Private Wealth

August 4, 2008

Fulfilling Dreams


It’s one thing to spend a million dollars on a boat. It’s another to buy it and then realize you don’t even like it. Patrick Astre, a financial planner in Shoreham, N.Y., says he had a client who purchased a 55-foot boat. Several months later, he spent another half a million dollars on new motors, Astre says.

“Basically, the boat didn’t go fast enough,” Astre says. “I thought it was fine.”

Initially, the client, who manufactures equipment for the military, wanted to just sell the boat and buy a new one. But Astre told him that would be difficult. In order to avoid a luxury tax on items that cost more than $100,000, Astre had created a Bermuda corporation that purchased the boat and then leased it back to the client. With that structure already in place, it was no longer easy to sell it.

The client opted to work with the boat he had. Astre found an engineer out on Greenport, Long Island, to take it out for a ride. He was told the torque of the engine wasn’t powerful enough to lift the hull of the boat high enough out of the water to achieve a higher speed. The solution was to purchase new motors.

As the wealth management sector becomes more crowded, advisors to the ultra-wealthy are helping their clients do everything—from helping plan for million-dollar weddings to finding them new airports for their private jets. While some advisors farm these jobs out to concierge firms, others have begun taking a more active role with the hope that helping clients fulfill all of their desires—and not just their financial ones—will help cement the relationship.

Massimo Magliari, a senior financial advisor with American Express Financial Advisors, for instance, says his firm recently helped a client who was disabled in a car accident to negotiate a lease on a new car that she could drive with her condition.

“Five or 10 years ago, these might have been strange requests. Today, it’s something we welcome as value-added service,” Magliari says.
Clients turn to their advisors not necessarily for advice on how to find a car or a boat but because they need to know how to fund the purchase. Advisors say they’re not just getting an education in things like boat motors and bar mitzvah venues. They’re also getting a window into the spending habits of the rich and famous. And high on the list of their desires these days are small planes. Many don’t want to have to deal with the long security lines at airports, the crowds and the timetable. They like the convenience of being able to fly from a local airport on their own schedule.

Others will go on vacation, and they’ll like the place so much, they want to own a piece of it. Astre says he had a client who took a trip to Hawaii, and he loved it so much he decided to buy a huge tract of land there, on which he built himself a large house. In fact, there was so much land left over, the client built town houses on it that he sold and wound up making a profit of almost $10 million.

“He recouped the money he spent on his own house,” Astre says.

That’s the best-case scenario. But more times than not, advisors will see their clients spend money on mountain ranches or beach houses that they use only three or four weeks out of the year, and yet they’ll pay enormous amounts of money on the upkeep. They can afford to do that, but some advisors look at it and think, it would be more economical to rent.

But economy isn’t always part of the equation. Some advisors say they have clients who spent as much on a bar mitzvah or a wedding as the gross domestic product of a small nation. Others want second childhoods and decide, at the age of 55, that it’s time to go out and buy a motorcycle. One man bought a house that he hasn’t even visited, let alone seen, because it was on a really nice golf course, and he gets on his private jet to fly out there four or five times a year just to play golf. Another spent half a million dollars on a bar mitzvah at the Waldorf-Astoria.

Bruce Fenton, founder of Atlantic Financial in Norwell, Mass., says there are people who have hired Britney Spears or the Rolling Stones to come to their private parties.

“I’ve seen people spend a million dollars on a wedding,” Fenton says. “But that doesn’t seem as lavish as spending that on a 16-year-old’s birthday. A 16-year-old doesn’t have a clue as to how much money that really is.”

Harley Lance Kaplan, a certified financial planner in Sherborn, Mass., says he just helped a client buy an island in Maine. “I said to him, ‘You don’t like cold weather.’ He said, ‘Well, just in case.’”

In fact, Kaplan says he sees a lot of wealthy people purchase things for status reasons, even when they don’t care for them. He had one client who paid $600,000 for a Roy Lichtenstein painting he didn’t even like. Another bought a boat he didn’t know how to use. Yet another buys horses even though he is allergic to them. “If you don’t like the animal, that’s fine. But buying a racehorse when you don’t even want anything at all to do with horses?” Kaplan says.

Some clients will buy businesses on a whim, just because they can, and they’ll realize you can’t operate them as a hobby. Craig Carnick, a financial planner in Colorado Springs, says he had two wealthy clients who bought restaurants that they hoped they could run in their spare time, and in both cases, they wound up selling.

Carnick had another client who was a physician and a wine aficionado, and he wanted to buy a wine store. That turned out to be a mixed blessing, he says. The client went on wine-tasting trips to France and Germany and other parts of Europe, and he became known as something of an expert in the wine community, which he enjoyed. But he also found himself at the center of some heated and messy employee disputes that resulted largely from his being an absentee owner. After six years, he got out of the business. In the end, he broke even, Carnick says.

