by Frazer Rice
Beyond flying privately, there can be other expensive addictions: exotic vacations, fancy restaurants, high-flying charitable organizations, and memberships in exclusive clubs. If a client of mine begins to venture beyond the realm of comfortable spending, I bring them back to the analysis of how much they cost. If they’re willing to revisit their goals, the investment portfolio, and long-term plans we’ve designed to meet those goals, it becomes easier for them to understand how their current spending decisions can impact their future lifestyle. They need a clear understanding of the difference between what they want to do and what they need to do. This can be a difficult discussion and one that changes over time.
Many people who are generous with charities, or pay for their children’s or grandchildren’s educations, spend too much of their wealth. This is not a function of how much they cost but instead how much they spend on others. Once again, it’s important to revisit their goals and align them with their gift-giving and altruistic expenses. I encourage clients to be “respectfully selfish” and take care of themselves first before giving everything away. This can often be the focus of annual or quarterly meetings to ensure that their goals and spending are correctly aligned and on target.
I’ve had many clients whose spending was out of control. It wasn’t necessarily bad spending; it was just excessive gift-giving to charities, education expenses for family members, and other benevolent expenditures. In a sense, this becomes a King Lear problem, when people give away too much and are unable to maintain themselves later. We’re normally able to return them to health, however, by finding ways to reduce spending to preserve or enhance their lifestyle. Remember, if you spend too much, there is little anyone can do to help you.
Creditors and Lawsuits
We live in a litigious society. As a reformed lawyer, I should know! From your line of work, to where you live, to your lifestyle habits, there’s always the threat of losing wealth through lawsuits. There are especially litigious people who are constantly looking to skim from others’ wealth. These lawsuits and attacks can happen to you regardless of whether you did anything wrong. Sometimes it’s just bad luck—maybe your business was hit by lightning, or someone put a mouse in the beer that was sold from your factory. Maybe it’s someone else’s poor judgment. What if your sixteen-year-old son borrows the car and runs over someone? A $20 million fortune can turn into a $10 million fortune overnight.
In any business environment, there can be disputes over what’s been provided, what’s been paid for, or the quality of what’s been paid for. If questionable components get transferred through your product, someone may go after you. At the same time, you have the employees. Practically any issue can pop up in the way of human resources, whether it’s an accusation of discrimination, a workplace accident, an undocumented worker, or a class action lawsuit. You must be on the lookout for those risks, because you, as the one with the deepest pockets, will be the first target.
To mitigate this risk, you should have a professional review of your property and casualty insurance. At a minimum, wealthy people need robust umbrella insurance policies that cover the gamut of issues that can arise. These are policies that cover against bad luck and bad judgment. A professional in risk management can help you understand your litigation risks and exposure and help you spend the appropriate amount of money for the insurance to mitigate these risks.
Without professional advice, you might overinsure for a risk that is not applicable to your situation while underinsuring for something that is relevant. You could end up living in Death Valley and paying for flood insurance or living in New York and carrying volcano coverage. A professional who understands your business and home life can stitch together the right mix of insurance for coverage that is efficient, smart, and relevant. Wealthy people are high-profile people. Thoughtful insurance is a smart way to protect one’s wealth.
Theft and Kidnapping
As people become wealthy, they become a target for theft and kidnapping and must guard against both. Some people in good and safe neighborhoods become complacent about their visibility, the demonstrations of their wealth, or the availability of public information about them. For the wealthy, it’s not a bad idea to have an expert analyze the vulnerabilities of their property or lifestyles to get a better understanding of how they might be robbed, exploited, or otherwise harmed by predators.
In this Kardashian world, people’s lives are being played out on a worldwide stage. People broadcast their every movement on Instagram and show off the jewelry they’ll be wearing to an event. Unfortunately, that’s information that can be used by predators. We’re increasingly advising our clients to have an expert do a social media audit and give an overview of what to be aware of from a security standpoint, especially before events where there will be ostentatious displays of wealth. As part of that audit, there may be a recommendation for armed security personnel.
As for kidnapping, think again of the Kardashian robbery as an example. This is a woman who had security and it still didn’t help. You may not need to surround your home with concrete walls, fifty-caliber machine guns, and alligator moats to prevent intruders from taking things or abducting people. However, we are certainly beyond the point of living comfortably with unlocked doors.
Inside your home, I recommend having two safes. The first safe is for show, and holds a couple of thousand dollars and a fake Rolex. The second safe holds the actual valuables and is well hidden. If someone breaks into your house and demands the contents of your safe, you may be able to minimize your losses with this subtle subterfuge.
Cybersecurity and Extortion
Cybersecurity is also a serious threat that is mushrooming and becoming more exotic, with new threats such as phishing and malware. Increasingly, people are having their accounts hacked and their private information stolen. As part of your protection, you should have backups of important information.
