The growing field of family governance is helping reverse the decadent dissolution of family fortunes.
Family wealth strategist Tom Rogerson is not a fan of Donald Trump the presidential candidate, but he admires Trump the dynasty builder.
It is not Trump’s billions that impress Rogerson but rather how Trump is preparing his children to inherit his empire without becoming adult brats.
Rogerson has an inkling of this because of a documentary, Born Rich, which was produced by Jamie Johnson, an heir to the Johnson & Johnson fortune. In the 2003 movie, most of Johnson’s fellow scions are not handling their wealth very well, with a key exception.
“One of the strongest, most proud and best prepared was Ivanka Trump,” Rogerson said. “He was doing a phenomenal job of preparing his daughter for what to think about success and wealth.”
This might be another Tale of the Two Trumps that former candidate Ben Carson had revealed about the Republican front-runner. Although The Donald displays a gold-plated Trump to the public, the documentary showed he was far more plain-spoken with his children.
“In the world, he was a bloated windbag, but at home, he was transparent,” Rogerson said as he relayed a story from Ivanka about her father during a low moment in his life. “She said that she and Trump walked by a bum on the street in New York, and Trump stopped her. He leaned over to her and said, ‘I just want you to know that guy has more money than I do right now.’ He was very transparent about where they were. Because of him, she has this pride and strength.”
Rogerson could have used that transparency in his own life. He became something of a wealth whisperer after his own father lost his family’s fortune. Rather than going back to his family compound after college, Rogerson had to go out in the world and build a career that eventually led him to become a family wealth strategist at Wilmington Trust.
He is now a proponent of family governance, a growing field that is helping change the perspective of estate planning. Rogerson used to practice traditional estate planning at the venerable accounting firm Coopers & Lybrand.
“I helped build the financial planning practice for Coopers in the Boston market,” Rogerson said. “And I was out there thinking I was doing great good for these families by helping them with sophisticated trust structures and generation skipping and provisions to protect their wealth from divorces. And all the things that so many advisors still are recommending to their clients.”
But as Rogerson read the latest research on why families were failing within a few generations, he realized he was going about it all wrong.
“It had very little to do with the quality of the plan,” he said. “It had almost everything to do with the preparedness of the next generation. We’ve prepared the money for the family, but we didn’t prepare the family for the money.”
Dynasties Gone Wild
Anderson Cooper is a successful news anchor on CNN, but few might realize that he is descended from American royalty — he is a sixth-generation Vanderbilt.
He has little but lineage to show for it. That is partly due to the fortune’s erosion over time but also because of the hard lessons drawn from generations of failure. His mother, Gloria Vanderbilt, wanted him to earn his own way in the world.
Cornelius “Commodore” Vanderbilt built a steamboat fleet and then a railroad empire that made him America’s first tycoon by the time he died in 1877. He left $100 million, which was more than the U.S. Treasury held.
Within 30 years, just after the Gilded Age that he helped start, many of his descendants ran out of money.
How did it go so wrong? Once the Vanderbilts ascended to society’s stratosphere, they battled to outdo everybody else. By the end of the 19th century, Fifth Avenue bristled with the family’s fortresslike mansions, elbowing aside grand families such as the Astors and setting the tone for the Pulitzers and other ascending families of the age.
The vast wealth seemed inexhaustible. But there’s always the principle that expenses rise to meet income. And then some.
“One of the problems is parents don’t teach the idea of sustainable spend rates,” Rogerson said. “We didn’t use to call it that. Here in Boston, the Brahmins called it ‘Don’t spend the principal.’ Nowadays, it’s hardly talked about.”
So sudden money leads to sudden spending. And that leads to expensive lifestyle maintenance.
“Let’s say a kid inherits $10 million,” Rogerson said. “The first thing he does is buy about $3 million worth of stuff — houses, toys, cars, boats — things like that. They assume that $7 million will cover the cost of their lifestyle going forward. But $7 million at a sustainable spend rate doesn’t actually cover the cost of that lifestyle.”
Low interest rates are not to blame, either. Although it’s true that even safe investments decades ago could yield more the single-digit rates of return, inflation was also higher. Then, as now, 3.5 percent is an approximate rate of sustainable spending, Rogerson said.
“Unsustainable,” though, seems to be too tame a word to describe some of the spending by scions. George Huntington Hartford II is a prime example.
