It turns out the other half — or at least the tiny slice who live at the top of the wealth pyramid — are not sleeping any better than the rest of America.
At a closed-door meeting of advisers to family offices — which serve families who typically are worth more than $500 million — I learned that the super-rich are just as concerned about the future as everyone else.
Even though the stock market has rebounded from its March 9 low, the family office advisers said many of their wealthiest clients were bracing for more bad news and wondering how it would affect their family unity.
“They are now looking at financial planning and things middle-class families live by,” Kathryn McCarthy, a leading adviser to wealthy families, including the Rockefellers, said at the gathering this week convened by Bessemer Trust.
Before you start laughing up your sleeve, be advised that this is not a good thing. When the super-rich get cold feet, the rest of America gets swine flu. They are, after all, the people who might finance new companies that create jobs, make big investments to support existing companies and spread their wealth throughout the economy.
According to a study the Family Office Exchange plans to release this month, the super-rich are most worried about what they do not know. Some 45 percent of the 108 ultrahigh-net-worth families surveyed in August ranked the economy and financial markets as their No. 1 concern. They were most concerned about government intervention in the financial markets and a commercial real estate bust.
Historically, the super-rich have focused mostly on family dynamics, since so much of their wealth is linked together and could be endangered by a rift. But the sudden decline in wealth — even if they still have hundreds of millions of dollars — has prompted soul-searching. The bad news is they are not confident about the American economy. The better news is they are looking at their families in a way that the average American could learn from.
MORE THAN MONEY What is most interesting is that many of the super-rich are looking at the risks of their relatives.
One of the big problems is how differently people within a family spend, save and invest money that has been managed as a pool for many generations. When the credit markets froze and the stock market tumbled, not every cousin agreed to tighten his alligator-skin belt. That caused friction.
Some family members with money in individual trusts are opting to go off on their own. The bigger issue is when families have to cooperate to run the business the patriarch set up.
In the past, family businesses and family wealth were commingled. If the business was struggling, the patriarch would often finance shortfalls. “Now the kids are upset about where the money is going,” said Holly Isdale, managing director at Bessemer. “Intrafamily dynamics are playing a bigger part in decisions.”
If the family put in place a strict estate plan, the children may legally own a good portion of what the patriarch made. And now they have choices to make that may go against his wishes. “These families have recognized that autopilot is not a good strategy,” said Amelia Renkert-Thomas, a lawyer with Withers Bergman.
The other risk to super-rich families is government action and increased regulation. They suspect it is coming but do not know how it will affect them. The result is that they are increasingly anxious about the future while still shell-shocked from the past year.
“We are telling them not to make changes for the sake of making changes,” said Theodore Beringer, managing director of the Beringer Group, a family office adviser. “First, they need to find out what needs to be changed.”
RETURN TO BASICS Figuring out what they need to do differently has prompted many super-rich families to ponder the same question as the rest of us: How did the boom years change us?
The basic issue for them is deciding what they want to do as a family now that they realize they cannot do everything. “You’re worth $500 million one day and wake up the next and it’s $350 million and you’ve pledged $100 million to the Met,” said Rob Elliott, senior managing director at Bessemer. “What are the family’s goals? Is it philanthropy or bringing along the next generation?”
Coming up with an answer has been complicated by second-guessing: should they, or could they, have done something differently? “They’re human — they sell too soon and they buy too high,” Mr. Beringer said. “It used to be, ‘I’m going to buy A and B.’ Now it’s, ‘I’ll buy A or B.’”
The bigger choice is what they do as a family when members are against both A and B. If that is left unresolved, tensions can fester.
NO MORE EASY MONEY One reason for the subprime mortgage collapse was that banks gave mortgages to homebuyers without verifying their ability to repay. The super-rich had their own version of this: the signature loan.
In this case, a person’s net worth would be verified but not, say, the value of the building she was buying. The feeling was if someone was worth $1 billion, she would have no problem paying back a loan for a $100 million office tower.
This gave the super-rich access to quick financing, for both hard assets like real estate and assets like securities. “There’s a realization that we can’t borrow any more to goose our returns,” Ms. McCarthy said.
Now banks want loans secured by a verifiable asset, and the super-rich are not borrowing as much. This has translated into a more conservative approach over all.
One thing the group convened by Bessemer agreed on is that their clients were hesitant to buy commercial real estate. They fear that the value of it could collapse with greater ferocity than the housing market.
The logic behind this is that with everyone cutting back — companies laying off workers, consumers watching what they buy — there is less demand for office and retail space. If leases expire and are not renewed, building owners will have trouble making their loan payments. That, in turn, will affect the investors who bought the bonds secured by this debt.
Even those real estate owners who are doing well could be hurt. “A lot of this debt is short term and it needs to be refinanced, but there is no market for that,” Ms. Isdale said. Next year and 2011 are expected to be the worst, Ms. McCarthy said.
So while the super-rich bought properties on the cheap in previous real estate downturns, they now may be struggling with the financing on the ones they own and wary to add more, even at discount prices.
Instead, super-rich families are focused on having cash on hand. One of the other uses of signature loans had been to pay for a lifestyle. Until a few years ago, many banks advised wealthy families to have 100 percent of their wealth invested to take advantage of the high returns across asset classes. If they needed cash, they could borrow at a low rate. It was easy, until it was not.
“They’ve realized they can’t have everything,” Ms. McCarthy said. “Now they’re asking, Is it worth it? That’s a question everyone should be asking.”
By Paul Sullivan, The New York Times, October 2, 2009.