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June 9, 2014

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October 17, 2005 The New Battlegound Brat PatrolWhat will happen when the baby boomers’ kids inherit their fortunes? Fearing rampant sloth,parents are turning to private bankers for help. What the banks can do.By Suzanne McGeeIn the opening shots of the 2003 documen-tary “Born Rich,” Jamie Johnson, the film’sdirector and heir to the Johnson & Johnsonpharmaceutical fortune, sums up the plightof many an angst-ridden inheritor. “At mid-night, I am going to inherit more money thanmost people can earn or spend in a lifetime,”he muses while dressing for his flapper-themed 21st birthday party. “I have beenwaiting for this night for as long as I canremember. The thing is, now that it’s here,I’m not really sure what to make of it all.”America’s private bankers have a few sug-gestions. In fact, banks, brokerage housesand boutiques catering to the wealthy appearto be brimming with ideas on how youngpeople can handle money responsibly andgracefully. They’re doling out parentingadvice, running financial boot camps forclients’ children and moderating family dis-putes. In part, the bankers are responding toclients’ anxieties; many wealthy parents feartheir kids will become idle layabouts orspoiled brats. Did someone say Paris Hilton?But the banks are also addressing a stark,competitive reality: Trillions will pass fromthe baby boomers to their kids in the comingyears, and the children may well considerdumping their parents’ bankers. “If you can’tstart building a comfortable relationship withthe next generation of wealthy individuals, ifyou can’t build loyalty by helping themunderstand why their parents did somethinga certain way, or making the wealth seem likeless of a burden and more of an opportunity,you will eventually lose that business,” saysTony de Chellis, managing director and headof the Private Wealth Management Group atUBS Wealth Management USA, a division ofthe giant Swiss bank.One study, for the trade publicationTrusts & Estates, found that a full 92% ofheirs switch advisers soon after getting theirinheritances. So the bankers do have theirwork cut out for them.Among wealthy parents and theirbankers, the rallying cry is: “Don’t let the kidsbecome the next Paris Hilton.” As she headsfor the sun, other scions are off to financialboot camp.The nation’s top private-banking outfitslook to have taken up the challenge. Manysay they now view family counseling as anessential weapon in the battle for assets. Thetop 40 firms, Barron’s finds, now managesome $4.4 billion of U.S. private-client assets,comprised of accounts of at least $1 millionand often more than $10 million. The group’stotal is up 13% from last year, outpacing thebrisk growth in overall assets held byAmerican millionaires.Increasingly, the field is becoming com-moditized. Just about any large private bankcan deliver competitive investment returnsand devise complex, customized trusts-andthe bankers know it. “That’s just the price ofentry,” says Jane Magpiong, head of Bank ofAmerica’s private bank. “The banks that willsucceed in the future are those that realizetheir task is more than just selling the prod-uct du jour.” That means that your privatebanker is just as likely to show up on yourdoorstep with suggestions about how to cre-ate a family “governance structure” as he isto propose a new tax strategy or discuss ahot hedge-fund investment opportunity.”These days, the most challenging issuesour clients confront don’t involve themechanics of wealth transfer to the nextgeneration, but how to make sure their heirsare prepared for the responsibility of thatwealth,” says Glenn Kurlander, managingdirector and head of the Citigroup FamilyWealth Advisory Services group.The push into family matters is most evi-dent in the top tier of the private-bankingmarket-the segment catering to ultra-wealthy individuals with private fortunes of$100 million or more. JP Morgan PrivateBank, for instance, offers scions of thesefamilies an opportunity to spend time hang-ing with their peers in luxury locales-St.Tropez, Miami and Madrid, to name a few-discussing everything from how to get theirparents to communicate better with them tothe newest thinking about asset allocation.The sessions, which have a two-year waitinglist, have spawned not only business partner-ships among attendees but also a marriage.Some of the benefits are more prosaic.After attending one session last year, “weended up hiring more people at the familyoffice to do more due diligence on managers,to increase our accounting capabilities,” saysTodd Goergen, who runs Ropart AssetManagement, a private-equity fund financed bywealth created by the consumer-products busi-ness his father founded, publicly traded Blyth.But Goergen says the discussions he hadwith fourth- or fifth-generation heirs ofwealthy European families made him thinkfor the first time about issues he hadn’t evencontemplated before. “Both my brother and Iwork hard, and are very happy to do so,” hesays. “But what happens when the wealth ispassed to our children, and my kids are lazy,and my brother’s kids work hard? Do my kidslive off of his kids’ work?”Goergen and his wife, who live in NewYork, don’t even have children yet. But hisolder brother has a son and daughter-and experts in counseling the wealthy sayit’s never too early to start planning for thenext generation.The problem is that talking about money isoften harder than explaining the facts of life orhaving a debate about politics or religion. Themore money there is, the harder it gets.Wealthy parents “don’t want their chil-dren to be spoiled, to feel entitled, and yetthey want them to enjoy the benefits thatwealth brings,” says Charlotte Beyer, founderof the Institute for Private Investors, a NewYork-based networking, research and educa-tion organization for high-net-worth families.”They yearn for a banker who is skilledenough at family-dynamics issues to helpthem ensure their children retain a sense ofpassion about achieving something on theirown, to help the children learn who to trustand become good stewards of wealth.”Private bankers, to be sure, usually aren’tpsychiatrists. But the industry is steadilybuilding its skills in the realm of familydynamics. The Williams Group, a Californiaconsulting firm that works with the wealthyon family-relationship issues in wealth trans-fer, has started helping bankers learn aboutthe field and this, says Victor Preisser, can bea balancing act. Banks “don’t want to take asuccessful private banker and turn him into