Caren Chesler - Resume and Articles

September 2011 issue

Why Wealth Disappears

Family businesses—no matter how well known—rarely succeed past the third generation.

By CAREN CHESLER

The J.R. Torrey Razor company manufactured straight razors from about 1850 to the end of World War I. It initially imported high-carbon steel razors from Sweden, but by the 1870s, Worcester, Mass., where the company was based, had become a steel manufacturing center, and J.R. Torrey Razor was one of its most prominent firms. The company’s success made the Torrey family one of the wealthiest in Worcester. They were the first to own an automobile and one of the first to have a telephone—though they soon removed it because the only other person in town with a phone was the butcher.

After the war, however, America’s love affair with straight razors began to wane as many people switched to safety razors. Joseph Torrey, the second generation of Torrey’s to lead the firm, couldn’t transform the company to make cheap disposable blades. He was also too preoccupied with flying—he held the fifth private flying license ever issued in the U.S.—speculating in the stock market and other escapades to manage the company. By the time he died in the early 1960s, his sister, Marion, had to rent out rooms in her house to students to make ends meet.

“It was a real rags to riches to rags story,” says Matthew Erskine, an estate attorney in Worcester.

Joe Torrey erroneously thought straight razors would continue to do well, Erskine said, even though other companies were phasing them out and manufacturing other cutting instruments.

“Joe was the CEO and controlled the stock, and he genuinely thought straight razors weren’t going to go away. But what do you do if a family member who is next in the succession is not doing a good job? How do you evaluate them objectively? That’s always an issue,” he says.

Something similar is going on in the Murdoch family, where Rupert Murdoch says his company, News Corp., which is embroiled in a telephone hacking scandal, is far too big and complex for him to have known everything that was going on, and yet at 80 years old, he claims to be the only one capable of cleaning up the mess, Erskine said.

“It’s a classic example of there being no succession plan that anyone believes in,” Erskine said. “As a result, there’s no plan for anyone else to manage that company.”

Indeed, 97% of family businesses do not survive past the third generation, according to the Family Business Institute. Look at the Forbes family, which has reportedly been forced to sell off many of its properties because of financial difficulties. In June, Bloomberg BusinessWeek ran an article entitled, “Fall of the House of Busch,” about how it took four generations to build Anheuser-Busch, one of the most celebrated companies in America, and only one for it to come apart. The St. Louis-based beer company that produces Budweiser survived Prohibition, labor strikes and price wars, growing to generate nearly $17 billion in revenue in 2008. But after failing to adapt to a changing market, the company was acquired by Belgian-Brazilian conglomerate InBev in a $52 billion hostile takeover. After the takeover, August Busch IV, the 47-year-old CEO at the time who had a reputation as a party boy, left his wife. Only his girlfriend, Adrienne Martin, a former Hooters waitress, saw him regularly, according to the article. After a night of partying on December 18, 2010, Martin was found dead from an apparent drug overdose in the young Busch’s home.

Wealth professionals say wealth often doesn’t make it to the third or fourth generation not because of estate taxes or an inability to transfer the wealth. It’s an inability to transfer the knowledge of how to create it and how to keep it.

“Would you rather have Tiger Woods’ money and trophies and golf clubs, or his knowledge of the game and his swing? The latter, because if you got that, you could get it all back,” says Simon Singer, founder of the Advisor Consulting Group, an Encino, Calif.-based firm that provides financial and estate planning advice.

Daniel Walker, president of Farmers and Merchants Bank in Long Beach, Calif., says the generation that created the wealth can be highly productive, but they often don’t teach those skills to the second and third generations.

“They often just spoil their children to death, and the children never have to work. And so they don’t,” Walker says.

Walker says he has a client who is in his 70s and still runs an aerospace business. He still supports his four children, who not only didn’t go into his business but also haven’t gone into anyone’s business. They simply don’t work. Walker says it’s his client’s own fault: He never empowered his children or invited them to join his business, and he never disciplined them for not working.

“I’m not saying if you empower them, they’ll automatically be winners,” Walker says. “But if you don’t give them a chance, and if you don’t try to find whatever their niche is in life and allow them to push forward in a productive manner, there’s no way for them to safeguard the assets accumulated by the first generation. They just don’t understand how to do it. So they will literally waste away those previous generations’ dollars.”