“I think if he had to do it over again, he probably would have just bought a bigger wine cellar,” Carnick says.
Problems arise when clients turn to their advisors to find out how to finance some of these hopes and dreams, and the advisor has to tell the clients they can’t really afford them.

“You might think that someone with $30 million or $40 million doesn’t really need to do a whole retirement planning exercise—because they’ve got so much money—but most people tend to live pretty close to what their capabilities are,” says Ben Johnson, an advisor with Laird Norton Tyee in Seattle. Johnson says the client may be able to afford something now, but it could put a dent in their retirement plan or their legacy.

Tim Phillips, CEO of Phillips & Company, a Portland, Ore.-based wealth management firm, says a lot of high-net-worth clients these days want to buy private jets, but while those with more than $50 million in assets won’t really have a problem, those with, say, $5 million to $10 million are pushing the envelope.

“They’re trying to stretch to own private aviation, because they’ve gotten a taste of it through a charter or through friends. And with the airport security lines the way they are, it seems to be the most compelling capital expense for a lot of these folks,” Phillips says. “But frankly, at those asset levels, it’s pretty tough.”

It’s not so much the initial outlay, which can be $2 million to $3 million. It’s the annual maintenance, the upkeep and the hangar. And it’s what they would have earned on that money if they hadn’t used it to purchase a jet. It seems like once someone buys an airplane, the money just keeps going out, one advisor says.

Yachts are even more costly—about five to 10 times more costly than a jet, Phillips says. They start at about $8 million to $10 million, and the operating costs are astronomical, Phillips says. The lower echelon simply can’t afford them, he says.

Phillips says he’ll walk the clients through an asset/liability model, where he takes their asset pool, determines what it is they want to fund with that money, and then assess whether they can afford it. For some, the answer is a resounding no—particularly for those in their mid-60s or older, who want to transfer wealth to the next generation. They realize that if they buy that jet or that boat, it could impact the size of that transfer, Phillips says.

Some don’t come to that realization on their own. And then the advisor is in the sticky position of trying to tell a client they can’t have their toys.

“Try talking a family into having a cheaper wedding for their only daughter or not splurging on a sweet 16,” says Russell Bailyn, a wealth manager with Premier Financial Advisors in Manhattan. “Most parents don’t want to hear it. And even if you give a rational explanation, they aren’t listening.”

The only thing an advisor can really do is place the clients’ other needs back on their radar screen, front and center, such as rising college costs and the need for them to save money for education, or looming retirement concerns, given that people now live longer and thus live well beyond the point at which they stop working. Even wealthy clients don’t want to feel like they could run short on funds during their later years, Bailyn says.

Oftentimes, it’s the millionaires—and not the billionaires—who are spending that kind of money on these life events. They’ll have maybe $8 million in assets, and they’ll spend $1 million on a wedding.

“That’s crazy to me. It’s over the top,” says Fenton of Atlantic Financial. “That’s a situation where it might have been nicer for the couple to have a nice new home. And if you’re a billionaire, you can do both.”

Fenton says one of the silliest things he ever saw was a man who won about $500,000 in a lottery, and he spent $200,000 of it on a new car for his 18-year-old daughter.

But it goes both ways: There are people who have lots of money, and yet they don’t spend very much of it. Fenton says some of the findings in a book called “The Millionaire Next Door,” written in the late 1990s by Thomas J. Stanley and William D. Danko, remain true today, such as the notion that the average millionaire will spend about $12 on a haircut while those with far less money spend about $20, or the fact that while some millionaires drive Mercedes-Benzes and Saabs, most drive very basic cars. Many of those interviewed for the book said they hadn’t bought a new suit in 20 years.

Fenton says it saddens him when he has clients who have so much and spend so little. He’ll tell them to travel the world. The phenomenon is more common with people who have built their own manufacturing business, perhaps in a blue-collar industry. Perhaps they’re the child of an immigrant, and they built a business over 40 or 50 years, and now it’s worth $100 million, yet they’ve never taken home a salary of more than $60,000. They’ll have $50 million in net worth, they drive a Ford pickup truck, and the most lavish thing they’ve done is take a trip to Disneyland.

“And then the kids inherit it. And so, sadly, this person has been pinching pennies for 30 or 40 years, and the money is only going to end up in a drug rehab program for their kids,” Fenton says.

It’s great to save money, Fenton says, but when you’re a billionaire and you’re mowing your own lawn and changing your own oil, you have to ask yourself, “What kind of quality of life do I have?”

There’s an old saying, “Do you die with a million dollars or a million memories?” The lucky ones manage to have both.

Copyright © 2008 Charter Financial Publishing Network