Following up last week’s entry on the risk of drug and alcohol abuse in wealthy families, the second risk from growing up in an affluent family I see among second- and third-generation family members is an overall sense of being “lost” in life. I frequently interact with individuals who have been raised in a wealthy environment, and they really don’t have a sense of purpose or meaning in their lives. Sometimes they are just “floating” and sort of hanging out. Other times they want to “go somewhere” and do something meaningful, but can’t find the right direction.

I have some observations about this dynamic and some possible underlying reasons. Although work is not the sole purpose or reason for living (thankfully), work does bring structure to our lives. As I have stated before, our culture has misperceptions about the purpose of work — primarily that we work to earn money. Thus, if a person or family has excess money for their needs and desires, they sometimes see no reason why they should have to work.

The problem with this view is that work is much more. The process of working provides us with the opportunity to learn, to try new tasks, to be exposed to new information and experiences, to develop new skills and abilitites, to problem solve and persevere, to create, to serve others, to accomplish tasks with our hands and see the results of our efforts. Just like the pleasure that comes from completing a difficult physical task out in nature — like climbing a mountain or running a marathon — so there is an innate sense of satisfaction that comes from working hard and completing a task. Also, when one does have to earn money to pay the bills or to save up to buy a car, there is the pride of accomplishment.

Individuals who come from families of wealth in some ways could be seen as being deprived of the opportunity to experience some of these feelings. There is an ancient Middle Eastern proverb that states, “The worker’s hunger drives him to work”. That is, when you are in need, you are motivated to work. Conversely, (and many political and economic policies are based on this belief) when a person feels no need or want, many people are not as motivated to work.

This issue speaks directly to parenting in our country and in wealthy families. If a child has everything they need, want, or could ever desire given to them (or provided for them), why should they work? What is the purpose of saving money if you know you will get the latest video iPod at Christmas or a luxury sportscar when you turn 16? If all you have to do is wait for the next holiday or birthday, and you will get whatever you want, why plan ahead or work on long-term goals?

So I propose that parents (and grandparents) engage in planned non-giving. Yes, you have the money to buy x,y or z. And yes, it would be a neat opportunity for your grandchild to go on an educational trip to (fill in the blank). But I suggest it would be better for them to have to earn some things (and experiences) themselves — and it will take longer for this to happen or they may “miss out” on some experiences, but the overall results in their life will be healthier.

One very wealthy family ($100M+) with whom I worked in Texas had it right, I think. The teenage kids had to pay for 50% of the cost of their first car. And their money had to come from either wages earned or birthday/Christmas money (that is, no trust money was involved). Plus, they had to pay for one half of their auto insurance. So the kids had choices to make. Play sports and work less, or work more and not go out for cross country. Buy a car now or save some more and get a nicer car in six months. This created an interesting problem for the family. One of the sons bought an older “beater” car, which was fine with the family. But many of the family’s wealthy friends would not let their children ride in the car because they did not feel it was sufficiently safe. Oh well.

One of the ancillary results of this issue — the lack of purpose and direction in life — has led me to do quite a bit of career coaching for family members. From teens to college students to young adults, and even middle aged adults — helping them find purposeful activity where they feel like they are using their skills and talents to help others or to do something productive with their life. Note that this is not necessarily an easy task, as has been addressed by a number of books, (see some of the resources put out by The Inheritance Project).

The “answer” to this issue is obviously not simple (”what is the purpose and meaning of your life?” “Why was I born into this set of fortunate circumstances?”). However, I do believe it is easier for individuals to actively engage in seeking the answers when there is a sense of struggle in life. Just like muscles become stronger when we push against resistance, so the fabric and core of “who we are” develops and becomes more clear when we have to struggle in life.

So, if you are a parent or grandparent, do your kids and grandchildren a favor. Don’t make everything easy for them. Don’t problem-solve for them all the time. Let them struggle. Give them the opportunity to persevere and overcome challenges (or maybe not) on their own. Through these difficulties they will gain the true sense of satisfaction in life that you want them to experience.

