Fables of Fortune

by Richard Watts

  One afternoon, I visited a couple at their home. When I arrived, they told me their fifteen-year-old son, Brian, was in trouble. I quietly continued to listen as they expressed their disappointment, and then I sat back to observe.

  When Brian arrived home after school, his dad and mom were waiting for him on the front porch. To the average teenager, that would have signaled some sort of trouble. But Brian was oblivious to any wrongdoing. He nodded at them and started to go inside.

  Dad stopped him in his tracks. Brian had borrowed his father’s credit card, searched the Internet, and bought a new Bose stereo system complete with extra speakers. When the boxes arrived, his parents immediately thought someone had stolen their credit card, but they soon realized something else had happened. Usually, if you steal a credit card, you steal the stuff you buy, too. Upon investigation, they found out it was Brian who had ordered the $3,000 stereo.

  When they confronted their son, he comfortably admitted without hesitation he had made the purchase. “Why?” they asked.

  He answered, “I ordered this for my birthday because it’s coming up in two weeks. You were going to buy me something anyway. I just ordered what I wanted to save you the trouble.”

  The two parents looked at each other with an “Uh-oh, we forgot about his birthday” look, and they drilled down again. “Why did you use Dad’s credit card?”

  His rapid answer: “Because you can’t write a check for an Internet purchase, and I avoided paying sales tax by purchasing the stereo out of state.”

  Again, his parents looked at each other as if the explanation had shed a whole new light on Brian’s decision to make this transaction. They lost focus on the amount of money he had spent, his need for the gift, or the fact they might have liked to contribute to its selection.

  There was a strange lull in the conversation. I realized Brian had explained his actions well enough to satisfy his parents. I struggled to keep my opinion to myself.

  In a matter-of-fact tone, Brian then told his parents he had discovered Bose had recently marketed a new and better model that cost only $1,000 more, and he had already ordered it on the same credit card. Mom and Dad made a feeble attempt at scolding Brian for spending the extra money without their permission, but he was already leaving the patio headed for video games in his room and other pressing distractions on his day’s agenda.

  Brian turned back at the front door and yelled back toward the patio, “Dad, the old stereo needs to be repacked and returned. Could you take it to the office and have one of the shipping workers return it?”

  Dad grumbled at his wife as if he disapproved of this inconvenience, but he didn’t say a word to Brian. The matter was closed.

  Children of humble families who invade the economic space of their own family interfere with the family’s ability to manage their everyday financial needs. If a kid from an average family charged unexpected items on a credit card, mom and dad couldn’t make their mortgage payment. Most children wouldn’t imagine doing something like that to their parents. The level of financial accountability is high, and punishment for ignoring it is immediate.

  But for the super-rich, no amount of expenditure on the part of the children will interfere with the family’s functioning or lifestyle. Spending is not tied to economic survival, so children can acquire material things relatively unnoticed. Wealthy parents must be vigilant in order to notice the infraction.

  Parents of “children of entitlement” often feel betrayed and underappreciated. Their children independently develop a spoiled attitude that makes them undeserving of a parent’s respect, “especially after all we have given them.” Many parents respond by first withholding parental approval and then stanching the flow of money. The end result is a breakdown in the parent-child relationship.

  THE CONSEQUENCES OF ENTITLEMENT

  Imagine taking a lion cub out of the wild, teaching it to suck on a bottle, and raising it in a beautiful enclosure. If we were to remove the bottle and put a live rabbit in the cage, the lion cub wouldn’t know what to do with the rabbit. The lion only knows the bottle. Therefore, it would only understand it was being denied sustenance. Given enough time to develop a raging hunger, the cub will eventually bite the hand that feeds it rather than the rabbit.

  Bill Oscar was forty-eight years old, the oldest son in a super-rich family. The senior Oscar, who started with nothing in Nebraska, had taken his ambition and a little seed money to the West Coast in the 1950s. Several decades later, the family owned more than a thousand apartment units in Los Angeles and nearly twenty-thousand acres of farmland in the Los Angeles Valley.

  Bill was in charge of overseeing the property side of the business. Hired managers were responsible for each building, but Bill was in charge of collecting the rent and paying the expenses monthly.

  One morning, Bill sat at my desk with guilt written all over his face. He confided in me that the scheduled rents totaled nearly $200,000 per month, but only $180,000 ever made it to the bank. He listed vacancies on the books even though the units weren’t vacant. Then Bill confessed he was appropriating $20,000 a month for his own needs. He explained he was living with a girl who had insisted he give her an American Express card so she could maintain the type of lifestyle she wanted to live. Bill had bragged to her about the wealth he had gained from his own investments. His girlfriend was calling his bluff. She charged more than $10,000 every month. Bill thought he would lose her if he cut off her allowance, but I think his motive had more to do with his ego.

  When I suggested his actions amounted to a criminal offense—probably a repeated felony—Bill laughed incredulously. “This is my money,” he said.

