Another important issue separating old and new wealth is risk tolerance. The entrepreneur probably will have a much higher tolerance for risk than will the trust fund inheritor. Wealth creators often feel that, even if they lose it all, they can make it again. Furthermore, wealth creators favor active portfolio management because they assume if they can beat the market in their own industry, they can beat the market in other areas. Indeed, some of their biggest problems arise from the fact that success came all too easily for them.
Old money favors preservation of capital. Most of Salzer's clients have the bulk of their assets in passive index-type investments. "It's no accident that we're called the Wealth Conservancy, because our clients don't need to double their money overnight. They don't need action and they don't need sex appeal."
Hausner sees a growing trend among advisors to down play "fancy razzle-dazzle investment programs" and emphasize holistic planning to meet client needs. "I have been fortunate to work with financial planners who are willing to look at some soft issues and interpersonal dynamics as they create the financial model for the family."
One soft issue that stands out is the issue of financial literacy. As Hausner says, "I would like to see planners do an assessment of clients' financial literacy, as well as an assessment of clients' risk tolerance."
There is an enormous need in the marketplace for financial education programs. Hausner's firm is developing a program called PRAXIS that takes young adults (ages 17-27) and puts them through a two-year personal finance course, including investing, insurance and even making purchases (how to buy a car and purchase a home). The course might be described as a mini-CFP curriculum for clients. "An important service for the financial planner is their involvement in 'financial parenting.' Planners have a responsibility to individuals growing up in a financial family to help them truly understand the basics about money-budgeting, asset allocation models, interpreting tax returns," Hausner says.
Longo has had clients who had never paid a single bill in their entire life. "They're totally helpless," she laments.
Carter agrees that the problem is great, but regrets the built-in temptation for advisory firms and family offices to encourage client dependency as a way of securing the client's account well into the future. "Actually, it's the dark side of the much touted need to institutionalize client relationships. All we're doing is institutionalizing our clients themselves by making them dependent on us. Helping our clients become independent and financially savvy will be the main bond to long-term relationships with those clients." Along with Charles Collier of Harvard University, Carter has developed an educational program that teaches financial literacy and responsibility (as well as philanthropy) to families of wealth.
Salzer identifies another educational niche: teaching inheritors more creative ways to establish incentive trusts for their children. Salzer says that many of the trusts she reviews are too rigid or manipulative; for example, trusts where distributions match earned income, but the type of work is specified in the trust. "Too controlling," says Salzer. Or trusts that specify the first distribution on the child achieving a B.A., a second on achieving a Ph.D., and a third on matching funds from earned income ... period.
As she sees it, there's not much opening here for a person who wanted to be an artist or a philanthropist or a stay-at-home mom. This is regrettable, she says, because incentive trusts have the potential to provide the missing cause-and-effect relationship with money that inheritors often lack. Salzer asserts, ìIncentive trusts need to have multiple options the beneficiary can choose from so that they can earn money, but still have a sense of accomplishment and fulfillment for themselves.î
Chris Dardaman, a partner at Polstra & Dardaman in Atlanta, mentions another important issue related to old-money trusts. ìWhen I think of old money I tend to think of money that was locked up in trust 50 to 100 years ago. We have clients that have trusts with large institutions in the Northeast that do a terrible job of servicing their clients, but legally the clients canít get rid of them because the old trusts donít provide for alternate trustees. Weíve had old-money clients come to us, saying that theyíd love to have their money somewhere other than XYZ Bank, but they have no alternative because of the trust arrangements.î