MONEY, MEANING, AND FAMILY

A family that clearly cares about itself can build enduring wealth, but it takes dedication and effort.

One of the first questions we ask our clients is: “What is important about money to you?” They tend to answer in a superficial way at first, but when we keep revisiting the question, their answers reveal much about who they are and what they are looking for from life. They talk about the importance of financial security, the freedom to pursue electives in life, and their need to establish a legacy.

A 2008 article in Psychology Today pointed out that as humans, all of us are dependent on the social system for all our needs (from the most basic like food and housing all the way through intan- gibles like self-worth and personal power). Money is a tool that works the system. As the article points out, “The social system recognizes its power and value and responds to it. Money is thus … an all-purpose social tool.”

When you think about money from this perspective, you start to realize that your wealth isn’t a number. Whether you have $25 million or $425 million, the numbers matter less than what your wealth allows you to do in life. So ask yourself: Do you feel in control of the money—or does it control you? Does it give you greater freedom—or do you feel burdened by your wealth? Does money give you opportunities for family closeness—or does it cause friction or dysfunction? Has money become a preoccupa- tion that’s taken precedence over family matters, your health, your spirituality, or your community? Does it bring peace—or anxiety? Take a step back and find a broader perspective. What, really, is the function of wealth in your life? Is it making your life better? Are you using it as the useful, effective tool it’s meant to be?

Not that long ago we were chatting with a client about what changes she might like to make in life, and she surprised us with the comment, “You know, what I’d really like is to move away from Atherton.” She was a quiet lady who previously had not discussed that desire. We rolled up our sleeves and went to work. Two years later, she made the move to Carmel, where she loves her new surroundings and the beautiful ocean views. She takes daily strolls on the beach and loves watching the sea otters amongst the kelp. For years she was living very comfortably, but she just didn’t wish to rock the boat—even though she had yearned to move because of a variety of issues in her life. It is moments like these that are especially heartwarming and gratifying to us as advisors.

It’s good to share such perspectives with your advisors because you might very well find the way to move forward with your hopes and dreams. As advisors, we aim to gain a depth of understanding of the emotional aspects that govern so much of life. Your attitude toward money and the manner in which you would like to see it managed often are deeply rooted in those emotions.

PURSUING WHAT’S IMPORTANT

We were brought in by an M&A to sit down with an entrepreneur who was selling his business. He wondered if the sales price would be enough for him to retire. How much tax would the sale generate? How he would draw an income? For years, the only income he had known was from the business. He enjoyed his lifestyle and did not want it to change.

We explained how transitioning to retirement is a different mind-set. No longer would he log into the computer to read about building the next widget, the company sales from the previous day, the management reports, or the marketing projections. Now he would be logging into travel websites to plan the next vacation.

He needed to understand what money meant to him. As we discussed this with him, he was able to identify what he wanted from life during his retirement. Based on this, we could prepare a Wealth Management Analysis. It accounted for the projected income flows and taxes over the next four years from the business sale and then for the outflows from hobbies and travel. We were able to determine that he had a very high probability of achieving

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what was important to him if he sold the business for a particular price. With this information in hand, the sale proceeded.

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Perhaps you have been accustomed to the ultra-high net worth lifestyle since birth. Or maybe you have come upon that kind of wealth relatively recently, and you may remember well the days of pinching pennies. But whether you are new money or old, you likely will be cautious in managing your finances—because you are truly concerned about how much you could lose. As we discussed in the last chapter, protecting your wealth is wise and necessary— but it shouldn’t become a source of anxiety that interferes with your peace of mind. You should be able to feel confident that you have a sound strategy in place for the future, one that also allows you to meet your most important goals.

A recent study carried out by Withers’ international law firm examined a thousand individuals with high and ultra-high net worth and found that those who are most financially success- ful concentrate on what the study defined as “success tasks.” You might think “success” would be connected to successful invest- ments and increasing wealth, but these individuals define success differently as “finding new and better ways to do things,” “making things happen,” “learning new things,” “discovering new opportu- nities,” and “building strong relationships.” The study found that those who were the most clear about their values and passions have wealth that continues to grow.