Hartford was named after his grandfather, founder of The Great Atlantic & Pacific Tea Co., which became the world’s largest retailer, A&P supermarkets. When Hartford was 6, he inherited an annual income of $1.5 million, a staggering sum in 1917.
But he managed to exceed that amount in short order with women, real estate, drugs and schemes. His social life ran the gamut of 20th-century fame, cavorting with such luminaries as Charlie Chaplin in his youth and Andy Warhol in his middle age.
Hartford financed movies and an artist colony, and built an art museum, but perhaps his most ambitious expense was Paradise Island.
That’s what he called a 685-acre parcel in the Bahamas formerly known as Hog Island that he bought and tried to develop into a new Monte Carlo. After sinking at least $30 million into the venture, he eventually sold it for $1 million. Now home to the Atlantis resort, the island is estimated to be worth $2 billion.
His fourth wife introduced him to cocaine and other drugs, leading him to reduce his Manhattan duplex to a hovel. His fortune drained to a trickle in his later years as he languished in the Bahamas not far from his former island.
At his side was Juliet, his lost-soul beauty of a daughter who appeared in the documentary Born Rich. In the movie, she described her father as barely present in her life as a child. She indulged in modeling and painting abstract art, a genre her father detested.
Apparently her aimless life found some purpose after the movie when her father fell ill and needed her help. She lived with him until he died at 97 in 2008.
One of his other children had committed suicide, and another died of a drug overdose.
Last Vestiges of Grandeur
Overlooking the Hudson River is the last shred of the Astor family empire. It is a decaying 43-room mansion called Rokeby on a 420-acre tract.
William Backhouse Astor Sr., who made his vast fortune in Manhattan real estate, bought the house in 1836, and the family has been adding on to the home ever since. But now that the money is gone, so is the maintenance.
Astor’s descendants have pledged not to sell it despite the leaking roof and vast disrepair.
Although the family has reached begrudging agreement on the house, the spirit of consensus is coming generations too late to save the family fortune or at least to save a financial structure that would have maintained the property.
That is a similar situation that Rogerson faced with his own family. After the fortune ran out, the family was saddled with a large property to maintain.
“We had a family compound here in Massachusetts, where I expected to exist for the rest of my life, and my kids would be able to enjoy it,” said Rogerson, who lives on a sliver of what used to be a vast estate. “We live on a piece of the property that’s been in the family for 13 or 14 generations. And I’ve always loved the fact that my kids are playing on the same rocks that my great-great-great-great grandparents played on when they were kids.”
The total property had been divided into 50 lots, many of which sold for fire sale prices. Now he and his family live in the neighborhood that grew up around them.
“My generation has entirely disappeared,” Rogerson said of his extended family. “Of all the different houses and lots, only three of them are still owned by the family.”
But it didn’t have to be that way. Before financial pressure forced the family to sell the property as quickly as possible, he had an idea that would have required a dramatic rethinking about the whole property.
“I had a vision that would have preserved that continuity,” he said. “I said, ‘Why don’t we sell this together? We can develop it together and maybe then take some of the proceeds and establish something in a less valuable piece of the property where we can maintain this sense of family and togetherness.’ And they looked at me like I was some kind of horrific dirtbag because I was recommending selling the family land.”
Instead, the land was sold at bargain prices, and the family was scattered.
Why can’t many families work together on estate issues? Usually it’s because the family members never worked together before and don’t trust each other when the stakes are high.
That is what family governance is all about.
Keeping the Family in the Family
The key to family governance is to have all the members participating long before the wealth generator dies. That is how trust develops.
“You need to have trust in the beginning, and that trust comes through meaningful experiences, team-building exercises, working together on smaller projects,” Rogerson said of the process. “I don’t have to love you. I don’t have to like you. But I need to trust you.”
Some families have developed sophisticated structures. Take the Bloch family, for example. Richard Bloch was the co-founder of H&R Block. His descendants created a family governance system that includes spouse onboarding. It can be more effective than a prenuptial agreement, which essentially excludes spouses from the family.
That process incorporates spouses into some of the family’s actual decision-making on committees. They, like many of the other family members, may start small and work their way up.
“I worked with a very wealthy family in London that had a series of committees, some of which focused on very low-consequence decisions like what entertainment or venue should they have for the next family meeting,” Rogerson said. “But some are very advanced, like how should we decide to sell a family enterprise and divide the proceeds from the sale? How should we discipline a family member for bad behavior within the family or outside the family?”
