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Shirtsleeves to Shirtsleeves

In the first season of the hit Showtime series “Billions”, main character Bobby Axelrod is executing a hostile takeover of YumTime, a struggling mass producer of sweet cakes and pies. As the famed hedge fund manager of Axe Capital, “Axe” is trying to convince the YumTime Chairman of the Board to go along with his plan to take control of the failing company so it can be rehabilitated. The company is plagued with falling profits ever since the current leadership downgraded the quality of ingredients and diminished the overall taste of the products.

The problems stem from the current CEO of YumTime, Hutch Bailey, III. He’s the third-generation owner of the company started by his grandfather Hutch, I. He’s over his head and ill-equipped to run the business as profits have declined 8 years straight while executive compensation has increased 300% under his leadership.

Without Axe’s capital and business know-how, the company will fail. Axe explains, “It’s classic, time immemorial. Hutch I starts it, Hutch II grows it, Hutch III blows it. Shirtsleeves to shirtsleeves in three generations.”

This story isn’t just Hollywood fiction. The fact is only 10% of affluent family wealth makes it to the third generation1.

In the book “Fortune’s Children: The Fall of House Vanderbilt”2, Arthur T. Vanderbilt II tells the story of the epic rise and fall of one of the world’s richest families. The Vanderbilt empire began with Cornelius “Commodore” Vanderbilt turning a $100 loan from his mother into the railroad empire New York Central. “He reportedly accumulated a $100 million fortune by the time of his death in 1877 - more than was held in the U.S. Treasury at the time.”3

His son, William Henry Vanderbilt (Generation 2), inherited the business and grew the family fortune. It wasn’t until Generation 3 that the business of thoroughbred horses, art collecting, and construction of grand estates distracted the heirs from their responsibility to the family legacy. By Generation 6, the wealth was mostly gone. Anderson Cooper, famous CNN anchorman and son of Gloria Vanderbilt, reportedly inherited “just” $1,500,0004.

Imagine Jeff Bezos’ current $165 billion fortune completely gone in 120 years…or sooner.

You don’t have to accumulate the wealth of Cornelius Vanderbilt or Jeff Bezos to understand the importance of putting a plan in place for your wealth to survive beyond you. Think of the sacrifices you have made by diligently saving and investing, reinvesting in your business, or somehow avoiding lifestyle creep. Then think of your kids – and their spouses and kids – enjoying your wealth with little or no appreciation for where it came from. Maddening right?

Don’t get mad, get a plan. I’m not specifically talking about completing an estate plan, though that is a very important element. Determining who gets what and when and under what condition is essential, but what I’m talking about is a plan that gets to the root of building a lasting multi-generational legacy.

Leaving a legacy is more than just leaving wealth. It’s a plan to pass on your mission, values, and vision. Focus on this as the foundation and future generations will be more inclined to protect the wealth.

Tell the Story Early and Often

One of the surest ways to build awareness in the next generations is to tell your family story.

Did you start with nothing but a nickel and dream and turn that into something significant? Did grandpa come to this country with $8 in his pocket yet created a multimillion-dollar business? Was there a significant turning point in your life where, had you not persisted, things could have gone another way?

Telling the family story of how your fortune was made is the first line of defense against future generations squandering it. If your wealth didn’t fall from the sky, where did it come from and what sacrifices went into the benefits the family enjoys today? What has been your contribution to maintaining the family legacy and wealth?

You’ll know you’ve done this right when your kids and adult children respond, “I know, I know, you’ve told us this a million times. You walked to school barefoot in the snow…uphill…both ways.” Keep telling it.

Family Meeting

The second way to protect against the demise of your fortune by future generations is to organize a family meeting. This formalized gathering can be run by you or a professional advisor. Together, you and your family will lay out your most important values. It’s vital that everyone participates, and family of all ages are welcome. It’s never too early to begin this process. You could even start with your immediate family and then open a deeper discussion with successive generations.

What is it that makes your family unique? What is the driving force behind how important family decisions are made? What is your philosophy around money? How does your family treat others?

Get this all out on paper or a whiteboard and then narrow the list to four or five values from the top themes. Side benefit – it’s common to recognize that one of your most important values has not been exercised in a while and it will give you a spark to reignite this in your family.

Make it a point to formalize this meeting at least annually, even if for thirty minutes. Start with your agreed-upon values from the last meeting. Have you been living these? Have any of these changed or no longer reflect who you are? Are there other values that better describe your family philosophy?

You could then take these values and formalize a family mission statement. I love mission statements, but this is not as important as gaining clarity and consensus on your values.

Establishing clarity and consensus around your family values will provide a framework for the generation to make durable financial decisions when the wealth is eventually in their hands.

Practice Scarcity and Adversity

It’s very difficult to experience scarcity and financial adversity when wealth is abundant. It’s natural for current generations to want a better life for successive generations. What is an affluent family to do anyway, fly private while the kids fly separately in coach? When you visit the family lake house do the kids sleep in a flea bag motel across the street? That would probably be a bit crazy, but if Generation 2 and 3 weren’t around when all the sacrifice was being made to build the wealth, then they probably won’t understand what it’s like to go without unless you teach them.

What are a couple of ways you could help successive generations practice deprivation?

For teens, the purchase of a first automobile is a fantastic place to start. Instead of purchasing a car the family could easily afford, what about matching dollar for dollar what your child is able to work for and save toward a car purchase? For young adults, what about a matching program for a down payment on the first home?

I was having a conversation with a friend the other day and she was telling me about a very important lesson her dad taught her at 14 years old. She comes from a wealthy family and vividly remembers nagging her dad day-in and day-out about buying her something she really wanted. He finally said, “Listen, it would be much easier for me to just give this to you, but that’s not what’s best for you.” Instead, he helped her create a plan to get it and she went to work to pay for it.

When it came to her first car, he helped her create a plan to work and save half of the purchase price. Working to purchase her first car made her incredibly proud. It wasn’t the prettiest thing in the high school parking lot and needed oil all the time, but she loved it. It meant something to her that she even talks about today. She is now successful in her own right and the lessons from her father have stuck with her. What a great story for her to tell her children…frequently.

I often wonder how many of the new Range Rovers in a high school parking lot represent more of a parent’s self-esteem than that of the child?

By teaching financial scarcity and adversity you are instilling the respect of money and putting a value on its accumulation.

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Legacy planning is a thorny topic with multidimensional and complex family dynamics but talking about it and putting a plan in place can be very rewarding. What I’m describing may seem unrealistic to some and even overly formal to others. For families that have accumulated any significant wealth, however, the day comes when a structured process is required to help the next generation deal with this incredible responsibility. This process will also nurture an appreciation for the sacrifices made by those that have come before.

I have met plenty of people who don’t care what happens after they’re gone. For everyone else, there are firms like ours attuned to the unique needs of affluent families. If we haven’t discussed this in detail already, reach out and we’ll create a plan to get the conversation started.

Happy Planning,

Brian


Further reading and citations:

1. https://www.schwab.com/resource-center/insights/content/making-family-fortune-last

2. https://www.amazon.com/Fortunes-Children-Fall-House-Vanderbilt/dp/0062224069

3. https://www.forbes.com/sites/natalierobehmed/2014/07/14/the-vanderbilts-how-american-royalty-lost-their-crown-jewels/#b56b6c7353ba

4. https://pagesix.com/2019/07/08/anderson-cooper-to-inherit-just-1-5m-from-mother-gloria-vanderbilt/