I apologize to my friend, Thayer Willis, for borrowing from the title of her excellent book, Navigating the Dark Side of Wealth, for this entry, but I really couldn’t think of a better description of the topic.

As I work with financially successful families across the country, I repeatedly see three negative patterns in family members. Most often (but not always) the problems are seen in second generation (children) and third generation (grandchildren) family members. The most serious of the three is drug and alcohol abuse. [I plan to address the other two themes in future postings.]

Drug and Alcohol Abuse

This is the “black hole” into which many individuals have fallen, some of whom spend their whole lives trying to escape from it. Unfortunately, others cease trying and either slowly kill themselves over time or end their lives abruptly.

Why do many wealthy family members struggle with drug and alcohol addiction? There are many possibilities, but I will share my own observations.

First, we need to recognize that many individuals struggle with drug and alcohol abuse, regardless of their financial status. According to the U.S. Department of Health and Human Services, in 2006 approximately 20 million Americans (8.3% of the population ages 12 and older) used illicit drugs within the month prior to the survey. Similarly, 23% of individuals 12 and older reported binge drinking at least once in the past month and 6.9% of the population reported heavy drinking (defined as binge drinking on at least 5 days in the past 30 days).  Interestingly, the binge drinking rate was 42% for young adults aged 18 to 25 and the rate of heavy drinking was 15%.  So we should expect a similar incidence rate for families of wealth. It may seem to some that the frequency of substance abuse is higher in wealthy families, but this may just be perception or the fact that these families often are more visible within the community. Regardless, I think the pathway of substance abuse for individuals from wealthy families has some unique characteristics.

The Pursuit of Pleasure. For some families their use of wealth is to pursue fun, excitement and pleasure. From the time the children are young, they go numerous exotic trips and the kids are sent to lengthy (four to six week) prestigious camps during the summer. As they become preteens and adolescents, they go on vacations every Christmas vacation and Spring break – to the family’s condo in Aspen for skiing, and to the beach house in Hawaii, the Caribbean or Mexico, along with cruises and excursions to Europe. In their later teens, they obviously go to the most challenging prep school (and many times, boarding school), drive luxury sports cars or SUVs, and basically pursue having a lot of fun. It is during this period (if not in middle school) that they start drinking, “partying”, and experimenting with drugs (usually pot and Ecstasy first).

The combination of access to easy money, a lot of free time, not much parental supervision, and a drive toward excitement leads to an expanded use of drug and alcohol. I believe additional factor includes a lack of purpose and meaning in life beyond pursuing pleasure.

In our culture, the primary view of work is for the purpose of earning money (to support yourself and buy what you need or want). If you have a lot of money (or your family does), the belief is that you really don’t need to work. So studying hard in school loses its meaning and finding a career direction isn’t a high priority (“I can always work for the family business or foundation.”)  In situations like this, it can be hard to find purpose or meaning in life beyond pursuing pleasure (see Jessie O’Neil’s book, The Golden Ghetto for her personal reflections on this issue.)

The coup d’etat of drug and alcohol abuse in wealthy families is that it is really difficult for the individual to “hit bottom”. It doesn’t take much money to keep an addict going (as evidenced by the homeless, unemployed alcoholics) and many wealthy family members have access to an almost unlimited amount of money. So how are they going to “reach the end of their rope”? Unless families take a very tough stand – to the point of seeming mean – the bottom may never be reached. And so the drug and alcohol use continues indefinitely.

Now, it is easy to describe a problem. It is far more difficult to give an answer.

I am not an addictions expert, by any stretch of the imagination. Each individual’s situation is unique, and there are many contributing factors to addictive behavior. However, I would suggest the following issues that families of wealth need to consider:

1. Be actively involved in your children’s lives. Do not parent by proxy, delegating your parenting to others. Be involved in their school activities and their peer relationships. Don’t be so busy with your activities that you are unable to supervise what is going on in their lives.

