Connecting clients and services.

First in a two-part series.

Almost a century ago in a world inhabited by our grandparents, the chasm between old money and new money seemed unbridgeable, as wide as the Pacific Ocean. In early 20th Century society, old money was viewed as being so much better than new money.

In reality, however, old money in America wasn't very old. It was simply that the behavior of some individuals who acquired wealth very quickly offended others.

Old-money scion Herbert Pell captured his class's patronizing attitude toward new money in this Depression-era musing. "Property in this country is drifting into the pockets of those who can keep it and out of the hands of those who can merely acquire it," Pell is quoted as saying in Nelson Aldrich Jr.'s Old Money. "It is obvious that the standards of the 'keeping' class will be different from those of the 'getters' and on the whole they will be better for the country at large."

In today's American meritocracy, Pell's condescension toward "those who can merely acquire it" has generally given way to a reluctant admiration, perhaps even envy, for newly minted entrepreneurs. Indeed, the adage "that money's so old there's ruston it," accurately sums up new money's critique of old money today.

While old money rusts away in trusts secluded within large banking institutions, new money provides the fuel for the engine of independent financial advice. In their best-selling The Millionaire Next Door, Thomas Stanley and William Danko claim that 80% of

American millionaires are first-generation wealth. Mark Spangler, a Seattle-based advisor whose clients include many individuals who have retired early from Microsoft, finds their greatest fear is that money will ruin their children. In some quarters today, the image of a spoiled, shiftless trust fund baby lounging around his Palm Beach yacht is as socially unacceptable as the crude, crass, self-made entrepreneur of the 1920s was.

The financial services industry spawned an entire white paper industry researching the consumer demands of these new millionaires next door. Four of the more well-known studies include Mark Hurley's The Future of the Financial Advisory Business, 1999 and 2000, at www.undiscoveredmanagers.com; Schwab Institutional's Strategies for Building a Successful Wealth Management Firm, 2001, at www.schwabinstitutional.com under the Market Knowledge tools section; Quantum Alliance's The Future of the Independent Financial Advisor, update 2002, at www.qa3.com; and Peter Wheeler's The Financial Services Industry's Adoption of the Family Office Model, 2002, at www.familyofficenetwork.com.

One trend this research notes is a demand among new-money clients for what were traditionally old-money services. Along with a growing supply of "newly affluent individuals," there is an increased demand for family office services-first-generation wealth seeking one-stop advising. The Schwab study warns, "Investment advisors who don't explore broadening their service often risk being shut out of the game." These services include investment management, tax compliance, financial planning, family business consulting, philanthropy con-sulting, trust services and concierge services (bill paying, household administration, security services).

While the demand for expanding services is indisputable, the ability to provide this plethora under one roof is still in beta testing. The marriage of old-money services to new-money clients may or may not prove to be a match made in heaven. Cautions Richard Wagner, principal of WorthLiving LLC in Denver, Colo.: "Small advisory firms that try to do everything for everybody are going to be increasingly under the gun. On the other hand, giant firms trying to operate on a more personal basis have a built-in problem. So, I think you're going to see people splitting into either more functional or more advisory models. Advisory models won't provide all the services of the functional models."

Furthermore, as many planners are discovering, new-money clients may not even be interested in old-money services. Kathy Longo, principal of Accredited Investors Inc. in Edina, Minn., works with a wide variety of clients and says that the service needs for old-money clients and for new-money clients are very different. "Before you start offering bill-paying services, be sure you know your clients because new-money clients won't be interested or willing to turn their checkbooks over to you."

"Know your clients," resonated as a common chorus among planners interviewed by Financial Advisor. However, just defining the difference between old-money and new-money clients proved to be challenging. What exactly is old money?

Chris Dardaman Jr., partner with Polstra & Dardaman LLC in Atlanta, works with high-net-worth families, mostly first-generation wealth, but some second. "In our firm we tend to think in terms of first generation and second generation rather than old money and new money," he explains. "After all, second-generation wealth might still feel that the money is new money to them. First-generation people tend to be more conservative, Millionaire Next Door types. They tend to live below their means (e.g. Sam Walton driving a 20-year-old pickup) and to be philanthropic. Second-generation wealth doesn't have the same work ethic or philanthropy ethic. However, I tend to distrust such generalizations because sometimes these traits are reversed."

