representative for wealthy Asian families in the Pacific Northwest, each with more than $200 million. “They said, ‘The kids are consuming our wealth, buying Lamborghinis and Bentleys, and we don’t know how to change the pattern,’ ” he recalls.
Williams is the co-author of the ur-text of the field: Preparing Heirs, a compact, green-jacketed 2003 book written with Vic Preisser that followed 3,250 families from 1975 to 1995. Their research found that 70 percent of inheritors failed in passing their fortunes on to the next generation. The book defined a failure as “involuntary loss of control of the assets.”
The overwhelming reason, they found, was either a breakdown in family communication or unprepared heirs. Just 3 percent of failures were attributed to such issues as taxes or legal challenges. While the book’s data are now decades old and largely precede the inheritance tax cuts that led to such critiques as Thomas Piketty’s Capital in the Twenty-First Century, the 70 percent failure rate is still commonly cited by advisers as a reason to engage their services.
“In our experience, there’s no amount of money that can’t be lost,” says Sheila Stinson, until recently director of family education at GenSpring Family Offices in Jupiter, Fla., a hamlet north of Palm Beach that’s been home to Michael Jordan, golfer Rory McIlroy, and Celine Dion. The firm, whose clients are worth at least $50 million each, created the Innovation & Learning Center in 2006 to lead workshops and teach classes.
One of its innovations is a board game called Shirtsleeves to Shirtsleeves that Stinson has played with clients and their children over cocktails or lunch, depending on their ages. Players get money in $1 million, $5 million, and $10 million denominations.
They navigate a Chutes & Ladders-like board through obstacles such as: “Your beach house in Malibu has become the place to be for your kids. Even though they’re in their mid-thirties and can’t show up for a family meeting, they never miss the afternoon set. Wipe out! LOSE $9 million.”
For younger kids, Stinson has used a game called Money Matters, which features flashcards showing pictures of material goods. She asks the children to tell her if the item is a “need” or a “want,” something they can do without. She recently showed a picture of a purse to four girls aged 9 to 11. One girl called it a want. Another said no, a Tory Burch handbag is essential.
“In our experience, there’s no amount of money that can’t be lost”
Ascent, a division of U.S. Bancorp, chose a youthful look for its offices, in Cincinnati, Denver, Minneapolis, San Francisco, and Seattle. The décor is all white, inspired by Apple stores and Virgin America aircraft cabins. In San Francisco, in a 21st-floor suite overlooking the bay, there’s a room where kids can relax while their parents talk to the staff. It has a couch, a white beanbag chair, and an Xbox.
Ascent’s craft has a lofty history. Family offices trace their lineage to 6th century royal stewards and, in the 19th century, advisers who managed art, collectibles, and homes for J.P. Morgan and other tycoons of the era. There are now some 3,000 such firms worldwide, at least half set up in the last 15 years, according to a 2013 Ernst & Young report.
Good help doesn’t come cheap. Ascent charges clients a minimum of $200,000 a year. Some don’t keep any money with the firm and only use its ancillary services, Cole says. The firm’s Center for Wealth Impact offers a director of family history and two “wealth dynamics” coaches trained in organizational psychology. The idea is to focus on the breakdowns in trust, communication, and education spotlighted in Williams and Preisser’s book.
Demons lurk for the wealthy, to the point that some researchers suggest that affluence creates a greater risk of depression, anxiety, and substance abuse. In one 1999 study of wealthy high school girls in a suburb in the Northeast, 1 in 5 reported clinically significant levels of depression, three times higher than the national average.
Wealthy boys showed more anxiety than average in a study by Suniya Luthar, a professor emerita at Columbia. Later research across the country has produced similar results. Rich kids have to navigate a complicated psychological stew, including guilt over inherited wealth and stress from the pressures of living up to a family legacy.
Ascent tries to head off problems by getting families to think about their mission and purpose, much as corporations do. Amy Zehnder, a senior wealth dynamics coach, says she asked one family’s three boys, ages 15, 19, and 21, to create a visual representation of the clan’s core values.
The boys returned with a drawing of a custom Jeep, each part corresponding to a different value. The antenna represented communication; the snowboard rack was work-life balance; the windshield, integrity; the engine, loyalty; the steering wheel, drive; the headlights, respect; the massive tires, ambition; and the lift kit, growth. Their dad was touched, Zehnder recalls. “As a family they made a decision that they were going to go and build this Jeep,” she says.
Cornerstone, the advisory firm in Bellevue, manages more than $3 billion. It taught its first class to three sets of siblings in 2006, after a client asked for financial instruction for her sons. Managing Director Sue Peterson went to a Barnes & Noble and found books for toddlers about quarters and dimes, some Suze Orman financial titles, and little else.
Peterson developed her own curriculum, eventually expanding it to a half-day of lessons on budgeting, credit cards, and investments. Parents spend the time in their own session, comparing notes. “How do you teach your kids about how fortunate they are?” Peterson says. “If you drive past Bellevue High, most of the cars pulling into the parking lot are nicer than mine.”
Liam Whitfield’s mother, Diane, heard about the class through a friend of her husband, Bill, a real estate investor. The family lives in Broadmoor, a gated enclave with a private golf course where the median home lists for $2.1 million.
The Whitfields have three sons: Liam, Stanley, 16, and Trammell, 8. They’d been thinking it was time for their older sons to start taking more ownership of their finances, Diane says. Liam might pay for all his friends to see a movie, while Stanley might spend his lunch money on video games.
“Just as much work goes into these kids that have money coming their way as kids that don’t,” she says. “The psychological component is huge: How do they mix with their friends? Do they only hang out with kids who have money?” Most of all, she’s tried to explain that with wealth comes responsibility.
Whitfield was drawn to a famous tale of a man who brought his salary home in dollar bills to show his children where the money went. “You know when your kids say, ‘Why don’t we have a pool?’ ” she says. “It’s because, well, we’re choosing to take you to Europe instead.”
After warning them that, yes, it might be a few hours of total boredom, she brought Liam and Stanley to the Cornerstone course. For Liam, who entered college this fall, the class was part of preparing to live on his own; his parents later asked him to write a budget for the summer. He’s sometimes had awkward situations with friends.
“I don’t carry cash on me, because I don’t like it when someone says, ‘Oh, Liam, you can afford it, so you should pay for it,’ ” he says.
As his persistent questioning in class showed, Liam is ready for more. He says he hopes to start joining in on family foundation meetings soon. An Eagle Scout who also swam, played football, and went to the district championships in shot put, he wants to become an orthopedic surgeon.
He plans to take premed courses at Westmont College in Santa Barbara, Calif., the school where his parents met. He’s found that too many kids of his generation, used to instant gratification from social media, find it easy to coast.
“We have everything at our fingertips,” he says. “It’s absurd, actually.”