Educating the Next Generation Because Money Doesn’t Come With Instructions January 17, 2008

1. Educating the Next GenerationBecause Money Doesn’t Come With InstructionsJanuary 17, 2008 G. Scott Clemons, CFA Managing Director 212-493-8379 scott.clemons@bbh.com

2. The Way to WealthBenjamin Franklin (1758) 2

3. The Art of Making Money PlentyBenjamin Franklin (1811)

4. The Art of Making MoneyBenjamin Franklin (19th Century)

5. The Wealth of NationsAdam Smith (1776) “In commercial countries, therefore, riches, in spite of the most violent regulations of law to prevent their dissipation, very seldom remain long in the same family.” Wealth of Nations, Book 3

6. Wealth Creation1987-2007 Net Household Wealth $ Trillions 70 60 50 40 30 20 10 Source: Federal Reserve Release Z.1, Table B.100 0 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

7. The Failure of Wealth TransitionSources of Failure Poor legal/tax/investment advice 3% Failure to establish family mission 12% Breakdown of family communication and trust 60% Inadequately prepared heirs 25% 7

8. A Lesson from History Henrietta “Hetty” Green 1834-1916 8

9. Being Good With MoneyAn Exercise in Balance • Being “good with money” is a combination of knowing how to … • Obtain it. • Grow it. • Spend it. • Give it away. • If you want the next generation to be responsible, give them responsibility. • Experience is the best teacher! • Create a “safe harbor” in which to make mistakes and learn from them. 9

10. The Welch Family • Young parents with four young children (ages 4-8), each of whom gets an allowance for certain household chores. • Lesson in how money is the result of contribution to the household. • Weekly family trip to the store to spend that week’s allowance. • Children can buy anything they want with their own money. • Lesson in how to spend money on what is really wanted. • Upon return home, whatever is left from that week’s allowance is doubled and put in the piggy bank. • Lesson in the power of saving. 10

11. The Robbins Family“Uncle Louis” Money • Parents with two teenage boys (14 and 16), each of whom received $3,000 from a fictitious “Uncle Louis” at the age of 13. • Removes the overtones of parental money. • Money can be used for whatever purpose the teenager wants. • Lesson in how it feels to receive money simply by being family. • Allows for mistakes without judgment. • Temptation is to blow some or even most of the money. • Leads to introspection in a safe environment and how to spend wisely. • Sizeable enough money to consider the role of investing and philanthropy. 11

12. Observations and Implications Observations • In both examples, the money alone isn’t the instructor. The participation of parents or mentors is key. • Yet the education is driven by the child’s experience, not the parent telling them what to do. • In order to create this freedom, the money is given without restrictions. Implications • Provide the next generation with enough money at an early enough age to attend class, but not so much that tuition is burdensome. • Provide the money with no strings attached, so that the child has enough freedom to learn from his or her mistakes. 12

13. The Role of Philanthropy • Participation in the philanthropic pursuits of the family at an early age provides … • A sense of how the family wealth allows it to express the family values. • Awareness of the larger purpose of wealth beyond the comfort and growth of the family. • A training ground in family dynamics, how to present, defend, interact and report. • An education in financial and legal concepts through interaction with outside advisors. • A deeper understanding of how charities work and how to distribute wealth wisely. 13

14. The Failure of Wealth TransitionSources of Failure Poor legal/tax/investment advice 3% Failure to establish family mission 12% Breakdown of family communication and trust 60% Inadequately prepared heirs 25% 14

15. Questions to Ask About Wealth Transitions • What do you want your wealth to do for you, your children and your grandchildren? • What difference will this wealth make in their lives, and will it help or harm them? • How will this wealth impact the community in which your children and grandchildren will live? • What are the core values of your family which you want to see preserved in future generations? • How does the family define wealth? 15

16. Definitions of Family Wealth or Capital • Human Capital • The unique abilities and talents of members of the family • Family health and happiness • Ethics, morality and character • Intellectual Capital • What people know, both formally and informally • Experience and learning • Heritage, tradition, faith, history and “distinctness” • Social Capital • Involvement with community and others • Responsibility to greater good • Philanthropic or charitable activities • Financial Capital • Cash, stocks, bonds, real estate • Art, collectibles and other tangible assets • The family business 16

