The New Battlegound Brat Patrol

October 17, 2005

October 17, 2005        

The New Battlegound Brat Patrol

What 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 McGee

In the opening shots of the 2003 documen-
tary “Born Rich,” Jamie Johnson, the film’s
director and heir to the Johnson & Johnson
pharmaceutical fortune, sums up the plight
of many an angst-ridden inheritor. “At mid-
night, I am going to inherit more money than
most people can earn or spend in a lifetime,”
he muses while dressing for his flapper-
themed 21st birthday party. “I have been
waiting for this night for as long as I can
remember. 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 houses
and boutiques catering to the wealthy appear
to be brimming with ideas on how young
people can handle money responsibly and
gracefully. They’re doling out parenting
advice, running financial boot camps for
clients’ children and moderating family dis-
putes. In part, the bankers are responding to
clients’ anxieties; many wealthy parents fear
their kids will become idle layabouts or
spoiled brats. Did someone say Paris Hilton?

But the banks are also addressing a stark,
competitive reality: Trillions will pass from
the baby boomers to their kids in the coming
years, and the children may well consider
dumping their parents’ bankers. “If you can’t
start building a comfortable relationship with
the next generation of wealthy individuals, if
you can’t build loyalty by helping them
understand why their parents did something
a certain way, or making the wealth seem like
less of a burden and more of an opportunity,
you will eventually lose that business,” says
Tony de Chellis, managing director and head
of the Private Wealth Management Group at
UBS Wealth Management USA, a division of
the giant Swiss bank.

One study, for the trade publication
Trusts & Estates, found that a full 92% of
heirs switch advisers soon after getting their
inheritances. So the bankers do have their
work cut out for them.

Among wealthy parents and their
bankers, the rallying cry is: “Don’t let the kids
become the next Paris Hilton.” As she heads
for the sun, other scions are off to financial
boot camp.

The nation’s top private-banking outfits
look to have taken up the challenge. Many
say they now view family counseling as an
essential weapon in the battle for assets. The
top 40 firms, Barron’s finds, now manage
some $4.4 billion of U.S. private-client assets,
comprised of accounts of at least $1 million
and often more than $10 million. The group’s
total is up 13% from last year, outpacing the
brisk growth in overall assets held by
American millionaires.

Increasingly, the field is becoming com-
moditized. Just about any large private bank
can deliver competitive investment returns
and devise complex, customized trusts—and
the bankers know it. “That’s just the price of
entry,” says Jane Magpiong, head of Bank of
America’s private bank. “The banks that will
succeed in the future are those that realize
their task is more than just selling the prod-
uct du jour.” That means that your private
banker is just as likely to show up on your
doorstep with suggestions about how to cre-
ate a family “governance structure” as he is
to propose a new tax strategy or discuss a
hot hedge-fund investment opportunity.

“These days, the most challenging issues
our clients confront don’t involve the
mechanics of wealth transfer to the next
generation, but how to make sure their heirs
are prepared for the responsibility of that
wealth,” says Glenn Kurlander, managing
director and head of the Citigroup Family
Wealth Advisory Services group.

The push into family matters is most evi-
dent in the top tier of the private-banking
market—the segment catering to ultra-
wealthy individuals with private fortunes of
$100 million or more. JP Morgan Private
Bank, for instance, offers scions of these
families 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 their
parents to communicate better with them to
the newest thinking about asset allocation.

The sessions, which have a two-year waiting
list, 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, “we
ended up hiring more people at the family
office to do more due diligence on managers,
to increase our accounting capabilities,” says
Todd Goergen, who runs Ropart Asset
Management, a private-equity fund financed by
wealth created by the consumer-products busi-
ness his father founded, publicly traded Blyth.

But Goergen says the discussions he had
with fourth- or fifth-generation heirs of
wealthy European families made him think
for the first time about issues he hadn’t even
contemplated before. “Both my brother and I
work hard, and are very happy to do so,” he
says. “But what happens when the wealth is
passed to our children, and my kids are lazy,
and my brother’s kids work hard? Do my kids
live off of his kids’ work?”

Goergen and his wife, who live in New
York, don’t even have children yet. But his
older brother has a son and daughter—
and experts in counseling the wealthy say
it’s never too early to start planning for the
next generation.

The problem is that talking about money is
often harder than explaining the facts of life or
having a debate about politics or religion. The
more money there is, the harder it gets.

Wealthy parents “don’t want their chil-
dren to be spoiled, to feel entitled, and yet
they want them to enjoy the benefits that
wealth brings,” says Charlotte Beyer, founder
of the Institute for Private Investors, a New
York-based networking, research and educa-
tion organization for high-net-worth families.

“They yearn for a banker who is skilled
enough at family-dynamics issues to help
them ensure their children retain a sense of
passion about achieving something on their
own, to help the children learn who to trust
and become good stewards of wealth.”

Private bankers, to be sure, usually aren’t
psychiatrists. But the industry is steadily
building its skills in the realm of family
dynamics. The Williams Group, a California
consulting firm that works with the wealthy
on family-relationship issues in wealth trans-
fer, has started helping bankers learn about
the field and this, says Victor Preisser, can be
a balancing act. Banks “don’t want to take a
successful private banker and turn him into a
mediocre coach or half-baked psychologist,"
he says. “If we do our jobs, they’re still pri-
vate bankers, but ones who can help clients
think about the softer issues.”