  “Actually,” I explained, “it is your mother and father’s money.”

  Bill declared that using money from one’s own family could not be a crime. “Aren’t I legally entitled to it?”

  Somehow he had rationalized that because of my role as his parents’ attorney, telling me would clear his conscience. Because I was the family counsel, he assumed I would not tell his parents. This forty-eight-year-old married man with children was a thief, taking from his family to support the shopping habits of his mistress. But he felt entitled to help himself to whatever he wanted.

  When Bill’s parents found out, they acted mildly disappointed, chose not to confront him, and hired an independent property manager to collect the rents in the future. Basically, Bill’s parents treated the situation as if he did not have the proper skill set to handle his job. Following the same pattern, they did not mention the incident to his brothers and sisters. Why risk family disharmony? The matter was closed.

  Sometimes you just have to recognize and admit the animal on the leash is calling the shots. By the way, the girlfriend bolted three weeks later, on to greener pastures.

  COMPRESSION AND EXPANSION

  Most of us experience a life filled with repeated fluctuations of compression and expansion. Difficult times last for a while, and then when they let up for a moment, we can move forward. Compression can be caused by both internal and external influences. Internally we struggle with our own egos, our ambitions, our sense of personal worth, our societal position, our self-image, our images of how others perceive us, our health goals, our addictions, our failings, and our feelings of being financially successful and good providers, to name a few. Externally we get a promotion at work, we get a raise, the economy is healthy, interest rates are low, our neighbors are gracious to us, or we get fired, lose our home to foreclosure, lose a parent, wife, or child, get a traffic ticket, or find our automobile just decided to quit running. Others have characterized this journey as traveling through the hills and valleys of life.

  If you believe you can avoid these rhythms at any income level, you are being unrealistic. They find everyone. Many people believe money relieves these symptoms of everyday existence. One thing is undeniable: There is a direct correlation between people feeling better as compression ends and expansion begins. The burden is temporarily lifted, an
d for a while life lets out a big sigh of relief and the mind experiences a moment of contentment.

  Oddly, most parents could be convicted of trying to make our children’s lives easier and less taxing than our own. Such parental ethics are either well-intentioned errors or just plain laziness. There is nothing better for children than to crash and burn as a result of their own errors in judgment and mistakes, for them to experience the consequences of their choices. You can tell a child not to put her hand on a hot stove ten times without success. It only takes letting her insist on it once for the child to learn the lesson.

  There are occasions when the super-rich put their kids on a course for destruction at the advice of professionals.

  One of the wealthiest families in our country sought the advice of the best estate-planning lawyers. Such lawyers are schooled in methods of maximizing the intergenerational transfer of wealth with the minimum amount of tax. They do not have training in the psychology of what happens to the children afterward, like a cruise-missile guidance engineer whose only concern is successfully delivering the payload to its target. They are not aware of or responsible for the explosion and collateral damage at the destination.

  For this super-wealthy family, estate-planning attorneys created an irrevocable trust that delivered $50 million of the family’s estate to their two heirs with less than half the typical gift or estate tax. Success! Not really. What the parents didn’t realize was the trust was not revocable. The parents could not change the terms. The children were in their twenties, and the trust was set to trigger distribution twenty years later. Why be concerned now? But the twenty years sped by quickly, and when the children were in their forties the money was distributed. By then, with twenty years’ growth, the principal had grown to more than $100 million. With no oversight or training, the two children took on their newly acquired wealth in the best way they knew how.

  To address the insecurity each child felt living life as the child of a local mogul, they addressed their deficit with excess: limousines, jets, mansions, lavish parties, numerous relationships outside their marriages, drugs, and alcohol. The dad, still a conservative billionaire and a gentleman, lives with the disappointment of children who are an embarrassment to their community. This family’s story is truly an example of converting a liquid asset into a long-term liability.

  My own family has difficulty with these issues. No one is immune. And as the numbers get larger, so does the proportional damage to our kids.

  Several years ago, my son called me in a panic. Actually, it was more of a confession. Over four years of college, unknown to me, he had racked up nearly $45,000 in credit-card debt. He had been juggling seven different cards companies had offered to him while he was in college. His mother and I paid for his tuition, and he was supposed to be on a fixed monthly budget. Apparently he felt the need to keep up with the partying and travel habits of his classmates, many of whom were given credit cards when they started college for discretionary expenses. The interest alone on his credit cards was more than $700 per month, based on an average interest rate of twenty-one percent, and his required monthly payment was nearly $2,000. It would take him twenty years to pay off all the debt.

  His mother immediately ran to his defense, citing his good grades, his tenacity in securing a job two weeks after graduation, and his past record of little or no delinquency. My wife and I did not see eye to eye on my decision, but however painful it was for her, she honored my wishes. I gave my son two options: (1) Declare bankruptcy and live with the credit damage, or (2) Follow my rules for handling the debt. He chose the latter. Here was the deal:

  I would consolidate the debt to a six percent loan on my house.