2. Identify the purpose and meaning of your family’s wealth and teach this to your children. Is your wealth only for your benefit? I believe if your view of wealth is primarily for your comfort and pursuit of pleasure, you run the risk of significant problems in your family in the future.

3. Understand that the purpose of “work” is more than earning money. Work (whether it is for money, volunteering, or chores at home) brings meaning to life. Using our time, energy and talents for the service of others gives us a sense of purpose. We need to work to develop our skills and abilities, and to find out what we are good at, and what we enjoy doing.

Like any aspect of parenting, there are no guarantees. I view these three issues as “vitamins” in a family’s life that can lead to a healthy family and help reduce the likelihood of serious problems.  There is much more which can be discussed regarding this topic, and I don’t want to diminish the seriousness of the issue with a light treatment.  But I think a brief introduction to some preventative steps that can be taken can hopefully cause some deeper thought with significant results down the road.

I’m on vacation this week — and when I’m on vacation (after the first few days of brainless activity), I dive in to books I have had in my reading pile for a while.  One of the books I brought, Inside the Investor’s Brain: The Power of Mind over Money by Richard Peterson, (published just this year) is quite interesting.  And I’d like to share some of the thoughts from the book with you all.

First off, Dr. Peterson is an associate editor at the Journal of Behavioral Finance, is a psychiatrist, a former stock trader and did postgraduate research at Stanford University in neuroeconomics (i.e. studying the neurology associated with financial decison-making).  So he is no lightweight.

Secondly, the primary focus of the book is to summarize the research which has been conducted over several decades regarding the psychological processes that underlie and impact investment decision-making, and to tie these factors to the physiological components that accompany them neurologically.  That is, Dr. Peterson looks at various decision-making strategies, the biases that interfere with good judgment, the emotional aspects (e.g. fear, overconfidence) that are intertwined, and what is going on chemically within the brain with these.

Rather than summarize the main points here, I want to just give some semi-random snippets of quotes that I personally have found interesting (page numbers follow the quote in parentheses).

“In investment management, mathematical genius may perform well in the short term, but it is no substitute for emotional intelligence.”  (2)

“The pursuit of profit for its own sake can quickly go awry. . . Pursuing profit as one’s primary goal can be a sign of emotional ill health. . . when money becomes the goal, rather than a by-product of enjoyable work, then emotional stability is apt to suffer.” (290)

“‘Our probability assessments shift based on how others present information to us.’” [Michael Maubossin]  Emotionally, investors have stronger reactions if possible outcomes are more vivid or imaginable. . .Stocks with exciting stories cause people to forecast high stock returns.” (179, 181)

“Because the future is intrinsically uncertain and market dynamics change, the past is a poor guide to the future.” (187)  “‘The fundamental law of investing is the uncertainty of the future.’ [Peter Bernstein] (179)  “‘The future is never clear, . . . Uncertainty is the friend of the buyer of long-term values.’” [Warren Buffet] (180) “‘Markets are constantly in a state of uncertainty and flux and money is made by discounting the obvious and betting on the unexpected.’” [George Soros] (182)

“But, in general, it is a congruence of characteristics, not any one individual trait, that leads to true excellence.  To achieve greatness in investing, education is the first step. . . . The next step is a self-evaluation. Identify your strengths and weaknesses and inventory your resources.  What is your psychological Achilles’ heel, and how will you protect it? . . . Small positive changes in psychological well-being, mental training and physical health improve the probability of successful decision making.  A slightly increased probability of success, over years of decision making leads to better long-term outcomes.” (289-290)

“‘Self-discipline is the single most important success factor.  Without it, nothing else matters.’ [Howard Fleishman, PhD, performance psychologist]. . . one’s degree of self-discipline correlates with wealth level.  In general, pursuing immediate gratification erodes prosperity. . .Investing ‘rules’ are useless for people who don’t first have discipline.” (295-296)  “‘No one can do your push-ups for you. [Jim Rohn]’” (290) 

“‘[Profitability] comes when the investor realizes that investment success does not come from external control, but from internal control.’” [Van K. Tharp] (301)

Dr. Peterson has a number of chapters on the emotional components of decision-making (intuition, fear & anxiety, excitement and its relationship to greed, overconfidence, the love of risk, and the impact of stress on decision-making).  Additionally, he summarizes a number of perceptual biases that affect making good decisions. (I hope to share those later).