17. Definitions of Family Wealth or Capital • Most families focus only on managing their financial capital, to the detriment of the other forms of capital. • Human, intellectual and social capital need just as much attention and nurturing as financial capital. • The highest and best use of financial capital is to provide growth for a family’s human, intellectual and social capital. • Financial wealth is a vehicle for expressing a family’s core values. 17

18. Wealth Transition Checklist • Our family has a mission statement that spells out the overall purpose of our wealth. • Defines wealth rather than letter it define the family. • Brings into consideration various types of wealth. • Provides guidance to outside advisors. • Every member of the family participates in important decision making, such as defining a mission for our wealth. • Defines wealth rather than letter it define the family. • Provides guidance to outside advisors. Source: Williams & Preisser, Preparing Heirs: Five Steps to a Successful Transition of Family Wealth and Values, 2003. 18

19. Family HistoryTraditions and Values

20. Wealth Transition Checklist • All members of the family have the opportunity of participating in management. • Not just financial management, but also philanthropy and the management of other forms of wealth. • “Opportunity” the key word. • All members of the family understand and accept their roles, and look forward to performing in those roles. • Matches individual interests and competencies with family needs. • Can lead to trouble if family members are unwillingly pressed into service. Source: Williams & Preisser, Preparing Heirs: Five Steps to a Successful Transition of Family Wealth and Values, 2003. 20

21. Wealth Transition Checklist • Heirs have reviewed estate plans and documents. • Communication and openness are key. • Establishes expectations and avoids nasty surprises. • Helps to drive discussion of meaning of future wealth. • Documents are designed to transfer wealth based on readiness rather than arbitrary age. • Helps to minimize the law of unintended consequences. • Yet very difficult for a corporate trustee to accept. Source: Williams & Preisser, Preparing Heirs: Five Steps to a Successful Transition of Family Wealth and Values, 2003. 21

22. Wealth Transition Checklist • The family mission includes creating incentives and opportunities for heirs to add to the family wealth. • Human, intellectual, social AND financial wealth. • The only way that wealth (broadly defined) grows. • Younger children are encouraged to participate in the family’s philanthropic planning and implementation. • An ideal training ground for the next generation. • Instills family values and demonstrates that wealth is a means of expressing those values. Source: Williams & Preisser, Preparing Heirs: Five Steps to a Successful Transition of Family Wealth and Values, 2003. 22

23. Wealth Transition Checklist • Family cohesion is as important as finances. • Don’t allow one definition of wealth to overwhelm the other three. • Understand and appreciate the contribution of all family members to all forms of family capital. • Celebrate family rituals and “rites of passage”. • The family communicates openly and meets regularly to discuss issues. • Frequent and open communication, whether formal or informal. • No hierarchy of authority on raising issues. • No subjects off limits. Source: Williams & Preisser, Preparing Heirs: Five Steps to a Successful Transition of Family Wealth and Values, 2003. 23

24. Further Reading 24

25. Further Viewing Georgianna Bloomberg Stephanie Ercklentz Christina Floyd Cody Franchetti Juliet Hartford Josiah Hornblower Jaime Johnson S.I. Newhouse Ivanka Trump Luke Weill Carlo von Zeitschel

26. Conclusions • It is never too young to start educating the next generation appropriately about how to be “good with money.” • Experience is the best teacher. Children should be entrusted with enough money with no strings attached to learn from personal trial and error. • Broaden the definition of wealth to include human, intellectual and social capital. • Philanthropy provides a wonderful platform for educating the next generation as to family dynamics, the importance of giving money away, and the role of outside advisors. • Educating the next generation is hard work and it never ends. • But the payoff is enormous, as measured by growth in all definitions of family capital. 26

27. Educating the Next GenerationBecause Money Doesn’t Come With InstructionsJanuary 17, 2008 G. Scott Clemons, CFA Managing Director 212-493-8379 scott.clemons@bbh.com