with interesting, successful people who have the resources and abilities to do amazing things.”
Cole earned a bachelor's degree from Emory University in Atlanta, Georgia. He is also a Certified Financial Planner and holds Series 7, 9, 10, and 66 licenses from the NASD.
Cole resides in Los Gatos, California, with his family.
PART I
The Meaning of Wealth
CHAPTER 1
The Wealth Management Challenge
The United States has always been the land of opportunity. Nearly anyone with a good idea and considerable drive can find a way to begin a business, nurture it, watch it grow, and hope to pass it on to children and grandchildren. In fact, it's estimated that 80 percent of American businesses are closely held or family enterprises the owners have built for themselves and succeeding generations.
How many of today's entrepreneurs put their names on the door and expect the business to fail? Probably none, but if they were to return to Earth within two generations, in most cases they would find that not only was the family name gone from the door, but also that the business itself had failed. According to a 2012 Harvard Business Review article by George Stalk Jr. and Henry Foley, “Avoid the Traps That Can Destroy Family Businesses,” 70 percent of family‐owned businesses, which hold the entrepreneurial founders' hopes for their families' futures, will be gone by the third generation. Most of them will fail or be sold before the second generation takes over, and only 10 percent will function as privately held companies by the third generation. The dreams of family legacy will be faint memories, perhaps preserved only in old newspaper clippings or pictures tossed into a shoebox.
The adage “Shirtsleeves to shirtsleeves in three generations” became a well‐known prophecy because it is, unfortunately, true. And it appears to be true in virtually every culture. In Ireland, the saying is, “Clogs to clogs in three generations.” In Italy, it's, “Stable to stars to stable” in the same time frame. In Japan, “The third generation ruins the house.” The Chinese proverb is, “From paddy to paddy in three generations.” Brazilians say, “Rich father, noble son, poor grandson.”
What it often means is that the first generation works hard to build the wealth and a better life for the family; the second generation, which has known both the frugality required to make a fortune and the advantages wealth confers, understands the value of hard work and either maintains or even expands the family's assets. The third generation, which has never struggled, is less likely to see the relationship between work and reward and more likely to spend down the money – and the cycle must begin again.
Consider, for example, the Vanderbilts, who are the poster family for the diminishment of wealth. It's a well‐known cautionary tale. The first‐generation patriarch, Cornelius Vanderbilt, took a $100 loan from his mother and built it into a $100 million fortune by the time he died in 1877. It's reported that the money he left to his family was more than the United States government held in its Treasury at the time. In the second generation, William Henry Vanderbilt, who died only eight years after his father, doubled the family fortune to an amount equivalent to $300 billion in today's economy.
But by the third generation, the Vanderbilts abandoned the wealth‐creation strategies of Cornelius and William and began a cycle of spending more than they were creating. The four sons of William Henry spent fortunes on some of the most imposing dwellings in the country. Cornelius Vanderbilt II constructed a 154‐room home – the largest private residence in New York – on West 58th Street. Next came The Breakers, a seventy‐room “cottage” in Newport, Rhode Island. This Italian Renaissance palazzo was modeled on those of sixteenth‐century Italy and was crammed with priceless antiques and art.
Cornelius's brother, William K. Vanderbilt, also built a summer home in Newport: Marble House. According to the Preservation Society of Newport County, Marble House was inspired by the Petit Trianon at Versailles and cost $11 million, $7 million of which were spent on 500,000 cubic feet of marble.
Frederick William Vanderbilt, the most private of the brothers, built an imposing mansion at Hyde Park, with furnishings purchased from Napoleon Bonaparte's Malmaison Palace.
And in Asheville, North Carolina, the youngest of the four brothers, George Washington Vanderbilt, erected his country home, the Biltmore, America's largest private estate, which contains 250 rooms and features extensive grounds and gardens. At the time George owned the property, it comprised 125,000 acres – the size of several American townships combined. Today the property encompasses 8,000 acres, but the gardens, outbuildings, and the house itself remain almost beyond belief in their scope and attractiveness.
The lifestyles of the family members, which also included top‐of‐the‐line yachts, horses, and other expensive pastimes, were as lavish as the family's residences (ten of them on New York's 5th Avenue). Their excessive spending came at the cost of mortgaging the family's financial future.
As Michael Klepper and Robert Gunther point out in their book, The Wealthy 100, by the time of the first Vanderbilt family reunion in 1973, less than a century after Cornelius Vanderbilt's death, there was not a single millionaire among the 120 members of the descendants in attendance.1 The family was spending, but as later generations married, had children, and increased the size of the Vanderbilt clan, no one was rebuilding the fortune. They had forgotten an important lesson: As a previous generation passes away, the next generation becomes the first generation, responsible for maintaining and increasing the fortune for the growing family. That didn't happen, and it was a recipe for disaster. The wealth was static, the family was dynamic, and the Vanderbilts didn't recover.
Today, some of the family, such as Gloria Vanderbilt and her son, Anderson Cooper, are highly successful, but their current affluence comes from their work in art, fashion, and media rather than as a result of inheritance, much of which was eaten up in lawsuits that took place when Gloria was a child.
In the early days of the Vanderbilt dynasty, it's possible the family believed the sheer size of their holdings protected them from any untoward outcomes, so spending was unabated. However, most families, even those with substantial wealth, are aware that if they don't plan well, an end point is possible. In fact, if they fail to plan, they are unknowingly planning to fail.
Of course, successful wealth transition involves careful financial planning that encompasses such factors as tax and investment strategies, asset management, information management and reporting, and the consequences of growth as successive generations marry and have children, to name a few. None of these factors exists in a vacuum. Everything from climate change to regional wars to a technological crash may affect investments and financial planning, and a failure to appreciate risks and rewards can have significant deleterious effects on the maintenance of a family's wealth.
However, in their book, Preparing Heirs: Five Steps to the Successful Transition of Family Wealth, Roy Williams and Vic Preisser show that even the best tactical planning is not enough. Their research with more than 3,000 families over a period of twenty‐five years demonstrated that:
• 60 percent of unsuccessful wealth transitions could be traced to a breakdown of communication and trust within the family.
• 25 percent were caused by inadequate preparation of the heirs.
• Only 15 percent were brought about by all other causes, and of those, only 3 percent had to do with professional failures in accounting, legal, financial, and tax advice. The rest usually could be chalked up to the family's failure to have a family wealth mission or consensus.2
Families
Steve Hargreaves, “Squandering the Family Fortune: Why Rich Families Are Losing Money,”
Roy Williams and Vic Preisser,