Rogerson said it was a quote from one of his clients that put the whole concept into perspective: “Wealth without responsibility and authority is a formula for resentment and failed self-worth.”
Commodore Vanderbilt helped establish the model of the hard-charging chief executive, but he also set the pattern of the domineering patriarch.
Vanderbilt was not shy about his opinion that he didn’t think his sons would ever measure up to him. He set them up with big money and small expectations — which people tend to live up to.
It’s no secret that the kind of driven people who can put together massive empires can also develop massive egos to match. Basically, they can be real jerks to their kids.
Joseph Pulitzer was an example of the dynamic, but the result of his estate planning would have surprised him.
Pulitzer built a newspaper empire that started in St. Louis and flourished in New York City. He set up his estate so that when he died in 1911, he punished his least favorite son, Joseph Pulitzer II, by leaving him the St. Louis Post-Dispatch.
He gave the crown jewel, the New York World, then the largest newspaper in the country, to his two favored sons, Ralph and Herbert.
Within 20 years, the New York brothers would sell the World for a fraction of its value during the Great Depression. The brothers and their heirs would squander the rest of the fortune and the family’s name.
The name Roxanne Pulitzer may ring a bell — or toot a horn. The wife of the drugging and debauching Ralph Jr. told all with a book after their scandalous divorce. Then she appeared nude in Playboy, posing with a trumpet. Apparently you would have to read the book to find out why.
In the meantime, Joe Pulitzer II turned the Post-Dispatch into one of the country’s best newspapers in its day and had the last laugh by winning 12 Pulitzer Prizes, which his father established.
Often, patriarchs and matriarchs might want to exert control from the grave, but the only thing they can be certain of is creating chaotic dysfunction.
“The structures they put in place to protect the assets often create the very problems that they’re trying to protect the money from in the first place,” Rogerson said. “So, well-intentioned planners, insurance agents and clients are getting together and collaborating together and creating plans that don’t empower the children.”
Who can help Type A business leaders see the chain of misery they are building? It could be insurance agents and estate planners who lead the way.
Getting the Buy-In
Rogerson is called in to help by insurance agents such as Jamie Bush, who is principal of Bush & Co., a financial services firm in Boston.
Bush calls in Wilmington Trust as an institutional co-trustee that will help ensure long-term stability for a family using a multimillion-dollar trust.
“Money can be a huge blessing in the right hands at the right time, or it can be really toxic in the wrong hands at the wrong time,” Bush said. “And because the people who set up these trusts to hold their assets, including life insurance proceeds, don’t know what’s going to befall the beneficiaries, children, grandchildren, second spouses, third spouses, etc., it’s helpful to have a co-trustee along with the independent trustees, who have a personal knowledge of the beneficiaries.”
Then Rogerson adds another element by also providing education in family communication and even some counseling. In fact, it was Rogerson who helped Bush see the value in reshaping his practice to be more holistic rather than product-focused.
But how does Bush even get to the understanding that a client might need that level of help? First of all, Bush can relate to these clients because he grew up among the wealthy in Greenwich, Conn., and is the nephew of one U.S. president and the cousin of another. In his community, he saw plenty of the quirks that can accompany wealth.
As an insurance agent, he is also accustomed to asking questions to determine need. But it’s more than the usual “What keeps you up at night?”
“The questions are ‘So what are your children’s or grandchildren’s needs? Are all of your children created equal? If you left $10 million to each of your children, would they all handle it the same way?’” Bush said. “It doesn’t take that much to get people to step back and say, ‘OK, I don’t know that giving $10 million to each of my children is a good idea. How do I explore that further?’”
If insurance agents or advisors are uncertain about approaching clients with these kinds of probing questions, Bush said they shouldn’t be, because the clients are probably already thinking about it.
“Very often, we’re talking about business succession plans, so the entrepreneur has already been scratching his or her head for a long time about how they’re going to pass this business on to the family and even if that’s a good idea,” Bush said about the thought process. “If I have a daughter who’s 40, has an MBA and is our CFO, and a son who’s 43, has the grandchildren but is an idiot, then I have a quandary.”
Clients are willing to unspool these problems with little prompting, Bush said. “People are usually very happy to have that discussion once it’s been established that this is a safe place to have this conversation, that it goes no further, and that we may have solutions to questions they have not been able to address themselves.”