To close, I’ll share from the preface to the book: “to really excel in investing, you’ve got to learn the skills to manage yourself.” (xv)

In my working with a variety of family businesses, one of the key issues to address is to develop a succession plan for the ownership of the business. That is, who will own the business in the future (and when, and how will this occur)? Obviously, the current owners want to receive fair financial remuneration and they usually want to ensure the ongoing health of the company, given that payments are set up over time.

In addition to the financial and business aspects, there are numerous family and relational issues which need to be addressed, as well. These include:

* how to be fair to all children/heirs, regardless if they work in the business or not
* can non-family executives buy part of the company?
* fears of non-family executives regarding their future
* the impact of non-working family members who become owners of the company
* conflicts and competing interests among family members.

Just like the complexity that exists in running a family business, so there are myriad interconnected issues in passing on the ownership of the business successfully.

This month I have an article addressing these issues in the Journal of Financial Planning entitled “Hidden Dragons: Handling Family Conflicts in Buy-Sell Agreements for Business Succession”. For those of you for which this is a relevant issue (whether you are an owner, a non-family manager, a family member, or a professional advisor), the article is posted on line (although the online version is a little “dry” because they don’t include the case examples).

Believe it or not, your approach to buying and giving gifts for Christmas can have a significant impact in the character development of your children and grandchildren. For wealthier families, I believe the gift giving process can affect how well the wealth transfer process in your family goes in the future. (However, the principles are applicable no matter the financial status of the family – the issues are true for lower income, middle income and wealthy families).

Essentially, ife is made up of two types of events:

*Small daily life patterns and habits

*Larger decisions and events (which often have symbolic meaning).

Christmas, and all of the family traditions which accompany it, typically falls into the latter category. A question to consider is: What will be the message communicated, directly or indirectly, through this year’s gift exchange?

In a recent NPR program, it was discussed how manufacturers are creating gifts for children and young people tat are more and more expensive — $100 is baseline, with $200-$300 not being unusual (video iPod’s, PS-III’s, wii’s).

What happens in a family (or society) where 7 to 10 year old children expect a gift (or more than one) that costs $200 or more? [To put it in perspective, that equates to over 15 hours of after-tax wages for the median income family in the U.S.]

In a related commentary, Dawn Turner Trice argues that restraint is one of the best gifts parents can give their children (through modeling) today.

My concerns have to do with the messages which can be learned (or inferred) by young people when they receive excessive gifts:

Entitlement. A foundational principle of life is that there is a relationship between responsibility and privileges. When a child repeatedly receives numerous privileges (in this case, expensive gifts or exotic vacations) without paying for any of it themselves, a sense of entitlement can develop. That is, they come to believe they deserve the privilege (and they should continue to receive more and more).

Parents and grandparents want to show their love by giving gifts that their children and grandchildren will enjoy and appreciate (I don’t think you want to give them a gift they will not enjoy and don’t appreciate). But, just like after eating too many sweets and rich desserts at a buffet, one ceases to enjoy the delicacies – so an overabundance of gifts leads to a lack of appreciation to what is received.

A focus on material possessions to bring happiness and fulfillment. In some families, the primary (or sole) focus of Christmas and family gatherings can become what cool gifts the young people will receive (ever notice how most older adults do not ask for much and are pleased with very small personal gifts?) Clearly, receiving nice gifts once or twice a year (for example, on your birthday) does not necessarily lead to a materialistic view of life. But if these are the exclusive examples of demonstrating love within a family, then material possessions can take on a great deal of meaning for individuals.