Still, skeptics question whether all these
efforts really benefit families.
“They may be well-intentioned, but a lot
of our members see these education and
communication efforts more as a way to
build brand loyalty, rather than to deliver
added value,” says Michael Sonnenfeldt, a
real-estate entrepreneur and founder of
TIGER 21, an organization that creates a
forum for very wealthy businessmen and
professionals to exchange investment ideas.

Bankers reply that providing advice
about how to prepare children to inherit
wealth is simply a logical next step after they
advise clients on maximizing wealth and
passing it on. “If all you are doing is making
sure you are getting wealth to the next gen-
eration, you may be doing more harm than
good,” says de Chellis of UBS.
Certainly, the perils of choosing not to
talk about wealth at all are all too apparent.

Children can grow up ill-prepared and
resentful. In Born Rich, Jamie Johnson
recalls learning about his family’s wealth
when, at the age of 10, a friend found his
father’s name on the Forbes list of the 400
richest Americans. The friend read aloud the
description to the whole class, and even his
teacher ran over to check it out. “It was
strange, all my friends and me finding out at
the same time how rich my family was,” he
recalls in the film. “I felt that I was learning a
secret that I wasn’t supposed to know.”

The son of media mogul S.I. Newhouse
recalled in the film that a similar disclosure
at his own school prompted his classmates
“to beat the crap out of me—at a Quaker
school!” Worst of all, he said, was that his
father didn’t seem to notice.

Private bankers urge clients to spill the
beans early, especially in the age of the
Internet, when a child or a child’s best friend
or worst enemy at school can easily come up
with a rough figure of what that child is
worth. Failing to discuss the wealth at all
may lead children to assume that they aren’t
trusted or that they will never need to worry
about money.

Holly Isdale, head of the wealth advisory
group of Lehman Brothers’ investment-man-
agement business, says one of her current
clients realized they needed guidance after
their child asked why he needed to go to col-
lege when he was going to inherit $50 million
from them? Sometimes Isdale said, the answer
is simple: “If you have wealth when your kids
are young, parents need to be able to show
them that they earned that wealth through
hard work; that it’s not about entitlement.”

Josh Fidler of Baltimore, whose real-
estate business has moved his family into the
high-net-worth category, began talking with
his three children, now ages 15 to 22, three
years ago. It started during a car ride to din-
ner, when one of the kids asked, out of the
blue, “Will we be able to live the way you live
when we grow up?”

That “sparked a very good discussion,”
Fidler says. And it prompted him to push his
private banker at Bank of America to help
him prepare his offspring for their inheri-
tances. “It’s like when you coach kids’ sports-
at some point, there is a transition when kids
want to start learning from someone new,
professional and independent, and not just
from Dad,” he recalls.

One of the most prominent results of the
growing intervention of private bankers is
the rise of family foundations for philanthro-
py. The Fidlers already have set one up, and
plenty of other families are following. “It’s in
the area of philanthropy where families have
an opportunity to instill shared values in
their children, and also teach them some of
the nuts and bolts about money, balance
sheets and making decisions,” says de UBS’
Chellis. “Even the youngest children can be
given $1,000 a year to give away, and asked to
explain how they did it at a family meeting.”

Bankers also suggest finding roles in the
foundations for heirs who aren’t interested
in, 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 dialogue
between generations and to bring down the
walls that keep generations apart,” says Mary
Callahan Erdoes, chief executive of the JP
Morgan Private Bank. Its seminars for heirs,
similar to programs offered by some other
private-banking firms, are part of that effort.

“We didn’t grow up wealthy, so it’s eye-
opening to learn about the assets my father
has accumulated,” says Erin McCann, the eld-
est of the three children of Jim McCann,
founder and chief executive of 1-800-
Flowers.com. Even though she works in her
father’s business as a marketing manager, she
says it wasn’t until she talked to others in her
shoes at a JP Morgan gathering in Miami that
she gained the confidence to play a truly active
role 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 quite
creative. Karen Klein, head of family-wealth
services at Merrill Lynch, went so far as to
create an internship for the 22-year-old
grandson of a client within the private bank,
largely to teach a lesson. The grandfather
realized that none of his family members had
ever had to work, so the grandson had no
idea of the routine of getting up and going to
an 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 private
banker in on family matters. Thomas
Rogerson, director of private-wealth man-
agement at Mellon Financial Private Wealth
Management Group, says the benefits may
not be clear to the Type A personalities who
attend seminars that he conducts for suc-
cessful business owners. “They think they
are 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 clients
welcome it, they can expect to hear plenty
about the softer stuff from private banking
firms in the years ahead. “This is an evolution
that we are going through—we are moving
from being a wealth manager to a newer par-
adigm: family-wealth advisory services of all
kinds,” says Robert Elliott, senior managing
director at New York-based Bessemer Trust.

Bessemer has launched a program to edu-
cate managers about the new approach, and
Elliot makes no bones about the long-term
objective: “We want to hold on to our clients
as long as possible,” he says. “We sometimes
joke that death is the ultimate competitor,
because kids are then free to pick their own
adviser. If we do our job well, they will
already have done so—and it will still be us.”

If you are interested in learning more about TIGER 21, please complete the contact form and you will receive a copy of our most recent Asset Allocation Report.