Be cautious about where you access your accounts. If you use an ATM at a strip club, don’t be surprised if the next transaction logged on your account is from Bulgaria. Convenience is nice, but public ATMs may not be the best option. It would be much better to use an ATM at an established bank with video surveillance.
With any electronic accounts, you need to change your passwords regularly, use strong passwords with the highest security protocols, and use a different password for each account if you can. If you have a security breach in one account, you want to limit the damage to that account. You don’t want those fourteen hackers in a Russian basement to automatically gain access to your other accounts. Report the breach as quickly as possible and bring in experts if your accounts have significant exposure.
Be especially mindful of the usual games that hackers play. As a rule, respond to email requests for information as a last resort. Build trusted relationships with your various vendors and bankers, and insist on double-layer verification. It can be inconvenient, but the hassle is worth it. Scammers’ tricks have become more advanced, and the newest social engineering may involve people calling you for certain pieces of information. There are even phone tricks where you’re asked a question, and if you answer yes, that audio recording triggers a parade of unauthorized transactions. Anytime you’re confused by phone calls or online inquiries, err on the side of caution. Provide as little information as you can, and seek help from authorized sources that you trust.
Be cautious about which online sites you trust with your credit card information. Similar to having two safes in your home, you should consider having two credit cards. The credit card you use most often should have a lower credit limit to reduce your exposure in the event of a breach. Also, when given different options for fraud protection, you should take the maximum protection that the credit card companies offer.
Online banking is another risk when it comes to cybersecurity. If you have a problem in the future, it’s helpful to have a personal relationship with someone at your bank. Instead
of relying on an 800 number and a call center in India, you want to be able to call someone you know and trust in the case of an emergency. The faster you can speak with someone who knows your situation and can get answers for you, the quicker the bank’s resources can be allocated to fix the problem and limit the damage. For example, my banking information was once stolen, and roughly $15,000 had been raked from me. I got in touch with my personal contacts at the bank and they responded quickly and effectively. I can’t imagine the outcome would have been the same if I’d been forced to use an 800 number and an overseas call center.
Be aware of becoming a target of extortion. There is always a possibility someone may try to enrich themselves by extorting money from you, whether it’s done by putting you into a compromising situation and asking for money to make it go away, or by smashing into your car and blaming you for the wreck. If you’re involved in a lawsuit attaching any fault to you, you’ll want to have a good lawyer. It’s probably a good idea to have that kind of relationship established early and strengthened to the extent that your lawyer is reachable with a fast phone call. Trouble waits for no one and speed of response can be useful in mitigating damage or defusing a threat. If a legal threat becomes a full-on lawsuit, settling is an option to quickly and discreetly resolve situations, and it keeps your legal issues out of the headlines. This helps to prevent setting you up as prey for other unscrupulous people.
Finally, in situations where alcohol or other drugs and influences may impair your judgment, have a family member or someone you trust nearby to keep you out of harm’s way. You should avoid situations where you can cause harm to anyone, and you should especially avoid bar fights. By punching someone, you can create greater damage than expected. What initially seems like a cheerful release of testosterone can quickly turn into a multimillion-dollar wrongful injury or death lawsuit.
Disaster Recovery Plans
I find it useful for my wealthy clients to have a disaster recovery plan. This can be done primarily by your wealth manager and can also be created in conjunction with other experts. When building a disaster recovery plan with clients, I ask them, “What if you wake up one morning, check your account balance online, and the balance is zero? Who do you call next?” Then we’ll play out that scenario a bit to determine whom to call in that situation.
Remember my recommendation about having someone you know at your bank? If you are wealthy, it’s likely you already have those banking relationships. They should be accessible around the clock to ensure any problem can be resolved quickly. When you discover on Saturday morning that your $10 million account has zero dollars in it, you want answers now—not Monday when the bank opens. You should have a list of contacts at the various institutions you do business with, as well as backup contacts you can call.
In building your disaster recovery plan, consider a legal scenario. If you run somebody over with your car, what do you do next? It’s a terrible thing to think about, but you want to react in a way that protects you on all levels, not just legally. Obviously, the first call in that situation should go to your lawyer. I also advise some of my wealthiest clients to have a public relations plan in place for emergencies. If an issue arises that they don’t know how to handle, they can call their public relations specialist for help. Your property and casualty insurance provider can be a good source of expertise as well.