Not understanding the reality of limited resources. Another key principle in life is the understanding (and acceptance) of the fact that we all have limited resources – time, energy, and finances. In wealthy families, money can appear to be unlimited to children and young people because they never see an end of it. The family can buy virtually anything they want and do anything they please. But the fact is: even wealth is limited. Ask the Vanderbilts, who went through over $100 million (in the 1870’s!) in two generations.

[There have been a number of solid books written on the challenges of being raised in a financially wealthy home (Gallo & Gallo, Silver Spoon Kids; Minear & Proctor, Kids Who Have Too Much; Kindlon, Too Much of a Good Thing; Hausner, Children of Paradise) that provide some helpful information on these issues.]

In the family business, the sole goal becomes “making money”. Individuals who become accustomed to a high-consuming lifestyle, need lots of money. And the family business can become the mechanism to generate the desired cash flow. The problem is – the focus becomes “making money”, rather than understanding that businesses are successful when they provide quality goods and services that people desire.

Let me tell you what I believe the potential risks are to families (and family-owned businesses) if you have a pattern of giving excessive gifts (or vacations) to your children and grandchildren:

1. They will grow to not appreciate the gifts (but still expect them).

2. They will begin to seek more & more expensive gifts and/or exotic vacations to satisfy their desires.

3. They will not understand the effort and intellectual capital it took to create the wealth that bought the gifts.

4. They may begin to value you more as a reservoir of financial resources, and less as a person they want to get to know and spend time with.

5. When the time comes to distribute the family’s wealth at your death, there is a far greater likelihood of conflict, selfishness, and acrimony.

6. Their focus in business will be more on “making money” rather than providing quality goods and services – and this can lead to poor decisions and unethical practices which can kill the company.

Am I overstating the case? Am I chasing windmills? Maybe, but I don’t think so.

I would suggest that you do the following this Christmas:

a) Go ahead and give a nice gift to each person. But show restraint (whatever that may look like in your situation) and only give one big gift.

b) Consider giving a smaller but more personal gift.

c) Structure some activities or discussions around other important values:

*talk about your family’s history – your early life, your parents’ or grandparents’;

*do a small service project together;

*take time to share together as a family those parts of your life for which you are genuinely thankful;

*play games together; have fun; laugh together.

I hope you have a great Christmas. I plan to!

p.s. I will not be writing for the next two weeks. This coming week I will be in SF, running a number of family meetings which will take all of my time. I then will be on Christmas vacation with my family.

In today’s Wichita Eagle business section, I have an article entitled “Family-owned businesses still power U.S. economy.” There are actually two main points in the article.

First, many people do not realize how many family-owned businesses there are – 89 per cent of all U.S. businesses. And these companies create 78 percent of all new jobs in our economy. Common examples of family-run businesses are restaurants, trucking companies, residential construction companies, auto dealerships, and all of the construction-related trades (electricians, plumbers, heating and air conditioning, roofers). As a result, the health of family owned businesses is crucial to the U.S. economy – and more focus and attention is being given to them.

The second issue is that the transfer of family owned companies across generations typically doesn’t go well – with only 30% successfully transferring to the second generation, and only 10% to the third generation. Previously, this has been attributed to estate taxes, but research now suggests that up to 70% of the failure rate of business succession is directly linked to a lack of trust and communication within the family.

So if you are in a family owned business, you really should be paying as much (if not more) attention to how well you are getting along as a family, maintaining connectedness and trust, as you do to planning for estate taxes. Think about it – be proactive and don’t let walls build up among family members. Talk. Meet together (and not just about business). And keep the lines of communication open – it will pay huge dividends for you and the business in the future.