Gary Altman, an estate-planning attorney based in Rockville, Md., says his own family business is a lesson in what can happen when knowledge isn’t passed on through the generations. His grandfather started a children’s coat manufacturing business, but he died suddenly in 1972 of a heart attack. Altman’s father, who’d had no management role prior to his father’s death—he was little more than a clerk—suddenly found himself in the catbird seat. Within six years, he had significantly expanded the business, but he did not realize that you couldn’t simply make profits by selling more coats. Those coat sales have to be profitable, Altman said.

In the years that followed, Altman’s father had more than one opportunity to sell the business, but he turned them all down. By 1984, he had spent all the reserves, had borrowed money where he could, owed money to unions and other people, and basically shut the business down. Twelve years after Altman’s grandfather died, the business he had started in 1934, one that had sent seven grandchildren to college, was finished.

“Many times, the founding member of a business does not nurture and help his or her children to become strong, resourceful leaders. Instead, they want control at all costs and are not willing to share control or ideas or money while they’re alive,” Altman said. “So when the founder dies, maybe suddenly, and control passes to a child or children who were not really integrally involved—and who may feel they have something to prove—the younger generation can run the business into the ground.”

Succession planning is as important in a family business as it is in a public corporation. Without it, the child who takes the reins—either because he’s the oldest or the one who lives closest to home—may not be the most qualified. Moreover, the family members who remain with the family business are sometimes the kids who got D’s and F’s in college. They return to the family business after school because it’s the only place they can get a job.

But families can lose their wealth by the third generation even when a family business isn’t involved. Sometimes, the second and third generations don’t even understand how to hold on to or create wealth. Wealth professionals interviewed for this article say time and again they’ve seen a first generation that creates the wealth followed by a second or third generation that only knows how to spend it. It doesn’t help that the kind of personality that creates an enormous amount of wealth is often a larger-than-life, type A personality who likes to remain in control.

The typical family has a patriarch who spent way too much time at the office, because the fact is, ordinary people doing ordinary things is not what makes money. It’s when people do extraordinary things that wealth can be created, and when that energy is put into work, something is often sacrificed at home, Singer says.

“They’ve usually put themselves first as opposed to those in their families, and it creates adversarial relationships with their spouses and children,” Singer says. “You can get all kinds of conflicts, drug and alcohol abuse [see sidebar]. We usually run into them after the addiction has already established itself, and the patterns are already created.”

Gene Sulzberger, a relationship officer for PRS Investment Advisors, a wealth manager in Miami, said the generation that comes after the wealth isn’t always as good about saving or watching its spending because it doesn’t have to; the children think they’re going to inherit a lot of money—probably because they are. Sulzberger says he typically sees the second generation lacking savings and perhaps spending lavishly, but still making money. The third and fourth generations, however, never even learned to save, and they grew up in that lavish lifestyle and may not have the incentive to go make more money.

“I tend to see a family’s wealth frittered away in the third or fourth generation,” he says.

He says he once had a wealthy client who had a son that, as Sulzberger puts it, wasn’t the brightest bulb. When his father died, and he inherited millions of dollars, the boy’s so-called friends came around and tried to get him interested in various ventures, many of which were restaurants. The son wound up blowing through all his money, and the last Sulzberger heard, he was living in the mountains of North Carolina with a friend.

“I guess the moral of the story is, you need to do estate planning when the children are not as sharp or bright as you’d hope them to be. Because they can be taken advantage of. When you have a famous name, you attract people who are going to take advantage of that second generation,” Sulzberger says.

He notes that all of the children in this particular family had full access to their money. None of it was in trusts. That’s not ideal.

“Sometimes there are fears or issues that stop people from wanting to do estate or wealth planning. The Latin community down here, for instance, has no tradition of wealth planning. They come from countries where there was no ability to even do wills,” Sulzberger says.

Rob Romanoff, a partner at the Chicago-based law firm Levenfield Pearlstein who specializes in asset planning and preservation, had a client who had almost a dozen restaurant franchises, and when he died, he left them to his two sons, each in his 40s. The restaurants were fairly successful until they were taken over by the sons, who couldn’t get along. They decided to split the restaurants. One brother sold his, thinking he could be successful doing something else. The other held on to his. The brother who sold wound up spending most of his money and now has little to show for it.

“It wasn’t substance abuse or addiction. He just spent. And he lived beyond his means,” Romanoff says. “The generation that created the wealth had a different ethic about spending than the next generation, and that’s not uncommon. I’ve seen that a lot.”