Money, Meaning, and FaMily

MONEY AND FAMILY

And yet, how much is enough? That is another question you may be asking yourself. How much money does it take to secure a family’s welfare so that anything in excess should go to charity? Is there a point where family members become so wealthy that the money does them harm and they would be better off with less?

Separating what money means to you from the hopes and dreams of your family is impossible. The meaning of money is deeply imbedded in the meaning of family. Wealth can be a resource that strengthens the family—but it can also work against the family. The main concern of many parents with ultra-high net worths is that great wealth will squelch their children’s individual ambition. This lack of ambition is not only an undesirable person- ality defect, but it also imperils the family wealth.

Money doesn’t have to destine kids to a life without aspira- tion and motivation, though. Wise parents find ways to build in the incentives, knowledge, and experience necessary for ongoing success. Good stewards of great wealth think generationally. They involve the kids and grandkids progressively, step-by-step, in money and business management. A good education is part of this but so is thorough, practical training, all the while making sure the young people are steeped in the family’s values and prin- ciples. Families that successfully transfer wealth to the younger generation give the children plenty of opportunities to learn how to handle wealth before it actually becomes their responsibility.

These opportunities will vary from family to family. Some families test the children on how well they will deal with money by gifting each of them with, say, half a million dollars and directing

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them to do with it as they think best. That’s not a lot of money for an estate worth hundreds of millions, but it is enough for the children to show whether they can seize an opportunity. They will learn a path to success—or not. We all have seen that children who are raised the same way can turn out dramatically different. Some take a solid and responsible course in life, while others veer off onto dangerous detours. As parents, we can only do the best we can.

And yet the families we discussed earlier that focused on “success tasks” were also the most successful at stewarding family wealth through the generations. They recognized that a sense of entitlement contributes to wealth destruction, but a sense of purpose, clearly communicated to all members of the family, is essential to wealth creation. Rather than counting their money, the most successful ultra-high income families make their money count. Their ongoing actions and practices clearly and actively communicate their values to the next generation.

It’s not just about business. It’s not just about investing. It’s also about setting standards for quality of character—and being able to continue to make a difference in the world. Some ultra- high net worth families are deeply involved in charities, and that is how they spend their time rather than trying to pursue further financial gain. For families like these, their focus isn’t on building more wealth; the priority might instead be how to best preserve it, even if the growth is modest, so that the wealth can be an ongoing resource that allows them to do good in the world. Outside forces—the overall economy or investment mistakes, for

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example—can put that at risk, but the family itself could be the biggest danger to the family’s ultra-high net worth.

A study by the Family Office Exchange asked first-genera- tion wealth creators what they most feared could jeopardize their family’s wealth. The top three fears were bad investments, a bad economy, and politics (for example, an administration coming into office that might tax away their wealth). Only 7 percent of the families interviewed said the biggest risk was their own family’s functionality, communication, and trust. And yet the Withers’ study mentioned earlier found that the most common cause of loss of wealth is a breakdown of communication and trust between family members.

Many families struggle because expectations are not commu- nicated well. What is needed, and sometimes lacking, is a strong guiding hand. Your family needs a firm and clear policy that states what it stands for. What is its direction? What does your family, as a body, believe to be important? What does money mean to you as family?

The generation that first attained the status of ultra-high net worth will have a different emotional attitude toward money than will the generation that inherits that worth. The natural friction between parent and child will inevitably also be played out in the financial arena. The founders of the fortune expect the next generations to respect what it took to produce it. Their children might well feel such respect, but having been raised with money, they might not fully appreciate the hard work and savvy it took to provide so well for them. If they lack those traits, they cannot pass them on to their children, who may feel entitled and therefore are not empowered for success.