amediocre coach or half-baked psychologist,”he says. “If we do our jobs, they’re still pri-vate bankers, but ones who can help clientsthink about the softer issues.”Still, skeptics question whether all theseefforts really benefit families.”They may be well-intentioned, but a lotof our members see these education andcommunication efforts more as a way tobuild brand loyalty, rather than to deliveradded value,” says Michael Sonnenfeldt, areal-estate entrepreneur and founder ofTIGER 21, an organization that creates aforum for very wealthy businessmen andprofessionals to exchange investment ideas.Bankers reply that providing adviceabout how to prepare children to inheritwealth is simply a logical next step after theyadvise clients on maximizing wealth andpassing it on. “If all you are doing is makingsure you are getting wealth to the next gen-eration, you may be doing more harm thangood,” says de Chellis of UBS.Certainly, the perils of choosing not totalk about wealth at all are all too apparent.Children can grow up ill-prepared andresentful. In Born Rich, Jamie Johnsonrecalls learning about his family’s wealthwhen, at the age of 10, a friend found hisfather’s name on the Forbes list of the 400richest Americans. The friend read aloud thedescription to the whole class, and even histeacher ran over to check it out. “It wasstrange, all my friends and me finding out atthe same time how rich my family was,” herecalls in the film. “I felt that I was learning asecret that I wasn’t supposed to know.”The son of media mogul S.I. Newhouserecalled in the film that a similar disclosureat his own school prompted his classmates”to beat the crap out of me-at a Quakerschool!” Worst of all, he said, was that hisfather didn’t seem to notice.Private bankers urge clients to spill thebeans early, especially in the age of theInternet, when a child or a child’s best friendor worst enemy at school can easily come upwith a rough figure of what that child isworth. Failing to discuss the wealth at allmay lead children to assume that they aren’ttrusted or that they will never need to worryabout money.Holly Isdale, head of the wealth advisorygroup of Lehman Brothers’ investment-man-agement business, says one of her currentclients realized they needed guidance aftertheir child asked why he needed to go to col-lege when he was going to inherit $50 millionfrom them? Sometimes Isdale said, the answeris simple: “If you have wealth when your kidsare young, parents need to be able to showthem that they earned that wealth throughhard work; that it’s not about entitlement.”Josh Fidler of Baltimore, whose real-estate business has moved his family into thehigh-net-worth category, began talking withhis three children, now ages 15 to 22, threeyears ago. It started during a car ride to din-ner, when one of the kids asked, out of theblue, “Will we be able to live the way you livewhen we grow up?”That “sparked a very good discussion,”Fidler says. And it prompted him to push hisprivate banker at Bank of America to helphim prepare his offspring for their inheri-tances. “It’s like when you coach kids’ sports-at some point, there is a transition when kidswant to start learning from someone new,professional and independent, and not justfrom Dad,” he recalls.One of the most prominent results of thegrowing intervention of private bankers isthe rise of family foundations for philanthro-py. The Fidlers already have set one up, andplenty of other families are following. “It’s inthe area of philanthropy where families havean opportunity to instill shared values intheir children, and also teach them some ofthe nuts and bolts about money, balancesheets and making decisions,” says de UBS’Chellis. “Even the youngest children can begiven $1,000 a year to give away, and asked toexplain how they did it at a family meeting.”Bankers also suggest finding roles in thefoundations for heirs who aren’t interestedin, or don’t have a talent for, the family busi-ness. Creating a niche for each family mem-ber minimizes the risk of inter-family squab-bles in the years to come.”Our overall goal is to foster dialoguebetween generations and to bring down thewalls that keep generations apart,” says MaryCallahan Erdoes, chief executive of the JPMorgan Private Bank. Its seminars for heirs,similar to programs offered by some otherprivate-banking firms, are part of that effort.”We didn’t grow up wealthy, so it’s eye-opening to learn about the assets my fatherhas accumulated,” says Erin McCann, the eld-est of the three children of Jim McCann,founder and chief executive of Even though she works in herfather’s business as a marketing manager, shesays it wasn’t until she talked to others in hershoes at a JP Morgan gathering in Miami thatshe gained the confidence to play a truly activerole within the family and the family business.At their best, private bankers can be neu-tral, impartial players in the midst of com-plex family dynamics. And some can be quitecreative. Karen Klein, head of family-wealthservices at Merrill Lynch, went so far as tocreate an internship for the 22-year-oldgrandson of a client within the private bank,largely to teach a lesson. The grandfatherrealized that none of his family members hadever had to work, so the grandson had noidea of the routine of getting up and going toan office every morning. “After that, he actu-ally went out and got a job,” Klein said.Not all clients see a need to let a privatebanker in on family matters. ThomasRogerson, director of private-wealth man-agement at Mellon Financial Private WealthManagement Group, says the benefits maynot be clear to the Type A personalities whoattend seminars that he conducts for suc-cessful business owners. “They think theyare there to learn about new tactics for solv-ing estate-tax problems… if I do my job right,they leave with a broader understanding.”Indeed, regardless of whether clientswelcome it, they can expect to hear plentyabout the softer stuff from private bankingfirms in the years ahead. “This is an evolutionthat we are going through-we are movingfrom being a wealth manager to a newer par-adigm: family-wealth advisory services of allkinds,” says Robert Elliott, senior managingdirector at New York-based Bessemer Trust.Bessemer has launched a program to edu-cate managers about the new approach, andElliot makes no bones about the long-termobjective: “We want to hold on to our clientsas long as possible,” he says. “We sometimesjoke that death is the ultimate competitor,because kids are then free to pick their ownadviser. If we do our job well, they willalready have done so-and it will still be us.”