  He would pay $700 per month until it was paid, and all his extra income, raises, and bonuses would go to the debt.

  Finally, he had to promise to own no credit card of any kind.

  These sets of conditions became known in my family as FBC (Financial Boot Camp). Because this monthly payment was one-third of my son’s total income, he was forced to give up his apartment and move in with three guys, sleep on a couch, and share a bathroom with two other guys for two years. He made sack lunches to take to work and bummed rides home to save gas. He learned to take dates to happy hours where he could buy a $2 beer and get free food. It was humiliating for him to say “no” to invitations from coworkers to go out to dinner or away for the weekend. He stayed home.

  His mother and I could not discuss the arrangement, as she still felt my solution was cruel and punishing. It was terrible for me, too. On the first of each month, I would go online and check the loan to make sure the $700 had been paid on time. Each month the principal was reduced about $500. A twenty-three-year-old’s lifestyle was severely diminished because of a monthly payment. But it was his payment. And the cause of that payment was his choice also.

  After two years, he applied and was accepted to business school.

  “What about the payment, Dad?” he asked.

  I replied, “The payment is still due. You have to figure it out.”

  He was able to secure a partial student loan to make the payment for twenty-four months of business school. He became a bargain animal in business school; he refused to own a car, rented or bought used furniture for next to nothing, and then sold it for a modest profit at graduation.

  We still had one final hurdle. The balance due was $23,000. Through his own persistence he secured a job as an investment banker at J.P. Morgan in New York City. His signing bonus netted him $25,000. That day he called, “Dad, I have $25,000 in the bank for the first time in my life and a massive student loan. You said four years ago I had to apply any bonuses I received toward the debt until paid. The day has come.”

  I pushed the phone aside as I sat at my home computer that morning to mute the lump in my throat that was causing me to choke.

  “Jump on your computer, Dad, and pull up the credit card account. Tell me the balance.”

  “$23,142,” I said.

  There was silence. He had set his account for an electronic payment transfer.

  “Watch the balance, Dad!”

  Before my eyes the balance I had monitored every month for four years changed in an instant to $0.00. Lesson over! What he said next I will never forget.

  “Dad, it sure feels good to be broke!”

  What he never knew was how his father sat at his home computer that morning and wept with pride. But it’s not about the parents, it’s about the children. Children need to be in charge of their destiny. My son has developed a wealth of integrity in the process. His mother now says the whole plan was our idea as parents.

  Most of the super-rich never experience compression. Generations grow up in a state of continual expansion, never going through the learning process that comes when we deal with problems or times of want. As a result, most of them are ill-equipped to handle even the smallest of life’s obstacles.

  In the economic slowdown that began in 2008, many of my “bulletproof” clients became very concerned about their financial status. One multimillionaire presented a spreadsheet that broke down exactly how much his wife was spending on Starbucks per year—around $3,400. He asked her to make coffee at home until the “squeeze” eased. Another man with a net worth of more than $200 million began to drive on side streets rather than paying tolls on the highway. Those who have been brought up in an atmosphere of constant expansion react strongly to the threat of compression—whether or not they will actually be affected by it in a meaningful way.

  The super-rich often deny their children the opportunity to develop integrity through experiencing compression. They deny their kids the satisfaction of earning things on their own and the fulfillment that comes from a job well done. Sadly, what begins as an act of love often ends in the decimation of a child’s character.

  COLD CASH AND COLDER HEARTS

  Children of wealth and their financial advisers often use the phrase “liquidity event.” This seemingly innocuous term holds a d
ark meaning; they are talking about mom and dad beginning “the big sleep” and the money finally showering down.

  I’ve spent countless afternoons sitting in conference rooms with super-rich parents as they listen to their children plan and scheme about how to bring mom and dad’s ship of wealth into port with the least amount of taxes paid. Their entire motivation is to retain the greatest amount of money for themselves.

  Lawyers, accountants, and advisers join in the process of “estate planning,” in which mom and dad are persuaded to either relinquish ownership of their money in the form of various trusts and tax shelters or to just give money to the children. One creative fifty-three-year-old “child” coined the phrases “warm money” and “cold money” to define, respectively, money that is received as a gift during the lifetime of the parent and money that is transferred after the death of the parent.

  Children of entitlement tend to take an inappropriate interest in the mental acuity of their parents as they age. In a normal family, when mom and dad become a little bit eccentric as time goes on, the children tend to leave them alone to enjoy their senior years without too much criticism. They chuckle when mom gives the grandchildren the same Christmas presents as last year or dad loses his keys … again.

  But when children of entitlement see any decline of mental clarity in their parents (real or imagined), they often become very “concerned” about the well-being of their parents and the empire their parents are managing. Many times the children will hold meetings without mom and dad present to discuss their concerns. The ultimate result is usually an attempt to wrest control of the cash away from mom and dad.