FINANCIAL ADVICE GLEANED FROM A DAY IN THE HOT SEAT

THE NEW YORK TIMES, FRIDAY, JUNE 17, 2011Financial Advice Gleaned From a Day in the Hot SeatBy PAUL SULLIVANWHEN I started writing this column almost three yearsago, one of my goals was to figure out what the wealthiestAmericans knew and pass along those lessons to middle- andupper-middle-class readers.Each of the 180 Members of TIGER 21 has a net worth ofat least $10 million, pays $30,000 in annual membership feesand commits to spending one day a month with other clubMembers. Nearly all of them made the money themselves -they didn’t inherit it – and most are men.I had asked to sit in on one of the group’ssignature sessions, the portfolio defense,but a few weeks ago, the Members invitedme to be in the hot seat. I jumped at thechance. Beyond looking at how money isinvested, the portfolio defense is intended toforce Members to discuss their wealth in thebroadest terms.I had heard horror stories. One Member wastold he needed to lose a lot of weight if he wasgoing to get people to invest in his new fund.Another was chastised for telling his childrenthat he had lost his money in the financialcrash so that he would not have to talk to themabout his immense wealth.Michael Sonnenfeldt, the founder of TIGER21, used the term “carefrontation” to describewhat happens in a portfolio defense. Theassessments are meant to be direct, unsettlingand possibly painful to hear, Mr. Sonnenfeldttold me. But the goal is to get Members to think differentlyabout what they are doing with their investments and abouteverything in their lives that is affected by their wealth, fromtheir family to charities.”It’s not meant for the faint-hearted,” Mr. Sonnenfeldtsaid. “This is a process that some people could clearly findoffensive or discomforting.”What I experienced was rough, but it was also thought-provoking. The value to me – and to anyone given a similaropportunity – was that the Members challenged everythingabout my assumptions on saving and spending. Here’s someof what I took away. OUR MISTAKES In the week leading up to this, I worked withJoel Treisman, an executive coach and the chairman of one ofTIGER’s 17 groups, to gather up all of our financial reports.I was confident that the group would think my wife and Iwere in good financial shape. We save a good percentage of ourincome. We don’t have any debt beyond mortgages and a carpayment. We probably spend a bit too much on food and petcare, but we don’t run up credit card bills to do it. The Members were warm and welcoming as we filled ourplates with poached salmon, grilled asparagus and buffalomozzarella from the buffet. But as soon as we were seated,it was all business. And I was immediately on the defensive.There were two big surprises but also blunt advice and somethoughtful questions about our portfolio.First, the surprises. The group agreed that we did not haveenough life or disability insurance. We both have insurancethat would cover about three or four years of earnings if oneof us died. This seemed sufficient to get past a few years ofsorting things out. The group disagreed. Going from twoincomes to one would mean a radical rethinking of our life. We needed more sizable policies to give us the freedom tosort through things. Though we both carry disability insurance,the policies are old and do not reflect our current income. Theywould also cover only 50 to 60 percent of our old base salaries.The Members thought we should buy individual policies toadd to this.The second surprise was about our savings. We have beensaving about 15 percent of our post-tax income. Alan Mantell,a lawyer who made his money in real estate, development andinvestment, said the issue was not how much we saved buthow we thought about spending.”You need to ask, ‚ÄòWhat can I afford to spend versus what doI need to spend?’ ” he said. We could be saving more moneyfor retirement – or in case something bad happens – if wecut back on things we did not really need, he said.All the Members agreed that we should sell our vacationcondominium. “You need to become more liquid,” saidThomas Gallagher, the former vice chairman of CIBC WorldMarkets. “If something bad happens, it’s easy to get rid of adog walker; it’s hard to get rid of a house in Naples.”Florida real estate is in a sad state, so I asked what theywould do with an offer that was less than our mortgage?”Take it,” Mr. Gallagher said. “Write the check and be donewith it.”As for our portfolio of stocks and bonds, the questions weremore basic. Leslie C. Quick III, whose money came fromQuick & Reilly, the discount brokerage firm, looked at ourinvestments – 50 percent in equities, 34 percent in fixedincome, 12 percent in commodities and real estate and 4percent in cash – and wanted to know how our investmentmanager had done in the bear market. He also thought weshould ask our adviser how he balances the risks in our jobsagainst those in our portfolio.Some solutions were simple. We can increase our term lifeinsurance for comparatively little money – $1 million of termlife costs about $700 a year. Individual disability policies costmore. Barry Lundquist, president of the Council for DisabilityAwareness, said the yearly premium would usually be 1 to 3 percent of a person’s salary, but the payout would still belimited to a percentage of that person’s income.As for our portfolio, I put the questions to our adviser, K. C.King of Emerson Investment Management. I liked that he didnot sidestep the bear market question: Emerson’s portfoliosdid better than the benchmarks in 2008, but they lost value likeeverything other than cash, gold and Treasuries.Where I took comfort, though, was in how he thought aboutour portfolio. “We’re very mindful that what we’re managingfor you and most of our clients is their core portfolio,” Mr.King said. “If someone said from the TIGER group that this isfairly conservative and you’re not taking big swings, we’d sayyou’re right. This is the portfolio that we’re trying to keep foryour daughter’s education and into your retirement.”The issue that Mr. Mantell raised about spending is thethorniest one. My wife and I are under no illusions that havinga condo in Florida makes financial sense. Trimming spendingin other places is easier: Walking the dogs ourselves, forinstance, would save $100 a week or $5,200 a year.In the end, though, there are such radical differences betweenthe wealth of the TIGER Members and most Americans thatsome of their advice could not apply.Mr. Sonnenfeldt estimated that 90 percent of TIGERMembers had paid off the mortgages on all of their homes.They also tend to view money as something to preserve ratherthan accumulate. Mr. Sonnenfeldt said Members spent about 3percent of their wealth annually, which allowed the principalto continue to grow. But at the $10 million entry level, thiswould mean $300,000 a year.Perhaps most important, none of the Members became richby eating out less. They became rich by working in industriesthat paid extremely well or by building businesses that theylater sold.Still, what was best about the session was that no one pulledany punches. Their honesty forced us to think hard about theassumptions we were making. Yes, it was difficult. But really,who wouldn’t want advice from those who have made it?