For the last 30 years, Richard Watts, an HBS grad with a wealth management practice in Santa Ana, Calif., has been working with the superrich. He calls his team “consiglieri,” because of their intimate and, he says, daily involvement with their clients, helping them to judge everything from contractors to potential equity deals.
One piece of advice he gives to each and every one of them (and they all have at least $100 million): Live like you don’t have the money. It will ruin your family if you don’t.
Sound alarmist? It’s meant to. In fact, Watts has seen so many internecine family feuds – particularly but not exclusively within the homes of the suddenly wealthy – that he recently authored the book: “Fables of Fortune: What Rich People Have That You Don’t Want.”
Given the attention around Facebook’s imminent IPO and the riches its employees are inexorably heading toward, I asked Watts to share some of his war stories, and advice. Our chat has been edited for length.
One of the overriding observations in your book is that every material thing that parents give a child steals a little something away from him or her. Can you elaborate for our readers?
Parents don’t ask themselves, ‘If I buy a car for my child or his 16th birthday, could I be hurting him?’ The last thing parents with all this money want is for their children to struggle, so instead, they tend to think: ‘It feels good for me to buy you a new car.’ But what you’ve taken away is the process that child might have gone through about whether to get a new or used car, along with the satisfaction of having worked toward owning one. You might have also put him in a position where other kids at school are envious of him. People generally like you more if you don’t act like you have money.
You also talk about your clients’ inability over time to be happy with what they have, especially when the wealth comes suddenly.
When it comes quickly, all of a sudden, there’s this giant panoply of material goods that they can buy, and their access to the world becomes huge, and they do become enamored with the idea that they can have whatever they want. But then those wants turn into needs. One day, it’s, ‘I’d like to have a boat.’ Later, it becomes, ‘I need to have a boat.’ Then they have the boat, maybe a 100-foot boat, but one of their peers buys a 150-foot boat, and they feel like they need a bigger one. One of my clients sunk $140 million into a 270-foot boat recently.
Frankly, it’s misbehaving, and the kids are watching and getting caught up in it. Suddenly, mom and dad are doing new stuff. We’re not going fishing as a family any more because now we can get a guide. All the anchors begin to pull up.
I understand that kids want familiarity. Can’t families form new traditions, though?
One of the difficult things of moving forward into that jet set is that it’s new territory all the time. And everyone is into different things. You start by going bird shooting on a ranch in Orange County, then the next step is spending $30,000 on a weekend up at Highland Hills Ranch, and the next step after that is shooting in Canada, where it’s $25,000 a day. The accessibility grows so fast that you want more and more and more and you push yourself up the ladder so quickly, that you forget why you liked something in the first place. With shooting it might have been simply to get up at sunrise with your dog.
How do you suggest parents balance their wealth with being responsible with it?
They should always err on the side of less. There is really no child that gains from having things gifted to him or her. Even when it comes to education, I’ve seen kids who’ve gone to Harvard on scholarships who’ve appreciated and done more with their education than [those whose educations were entirely paid by their parents].
Most important is that parents live responsibly in front of their kids. The most responsible families I have still live in homes that cost maybe $1 million to $2 million rather than $10 million and who are very intentionally not buying Bentleys and Ferraris. To take it to the nth degree, look at Warren Buffett, a guy who could buy a jet every day but lives extremely modestly.
Warren Buffett also bought his son a farm. Is it okay to try to help further a child’s career? What’s safe, comparatively speaking?
Of the various things a parent can do, I’m the biggest proponent of education. But I’ve had parents ask about giving their children a salary each month and I’ve told them it would be disastrous and in some cases they’ve told me they’re going to do it anyway and guess what? It’s been disastrous. After two years, the money is no longer enough, one of the kids is saving while the other has credit card debt and needs to be bailed out and the family is at war. And you can’t go backwards with these decisions.
By the way, in some of these cases, the “kids” are in their 40s and 50s. It’s a paradox, but once you finally get [rich], you have to live like you don’t have it.
What to do then? In your experience, does frugal beget frugal? How do you advise your clients to pass on their wealth?
Well, I think it’s foolish for parents to dump 100 percent of their wealth onto their children [when they die]. That’s creating the same situation as a parent enjoying a windfall and not dealing with it themselves.
We craft dynasty trusts with the matriarch and patriarch. Let’s say they have $100 million, and three children. One is a teacher, one is a doctor, and the last is an entrepreneur. We create a private bank with a board that’s led by four or five family representatives for those children. If the entrepreneur needs money, he has to file a business plan; if the teacher wants to buy a home, the board has to sit down and talk about that home, which should be tied to the teacher’s income. What we do is create a pathway where, within the confines of the children’s careers, they can get a vacation home or expand their business.
This goes on for two generations only – the kids and the grandchildren. By the time you hit the fourth generation, the [descendants] can choose how to disperse the money to good causes. If you are [the great grandchild of] a Getty, for example, you can walk to a place and say, ‘I only make $75,000 a year, but I’m going to build you a hospital. I can you give you money from my family foundation.’
So the idea is to enable those later generations to become benefactors without themselves being rich. Do you advise all of your clients to follow the same path?
A friend of mine represents a family with 500 heirs on the payroll, all of them subsidized, none of whom have to work, thanks to their great grandfather. That’s not good. He ensured the dilution of his family.
The truth is that usually by the third of fourth generation, the money is gone anyway. But in the cases where it’s not, when you see these families after three generations, you wish on them that their children could start over.