Well, it happened again. In working with a two-generational family, the issue of taxes and personal values came up. Although there was a little bit of conflict, the real issue was confusion: “What should I do?” And the confusion was caused by an advisor’s sole focus on reducing taxes, rather than hearing the real desire of the client.

The matriarch is a very kind, gentle woman and she is also very generous. She and her deceased husband are classic examples of the “millionaire next door” (see Thomas Stanley’s excellent book of the same name). They were hard workers, frugal, lived simply, saved, and were wise investors. As a result, she has more than enough money for her needs and is able to share with others.

Because of some circumstances in the extended family (her children and their families), she decided to give a significant monetary gift to each of them. However, it was above and beyond their annual exclusion ($22,000 to each couple), and also went beyond her lifetime gifting exclusion (she had used up much of it previously). As a result, gift taxes were going to be paid on the gifts.

The question that came up was this. Depending on how the gift was structured and recorded with the IRS, it impacted whether Mrs. Y (the giver) paid the gift taxes or whether her children (the recipients) paid the taxes. And to complicate things, if she paid the taxes, the government would get approximately $30,000 more than if her children paid the taxes out of the gift they received.

Because of this last fact – that the family would be paying $30,000 more in taxes if Mrs. Y paid the gift tax – her attorney told her that the kids should pay the taxes. This made sense from the overall view of the family’s estate. However, Mrs. Y was confused. She wanted to share some money with her family, and yet by having them pay the taxes, it reduced the amount they actually would receive.

So Mrs. Y and I talked. After hearing the facts about the situation, and her resulting confusion, I told her, “This is really not just a financial decision. It is a values decision – about what is most important to you. Is it more important to you to avoid paying more to ‘Uncle Sam’ or is it more important to you to get more of the money to your children right now? There is not necessarily a ‘right’ or ‘wrong’ answer to this decision – it is more about what you want to accomplish.”

Mrs Y immediately affirmed, that in this situation, it was more important to her to get the maximum amount to her children, even if it meant paying more taxes. She then smiled and said “Thanks”, and communicated her desires (and decision) to her attorney and accountant.

Yes, the title reads somewhat like a National Enquirer headline, but it’s true – focusing solely on avoiding taxes (whether capital gains tax, income tax, or estate taxes) can lead to family conflicts.

This past week I had the opportunity to meet with a family, to review their wealth transfer plan and their plans for giving to charity. As is the case with many astute investors, this couple has experienced some significant growth in their assets as a result of some of their investments doing quite well. For example, one of their investments over the past year provided a 100% return on their initial amount invested (that is, they doubled their money). Plus it looks like the company they invested in will sell and they may receive as much as eight times their original investment! Obviously, this is “once in a lifetime” scenario which has gone well for them – it will create millions of dollars in investment income they were not planning on. (“Not a bad problem to have”, as most people reply.)

Here’s the real problem. In discussing what they should do with the extra $5 million they will be receiving, it became clear there was a difference of opinion on what to do with money. From the point of view of minimizing the capital gains tax they will be paying, there is one set of action steps they should take. From a philanthropic perspective – all of sudden having a large sum of money and seeing an opportunity to share with others, there is another set of potential action steps. And from a long-term planning point of view (investing the sum so that it creates additional income, allowing the “breadwinner” to retire early), there are other steps which could be taken.

So what is the right direction? What should this family do with their windfall profits?

It depends. On them. On their values. On their future plans and goals. On their worldview and life priorities.

That’s the point. And that is the discussion we started to have together (it is not finished yet). What is important to you? How do you want to “invest” this gift to you? Maybe we should look at balancing needs and perspectives, rather than use an “all or nothing” approach.

Unfortunately, however, most financial advisors focus solely on the financial aspect of financial decisions (and specifically, on taxes) – and miss a very important part of decisions involving money: values.

So, next time you are making a financial decision (I hope it is one where you have lots of extra money), remember – don’t base it solely on its impact on your taxes. There are a lot of equally important variables to consider as well.