He knew another family in which the father created a finance-related business that was very profitable, and so his five children grew up with a lot of money. The family still owns the business, but the children spend lavishly on all kinds of material goods like houses, cars and, in some cases, drugs. There are no safeguards against it, he says.

Nothing has been put into a trust. In fact, the father gave each child 15% of the business when it was in its heyday about ten years ago. At the time, it seemed like a good way to pass on wealth and circumvent estate taxes. But they began receiving several million dollars a year, which is like letting the dog have access to his food bag.

“If you put a few million in most 30-year-olds’ hands without a whole lot of guidance, it may get wasted,” Romanoff says. “They don’t have any idea that the gravy train may end.”

Anheuser-Busch’s famous brewery on the company’s 100-acre campus in St. Louis is a National Historic Landmark. According to the Bloomberg article, there are stables on the property that house the Clydesdale horses that appear in the company’s beer ads, and in those stables hangs a 600-pound brass chandelier from the 1904 World’s Fair. The company’s philosophy apparently was, “Spend money to make money and make friends.” However, its founding fathers probably didn’t mean one should swing from the chandeliers in order to do it.

Addiction A Bane Of The Wealthy
In the final moments of the movie Willy Wonka & the Chocolate Factory, Wonka says to the little boy who will soon be taking over his business, “Charlie, don’t forget what happened to the man who suddenly got everything he always wanted.”
“What happened?” Charlie asks.
“He lived happily ever after,” Wonka says.
If only that were true. Studies have found that the more money someone has, the more likely they are to use drugs or alcohol. A 2008 study by the World Health Organization found that higher income was associated with a greater likelihood of drug use.
Those who treat wealthy addicts say they can usually be divided into several distinct categories: inherited wealth, earned wealth and celebrity wealth. The most likely to recover, according to those interviewed, are people who earned their money in this lifetime and still have a sense of what life was like without it. They can remember a time when they had more humility and less extravagance, and they had a clearer sense of who they were.
“Inherited wealth is probably the most difficult to work with. If there were actual statistics, there would be an incredible relapse rate. It’s a real tough population. There are places in Malibu that basically warehouse these trust fund babies,” says Heidi Kunzli, owner of Privé-Swiss, a treatment center in Salisbury, Conn., for “high-profile” addicts.
Some of them have horrific substance abuse in their families that goes back generations, Kunzli said. And so the children not only grow up in a dysfunctional family where addiction has become part of the family fabric, but with all the wealth, many didn’t learn any values or work ethic. They have no ambitions or goals—because they never had to have any. And they often don’t have to deal with the consequences of their bad behavior because they have people on the family payroll who will cover their tracks.
The bright spot is that if wealth keeps people in drugs and alcohol, if they remain addicted, they’re not going to have the money for very long.
That’s because the more money people have, the more drugs and alcohol they can consume. After a while, if the addict has any control over the family’s finances, the wealth may be put in jeopardy. While there are a number of reasons wealthy families see their fortunes dwindle, substance abuse is one of the most common, according to professionals.
“What happens with a lot of these guys is once they start to make millions—billions in some cases—the power really goes to their head,” Kunzli says.
She has had a billionaire hedge fund manager in and out of her clinic over the years because he was using his money to buy all the drugs and sex he could ever want. He wound up addicted to cocaine and sex. His wife took the children and left him, and he became suicidal.
“They come to a point where they’ve made it to the very top and basically, once they stop this really intense dog-eat-dog climb to get to the top, there’s a feeling of, well, now what do I do?” Kunzli says. “We see this a lot with executives, this feeling of ‘What’s next?’ Nothing satisfies them anymore.”
Paul Hokemeyer, a New York City-based family therapist for the wealthy, says he had one client who was a powerful figure in the financial industry, living in Connecticut with his wife and children, who would get drunk and hire male prostitutes. The only reason he stopped was because he fell in love with one of them, and it threw his life into chaos.
“With hedge fund managers, they basically have these very highly paid, high-powered, high-pressured lives with a lot of sexual infidelity. A lot are using prostitutes. And a lot are using cocaine,” he says.
For adults, the addiction may be brought on by excess or stress. Many teens from affluent families start abusing drugs and alcohol because they have parents who aren’t around or are simply too controlling when they are.
