High Beta Wealthy and the Forbes 400

There is a new theory floating around that a group called High Beta Wealthy exist. The idea is that folks in the top 1% of the wealthy don’t stay there – they are ‘high beta’. Beta – as you probably know – is a measure of a stock’s volatility. A stock is said to be high beta if the price jumps around a lot more that the rest of the market.

High Beta Wealth holders are those that move into and out of wealth. Robert Frank, author ofRichistan  has written a new book about high beta wealth – surprisingly enough called The High-Beta Rich: How the Manic Wealthy Will Take Us to the Next Boom, Bubble, and Bust.

He starts his new story out by describing a visit he made in 2006 to the creator of the Yellowstone Club – Tom Blixseth. He describes the impressive chauffeured drive out to the mansion, the opulence of the house, the large size of the household staff and the beauty of the land around it. He mentions the expensive toys that the Blixseth’s have – such as 3 private jets, 7 homes, including a castle in France and etc.

He continues the story with a repeat visit he made in 2010. The servants are gone, the phone service is disconnected, the mansion grounds and private golf course dead or dying and Ms. Blixseth now having to take commercial air flights for the first time in 20 years.

In a Wall Street journal Wealth Report article “The Truth About Wealth”,  Frank says that the Federal Reserve data is showing that of those that were in the top 1% of income in 2007, 30% were no longer there in 2009. He says “With their dependence on financial markets, their leverage and their hyperspending, the top 1% have income swings that now are more than twice as high as those of the rest of the population. “

Ms. Lagomasino, CEO of Genspring Family Offices, a wealth-management firm based in Palm Beach Gardens, Fla. Commissioned a report when she was chief executive of J.P.Morgan Private Bank – “Beating the Odds: Improving the 15% Probability of Staying Wealthy“.  The author of that report found that only 15% of the Forbes 400 stayed on the list over a 21-year period. (Deaths accounted for less than a third of the drop-offs.) .

In that report the authors state “It takes extraordinary energy to create wealth. By the same token, it takes an equally concerted focus to preserve wealth.”

Since the mission of Family Money Values is to help families use their values to keep their wealth and well being for generations, I want to share the findings put forth in the report.

Using the Forbes 400 list from 1982 they studied the folks who dropped off the list due to what they saw as material risks to the fortunes involved.

The eight risks they identified were:

1.  Having a concentrated position in one company, one asset class, one geographic area.

Frequently the founding father (or mother) started a business and the wealth is concentrated in that business. The report recommends taking steps along the way to sell off parts of the company or otherwise hedge the risk of all the wealth being shares in the company.

If the concentration is in other public companies, then the recommendation is to diversify, saying:

“For wealthy families, a century is not an excessively long time frame for planning. No one knows which industries will be valued in 2104. But we do know that, over time, obsolescence is inevitable and, therefore, concentration risk should be reduced.”

2.  Spending too much
People tend to think of spending only as in buying things, but it can also include investing in a company or transferring wealth – not just maintaining a certain lifestyle level.

The report recommends thinking of the amount of spending you do as being a percent of your investable assets, not an absolute amount.

The probability of your wealth declining more than 20% over 20 years depends on what percent of your investable assets you spend, they say. If you spend 3%, the probability is less than 10%. If you spend 5%, the probability is between 25-40% and if you spend 7%, the probability of you losing 20% over 20 years increases to 70-90%

Investing strategies (getting more return through more risk) won’t offset spending risks. Cost of getting to your goals could, but usually doesn’t if you are in the stock market, outpace investment returns over time.

3.  Ill considered leverage
Borrowing against a highly concentrated investment can cause double trouble, according to this report. Multiple aspects of debt must be considered, including the risks that exist to the security used to obtain the leverage.

“With surprising frequency, borrowers believe that debt is manageable because they currently have enough excess cash flow to meet the required payments.”

4.  Taxes
Most governments, especially the US government and our state governments, do not like generational wealth and they take steps to tax wealth transfer at abusive levels.

Examples in the report included a lady named Jessica Savitch who’s heirs lost half of her estate to taxes when she died.

With the 2008 economic downturn and subsequent world economic woes and government debt, taxation will only get more severe. Families must plan to minimize the bite.

5.  Family Dynamics
As noted elsewhere on our blog, preparing your family and heirs to receive a founding father’s (or mother’s) fortune is an essential step in keeping family money over generations.

A dysfunctional family whose members can’t work together, and don’t have governance structures in place to aide them will argue in public and lose the family fortune.

Next generation family members who are not trained to understand family finances or to lead their generation will run through the fortune.

A patriarch who refuses to relinquish any control or explain any financial structures to heirs will leave a confusing picture to heirs, causing suspicion and strife among them.

Likewise a founding matriarch who suddenly dies or becomes incompetent can cause financial ruin, especially if there is no ‘key man’ insurance on her.

6.  Liability
In a world where people feel free to sue at the drop of the hat, liability measures are essential to wealth preservation.

Make sure the family has enough insurance and that controls are in place to ensure that employees, advisers and etc are controlled by checks and balances when dealing with the family wealth.

7.  Currency
Some families are global in nature, with multiple business concerns in many countries and family members living in different areas of the globe. Such a family may be subject to currency risk. If family assets and family liabilities are held in different currencies and the liability currency strengthens while the asset currency weakens, real wealth will be reduced.

8.  Government action
Governments have been known to generate extreme tax increases or even appropriate private assets for themselves. Governements also take actions on their domestic money supply that can impact family wealth by causing hyper inflation.

The key defense is to identify assets that are at risk and diversify the location of those assets geographically or by type of entity holding them.

Are you at risk to be a High Beta Wealth?
The Wall Street Journal has come up with a 7 question quiz to determine your risk level of falling off the wealth wagon. Try taking it to see whether you think it measure the right things!

Have you considered what you will do when you finally ‘make it’? Will you lose it within 20 years? Do you want to spend your own fortune, or pass it along to your next generation?