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22^{The first generation created the}wealth, but the later generations will

Most ultra-high net

worth families fail.

have the task of sustaining it. It takes a concerted effort to keep a family on track toward the original vision. About 80 percent of

In fact, most ultra-high net worth

the time, the wealth

families fail. About 80 percent of the time, the wealth does not endure does not endure for

for the third generation. Unless you the third generation.

take family matters seriously, the dreams will probably not last. Even if the money is handled competently and transitioned efficiently, if those who receive it do not appreciate what the family is all about, the

wealth eventually may very well evaporate.

HOW TO PREVENT “SHIRTSLEEVES TO SHIRTSLEEVES”

There is an old saying, “shirtsleeves to shirtsleeves in three genera- tions,” which means that the older generation started out doing manual labor, worked hard, and amassed wealth—and by the time their great-grandchildren are in charge, the family is back where they started, with the wealth all gone. Some version of this saying has long been known in many cultures around the world, attesting to the fact that it captures something essential about human nature. One generation rises from the fields or from the factories and finds success that was unprecedented in the family. The next generation lives well, but learns little and ultimately

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loses its grip on that wealth—and the third generation finds itself back where the family began. The old saying has proved itself true innumerable times.

Failure to properly train the younger generations isn’t the only cause of shirtsleeves-to-shirtsleeves outcomes. Another challenge ultra-high net worth families face is that portfolio growth is linear, but family growth is exponential with each new generation. So if the first generation consists of two family members living on $6 million per year from investments worth $200 million (in other words, living off of about 3 percent of their portfolio), and the family wishes to keep up with inflation (which we will assume runs 3 percent), their

Another challenge ultra- portfolio will need to earn 6 percent to keep up with

high net worth families

inflation while still providing

face is that portfolio the same level of lifestyle. That

growth is linear, but family sounds like a modest goal. But remember, as more genera-

growth is exponential with

tions come along, the family

each new generation. will have more and more people to support at that same lifestyle. By the fifth generation there will likely be at least thirty- two family members, and while the total amount of money being distributed annually will increase if the portfolio is keeping up with inflation, the income per family member will be decreasing, from $3 million during the first generation to $2.355 million by the fifth generation. By the tenth generation, when there could easily be a thousand or more family members, the 3 percent distribution would be down to $980,000 per family member.

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This means if you want comparable benefits for your family’s future generations, then, after taking into consideration inflation, taxes, and fees, portfolio distributions may very well need to be 1 percent or less! You can improve on this if inflation remains low, if you take on more risk and achieve higher returns, or if you pay less fees and taxes. However, controlling inflation is not possible—so instead, you can implement effective after-tax strategies. By doing so, fees and taxes might be lowered to 1.5 percent.

Do you know what your taxes and fees plus inflation cost you as a percentage of your portfolio annually? We’ve often seen new clients who were losing 2.5 percent or more annually in fees and taxes. In such a case, your portfolio would have to grow by 5.5 percent annually just to offset inflation (assume 3 percent), fees, and taxes. Compare this to a fee- and tax-efficient portfolio of 1.5 percent, which would keep up with inflation at 4.5 percent.

So if you wish to base your lifestyle on 1 to 3 percent income from your investments in hopes of allowing your wealth to match your family growth, then the inefficient path necessitates a return of 6.5 to 8.5 percent while the efficient path requires 5.5 to 7.5 percent. There is a measurable difference in the level of risk and volatility (losses) one might experience between the two, and no one we know wishes for more risk unnecessarily. Forewarned means forearmed. You can use this knowledge to work with your wealth advisors to safeguard your family’s future—so that you won’t end up being one of those shirtsleeves-to-shirtsleeves stories!

You’ll need to use soft skills—“people skills.” If you lack hard skills, your wealth managers should have the expertise you need, but you can’t hire someone to handle your family relationships for you!

Money, Meaning, and FaMily

Soft skills are harder to observe and quantify than hard skills. They have to do with how people relate to each other: communi- cating, listening, giving feedback, cooperating, solving problems, contributing ideas, and resolving conflict. Part of protecting your family’s wealth for future generations will require that you regularly practice many soft skills: setting an example; team- building; facilitating dialogue and managing conflict; delegating; coaching, mentoring, and motivating; encouraging innovation and independence; problem solving and decision making.