Finally, having an emergency plan is an important component of your disaster recovery plan. Increasingly, you hear about the military concept of a “bug-out bag.” If everything falls apart and you need to get out of Dodge, are you ready? What resources do you need? Having ten thousand bars of gold in your basement isn’t going to help you when the zombie apocalypse arrives. We tell people to pick a number—maybe $25,000 in cash—which should get them pretty far if circumstances become dire. And by dire, I mean the things that have happened in New York City in recent years: the 1994 firebombing in downtown New York City, the 9/11 terrorist attacks, and Hurricane Sandy.
Hurricane Sandy effectively shut down the city for seven days. Living in New York City, I can personally attest that people living in the city seemed to be okay for the first three days, but things soon became worse. It’s not pleasant when you are without water and power and food, when the traffic lights don’t work, the ATMs are empty, and you don’t have access to other resources. People began to feel like refugees in their own borough, and they started getting unfriendly. You can build an exit plan that would address this and other scenarios.
Taken to the extreme, a billionaire’s exit plan may include a compound in New Zealand with private jets and helicopters at the ready. On a smaller scale, especially for people in popular areas or major urban environments, you may want to talk through some what-if scenarios with your family. What if the freeways are shut down? What if public transit is suspended? What if there is unexpected flooding again? You can game out these types of scenarios and build your exit plan. It’s worth practicing once in a while.
Nearly every major corporation has a set of disaster recovery plans designed to enable them to account for their people when there is an emergency. The same may be appropriate for wealthy individuals. You may want to plan the place you would go, the way you would get there, and the people you would meet or contact if things go haywire. This will prevent you from being stranded with an empty wallet and a car locked in an inaccessible garage.
Answering Our Budding Thespian
We began this chapter with an initial meeting with an actor about to hit it big. His issues went something like this:
My ship has come in! I’ve signed a $25 million contract to make a movie. I’m young, handsome, and the world is my oyster. I’m flying around in private jets, dating supermodels, and I’m never going back. This is how I want to live. What do I do to protect myself and ensure I don’t end up waiting tables back in Burbank?
My Answer
To loosely quote the great Dave Chappelle: save your money. You may have just earned $25 million, but this money needs to last the rest of your life. More may be coming, but it’s foolish to rely on that. Look at professional athletes, such as running backs in football. Statistically, if you’re still a running back past the age of thirty, you’re one in a million. In unpredictable professions like football or acting, you may have only a short window of opportunity for leveraging your talent. What if you get injured or don’t perform as well as expected? Your first contract could end up being your last contract. When a lump sum of money comes in, no matter who you are—an actor, an athlete, a business executive, or the beneficiary of a will or trust—you should consider a program that ensures a reliable income for the rest of your life (and beyond).
You’ll need to protect yourself from predators and costly accidents. If you’re a movie star, a car accident could put you in a worse position of leverage. To mitigate those types of risk, you’ll want to make sure you have the right experts around you and insure against the risks and threats to your wealth. It might entail Lloyd’s of London insuring your legs against knee injuries, or it might be coverage protecting the more common risks facing business owners (such as medical malpractice insurance for doctors).
Be mindful of your spending. And if you’re a high-profile person, remain aware that you can easily become a target. As awesome as it is to meet Beyoncé and George Clooney and have your own groupies, high visibility comes with many negatives. It can attract predatory people who would love to make their reputation or paycheck off your back.
When you become wealthy, it’s amazing how many people come out of the woodwork looking for handouts or business funding. Other people will approach you with unsolicited advice on subjects they know nothing about. This can include people who mean well. If your wealth has come suddenly, you’ll want to maintain your support system of people who provide you with clear advice about important life issues. You don’t have to abandon where you came from or shed your previous sources of advice. However, while w
ell-developed friendships are important, you also need to be willing to bring in the experts who can protect you and help you grow going forward.
Chapter Seven
7. Who Manages Your Wealth?
It’s not surprising that wealthy families come away from all this analysis and deliberation and think, “You make this sound easy, but we need some help.” That is the sanest statement you can make. You have big and complicated issues.
Even the most sophisticated of clients will rely on outside advice. It is physically impossible to be an expert in every subject matter required to properly structure, administer, invest, and protect wealth. And why wouldn’t you lean on outside resources? Outside assistance should create a professional wealth management environment and free up time and resources for you to pursue other projects, whether they be business related, philanthropic, or just plain fun.
When you understand that it’s okay to ask for help and to intelligently lean on experts, you’re ready to move forward. Let’s look at a recent example from an investment banker who reached out to me as he was beginning to approach retirement. This gentleman is used to getting his own way and getting deals done by force of will and ingenuity. He hasn’t got time for jibber-jabber, so he is pretty blunt.
“Hi, Frazer,” he said to me. “You know the drill. I’m sure you have handled this situation before. I’ve been slaving away as an investment banker for years, working on everyone else’s companies and plans. Now I need to take a look at my own wealth planning and make sure I’m well-positioned for the future.”