And once they have that conversation, the solution is not only a matter of creating the right instruments for heirs. Setting up the relationships is key to ensuring a smooth wealth transition for generations to come. For example, not naming one sibling as the trustee in a family with several siblings would be beneficial.
But sometimes these issues can be beyond the ability or comfort of an insurance agent or advisor. After all, some of this is verging into counseling. So Bush calls in a wealth psychologist.
Enter The Wealth Psychologist
Sometimes Bush will call Karen Weisgerber, who is not only a wealth psychologist with Cambium Consulting working with agents but was also a researcher at Boston College’s Center of Wealth and Philanthropy.
One of the subjects she helped research was what concerned wealthy people the most. The researchers expected that it was their philanthropy. But actually it was the money’s impact on their children.
They then looked into what people were doing about it, and it turned out that it was not much.
“That doesn’t tend to go very well,” Weisgerber said. “There’s evidence that if there’s no conversation or preparation or expectation shaped about what the wealth is and how it could potentially be used, the chances of the wealth becoming a successful element in their lives are really compromised.”
Sometimes children are not even aware of how much wealth there is. This in itself can create resentment and a lack of control, because, for example, they might have wanted to devote their lives to a less lucrative, but more fulfilling, career had they known.
Information is step one. Then come communication and real involvement.
When the wealth is such that it becomes the stuff of dynasties, structures such as foundations are in place. But involvement doesn’t mean the children get to manage the foundation that their parents established.
“There needs to still be kind of a preparation and clinical buy-in from the next generation,” Weisgerber said. “They don’t necessarily just want a seat at the foundation table. Increasingly, it’s just not appealing for the younger generations to just put on the mantle of the parents and write checks for them. They’re actually interested in bringing their voice to it.”
Life insurance agents and financial advisors can be instrumental in helping the first generation and descendants develop this new approach, but it means advisors need to reframe their thinking themselves.
“It’s not about ‘preserving wealth,’ although financial advisors like to talk about that. There’s a natural attrition of wealth, and it is not always going to be preserved,” she said. “In some ways, we’re looking at a contemporary culture where people are far less interested in preserving wealth and far more interested in the impact of their wealth. The millennials tend to be less interested in amassing wealth and more interested in the quality of their time and experience.”
Weisgerber’s practice, Cambium, crystallizes this new way of approaching family wealth. It mixes finance, law, developmental and motivational psychology, personality and family dynamics training, business and governance education, decision-making research, philosophy, and theology.
She also works with advisors who are becoming more interested in being able to handle these softer issues. “One of the advisors said, ‘I don’t want to be the deer in the headlights when they ask me that question. I want to be the one who can answer it well but who then can put it front of them and say, ‘If you want your kids to be successful and high-functioning, chances are there needs to be some education and preparation, and how can we think about that?”’”
Part of the approach is understanding and managing the hard-charging entrepreneur. In fact, quite often the wealth generator hasn’t thought about these issues, and it is the spouse who brings them in. So, broaching these subjects takes a bit of finesse to overcome potential resistance. Start by exploring the client’s vision.
“That vision is often education, being committed to something, working hard,” she said. “Because the entrepreneurs really can’t stand when their kids aren’t working hard.”
But the expectation that their kids will measure up to them can be disappointing for the parents and destructive to the children. “I try to help clients understand that entrepreneurial genius is often a generation-skipping gene.”
Going Where the Money Is
Although agents and advisors want to learn these methods to handle the questions, Weisgerber said some also have another motivation: accessing and keeping high-net-worth clients.
Many, if not most, wealthy people have estate-planning structures in place, so the market is saturated. Therefore, advisors are increasingly interested in this other way of breaking into this market.
“They’re very worried about this with getting new clients but also with their current clients,” she said. “Advisors have to deal with the next generation because when the wealth transitions, very often children or even spouses don’t stay with the same advisor.”
Advisors are rewarded with contented clients and potential clients by doing this work. And heirs are rewarded with a healthy transfer of wealth that aligns with their values along with their parents’.
But Jamie Bush said from what he has seen, the first-generation client might be reaping the best benefit of all by establishing a healthy legacy.
“The reward of having supportive family members after the parents are gone, and having grandchildren grow up with healthy relationships with their cousins in this complex world — that’s worth more than millions.”