For Longo, old wealth does not begin until the third generation. "The second generation is not as influenced by wealth (in the sense of entitlement) as the third because they still have the advantage of witnessing the hard work of the creator generation. They still equate value creation with hard work." It's only in the third generation that the cause-and-effect relationship between work and money really disappears, she finds.

Unlike Dardaman and Longo, Myra Salzer works exclusively with inheritors. While her clients extend into several generations of inherited wealth, many clients of her firm, Wealth Conservancy Inc. in Boulder, Colo., are second- and third-generation wealth, or G2 and G3 in the shorthand of old-money advisors. Like Longo, she finds that G2 and G3 wealth is very different. "In my experience, the second generation does not grow up wealthy in the traditional sense. Their fathers are busy creating the wealth, and G2 pays the price of love and attention for this money." Since wealth creators (G1) are frequently disinterested in wealth management, G2 clients have no one to teach them about managing money. They generally learn on their own and provide the third and fourth generations with a model to follow.

However, the primary difference between old and new wealth is the client's relationship to money, not his or her generation level. As Salzer reflects, "No matter what generation of inheritors I'm dealing with, my clients don't have a cause-and-effect relationship with their wealth. They don't have the benefit of having received this money as a result of something they have done. Their ownership with it is very different than a wealth creator's."

Wagner expands on this point. "If you're the son or daughter of somebody with whatever it takes to make a ton of money, I can't think of any offspring less likely to resemble their parents than these kids," he explains. "They may have the same genetic structure, but they simply don't have the hunger of the first generation."

Wagner adds that old wealth is essentially a family, not an individual, phenomenon. "If you're trained by your family to expect money as part of your life, then you're probably in the category of old money," he says.

IFF Advisor's Dr. Lee Hausner elaborates in his work about the nuances of old- and new-wealth's relationship to their money. A psychologist for the Beverly Hills Unified School District for 19 years, Hausner has established an international reputation for her work with families on wealth and philanthropic issues.

She distinguishes between two very different types of old wealth-active and passive. The active category refers to inheritors leading a productive and purposeful existence. Though not necessarily wealth producers, they are high achievers. Some of Hausner's more active clients are entrepreneurs, while others are philanthropists. Salzer notes that old wealth has allowed two of her clients, Olympic athletes, to focus 100% of their energy on their sport. On the other hand, Hausner recognizes a class of passive old wealth or trust-fund babies. These folks are the idle rich who never quite manage to answer the question, "What do I do when I wake up today?"

Hausner also differentiates two very different kinds of new wealth-sudden new wealth and slower new wealth. Sudden wealth involves any instant acquisition, whether by lottery winning, court settlement or unexpected inheritance. Hausner includes the dotcom phenomenon in this category-employees of successful companies (or companies the stock market deems successful) that are started and sold in less than five years. The experience of clients in either instance is the same: "shell-shocked," as she describes it. On the other hand, most new wealth is acquired the slow, old-fashioned way-building a business over 20 years, selling it and coming into liquid wealth requiring financial management.

Why do advisors need to be aware of these distinctions? According to Tom Livergood, an advisor at Family Office Management LLC in Hinsdale, Ill., to provide their clients with the right advice, advisors need to be sensitive to the different motivations of old and new as well as active and passive wealth. For example, in his experience, active wealth creators who sell the family business before their "inner time" is right, usually suffer from a serious case of "seller's remorse." Entrepreneurs need to be counseled about the pitfalls of "offers they just can't refuse."

In an article for the Journal of Retirement Planning (January 2000), Livergood traced the three stages of CHBO (closely held business owner) grief. Pre-Deal Stage: "It's too good to be true." Doing-the-Deal Stage: "Circle the wagons." Post-Deal Stage: "Oh my gosh, what have I done now?" For the slower, new-wealth types, trading their life's passion for liquidity is a transaction that does not consider their unique relationship to their money.

Livergood's stages of CHBO grief point to the simple fact that old-money clients have quite a lot to teach their new-money counterparts about the stages of wealth. Furthermore, while the market for old-money clients is clearly limited (as Hausner says, inheritors already either have advisors or their money is tied up in trusts), new-money clients are turning into and reproducing old-money clients everyday. Wagner points out that trillions of dollars are in the process of being transferred to the next generation, leaving plenty of people grappling with issues of generational wealth-to be examined in the June issue of Financial Advisor.

Jim Grote, CFP, is a financial writer who has written for numerous magaznes. He can be reached at [email protected].