You always want to pass these skills along to the younger gen- erations. Young people learn people skills at school and with their friends, but the primary place where they’ll integrate these skills into their characters is in the home. And the most effective teacher is always your own example!

We all have our individual unique portfolios of people skills; some behaviors may be effective, while others cause problems. None of us are perfect! All families have their share of dysfunc- tion. This means we can expect that conflicts will arrive—and we should prepare for them.

To do this, you’ll need policies in place to resolve differences and handle difficult issues, before the conflicts occur. The intention of all these policies should always be to support the well-being of your family as the first and foremost priority. Your family can create committees with the power to resolve such matters—sort of a family board of directors. The committee would decide the course of action and determine whether a family member’s actions were irresponsible or detrimental. It could vest someone else in the family with the power to take care of it.

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Here’s where soft skills and hard skills intersect. With a clear understanding of what is important about money to your family, an investment strategy can be shaped that is prudent and tax efficient. This strategy needs to be coherent, integrating all aspects of your wealth management, so that all the advisors involved can make proper recommendations that will meet the needs of the family. We’ll talk about this more in chapter 5. Hard skills and soft skills need to work together and compliment each other, each in their proper place.

This doesn’t mean, though, that emotion should ever be allowed to rule your investment strategies. Know what your “soft goals” are (the dreams you have for yourself and your family), but then step back and let hard skills do their job without interfer- ence from emotions. Emotion by its nature tends to make awful investment decisions. It can lead to investment strategies that are actually contrary to the family’s best interests.

For example, humans have a tendency to fear and resist change—and to hold on to things simply because they’re familiar. Investors sometimes hold on to stock as if it were a comfortable pair of old jeans. They have a sentimental attachment to it that may blind them to its actual merit. Sometimes they feel loyal to the memory of a parent who told them, “Never sell that holding! It will always see you through.” Research has also shown that people feel more emotion at the prospect of losing money than they do at the prospect of making money. This means that they tend to hold on tight to their assets, even though a certain degree of healthy risk could lead to high financial returns.

Any time emotions control investment, the long-term outcome is often out of line with the individual’s true goals. It

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limits possibilities; you could lose out on a better investment or pass up a chance to live a happier, fuller life. Emotions can blind you to the reality of the situation. They can come between you and a clear understanding of the real meaning of money.

A retired couple we worked with had millions of a dollars invested in stock from the husband’s former employer, a local oil company. They felt an emotional attachment to that stock for a range of reasons. It may have represented an ongoing tie to their younger selves, to a time in their lives that was important and worthwhile. For the husband, it was a connection to his professional self. Working for this company had been important to his identity, and he felt a sense of loyalty to it.

This emotional attachment got in the way of this couple being able to hear sound financial advice based on hard skills. They refused to touch the stock, and we had to respect their desires. After all, it was their money, and in the end, the decision was theirs to make. When oil prices dropped, though, they suffered very large losses.

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When the emotions connected to money are played out in a family, added dimensions are added to the situation. Family members’ emotions may conflict with each other. For example, one person may feel deeply attached to a particular asset, such as a real estate investment, while another person has negative memories connected to that property. This could mean that when

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the opportunity comes along to monetize the real estate invest- ment in order to generate liquidity for other investment oppor- tunities, the first individual may stubbornly resist selling. On the other hand, the second individual may want to seize an opportu- nity to sell the real estate, despite the serious tax consequences that could make this a dangerous move. Either way, a family battle can easily ensue.

Protecting your family’s wealth means you need to take a close look at the rationale behind investment strategies and other decisions relating to family assets. Everybody needs to feel they have a fair say and have participated in the process of making a decision. This isn’t easy—but it’s possible.

Be proactive. Put the guidelines in place that will help your family resolve conflicts before they happen. Make certain that every member understands and agrees on the meaning of money for your family.

To do this, you might think of your family’s wealth as a small sovereign nation. How can you be sure that everyone knows and understands the most basic values of that “nation”? What is the most basic document that clearly establishes the “laws of the land”?