Eileen Sullivan, a family counselor from Corte Madera, Calif., who traveled in these circles when she was young, says children who were intensely coddled are looking for an epic experience. If they don’t have those experiences on their own, they will create them.
“Often, kids from privilege have been so coddled, they have to create a crisis to have a sense of their own inner strength,” Sullivan says.
Some addiction comes on more subtly. Alesandra Rain, who runs Point of Return, an addiction clinic in Westlake Village, Calif., says she sees a lot of wealthy patients who have become addicted to pharmaceutical drugs like Xanax, Ativan, Klonopin and Valium, as well as sleeping pills, such as Ambien and Lunesta. Many start out taking them for stress or because they have trouble sleeping, and they wind up addicted.
“That’s how it started with Michael Jackson. He couldn’t sleep,” Rain says. “A lot of the wealthy are under tremendous stress, and they’re on anxiety medications or sleeping pills.”
The younger set often uses a combination of drugs and alcohol that include oxycodone (also known as Oxycontin) or cocaine. Pharmaceuticals can be appealing because they’re more discreet than, say, alcohol. Celebrities, for instance, know they’re being photographed a lot and don’t want to be seen falling down drunk.
“The adults will come in for opiates they were taking for pain management. They’re not addicts, but they don’t realize they’re taking enough Oxycontin to make 12 street jockeys happy,” says William Oswald, founder of Summit Malibu, an alcohol and addiction treatment center in Santa Barbara, Calif. “We’ve seen more and more pain management clients than ever before.”
The problem with the wealthy is that it’s harder for them to realize they have a problem because they don’t face the usual consequences that might compel someone of lesser means to seek out help, like losing a job or family.
“I had a client who was a 47-year-old executive who got a $15 million bonus and had a house in the Hamptons, a wife and a girlfriend. How can we have a conversation about what alcohol does?” Hokemeyer says.
People sometimes have a vested interest in keeping their rich friends or relatives high. Friends may like the access they get to a privileged party scene, or having their drinks and cocaine paid for. Siblings may like it if their brother is strung out because it could mean a bigger inheritance for them. Advisors may not want to bring a problem to their client’s attention for fear they will be fired.
Therapists interviewed say it’s often the children—usually the daughters—or the chief financial officers or chief operating officers who contact a treatment center for their parent or colleague.
“The only time we get wives calling is if the husband has moved out of the house,” Kunzli says.
Wealthy parents are usually alerted to the fact that their child has a problem either when they’re flunking out of school or they’re facing a lot of drunk-driving violations.
Or their kids may be developmentally stuck. Their child’s friends will go off and get jobs and internships, and their kid has the social skills of a 17-year-old. They become an embarrassment, and that’s when the parents will contact professionals for help, says Russell Hyken, a family counselor in St. Louis.
“I call it forced coercion. They’ll say, ‘Son, we’re cutting you off until you get off the drugs,’” he says.
Trust funds are often used to try to strong-arm an addict into recovery or keep them away from the family fortune. Steven Zelinger, an estate attorney with Rabil, Kingett & Stewart in Turnersville, N.J., says he’s currently handling an estate for a woman who passed away about a year ago. She set up a trust for her brother, who has been addicted to cocaine and alcohol for years, to ensure he would only be able to access money for emergencies. The woman, 64, and her brother, 61, had inherited several million dollars from their father years earlier, but the brother squandered his $1 million on his addiction.
“The husband, who is now the trustee, said at least the guy is pretty up-front about his addiction. He just doesn’t care,” Zelinger says. “The brother wants to know where the money is. I don’t think he understands how the trust is set up.”
Just as the addiction plays out differently for the wealthy, so does recovery. Therapists say the wealthy can be so entitled and defiant—both young and old—that just getting them to a meeting or facility and keeping them there is difficult. It doesn’t help that many of the wealthy either don’t want the public to know about their addiction or can’t afford for that to happen. The family will sometimes brush it under the rug rather than deal with it, therapists say. The last thing they’d want is for their adult child to air the family’s dirty laundry.
In some cases, there are issues of fiduciary responsibility, if the wealthy individual holds a high-level position at a public company. His addiction could be perceived as a breach. The result is that there are AA meetings specifically for the wealthy.
“There’s a whole secret world of AA meetings that go on that the public doesn’t even know about. That’s where most of your celebrities are that don’t want the public or the media to know they have a problem,” Kunzli says.