How the Rich Are Trying to Make Money Now

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Money and families: it doesn't matter how much you have, it's always an argument.

I just returned from moderating a two-day Family Wealth conference, which consisted of over 100 very wealthy families getting together to discuss where they should be putting their money.

One thing stood out: conflicts over money are always present, no matter how big the pie is.

And the pie for wealthy families has been shrinking, just like everyone else.

Many wealthy families made their money in remarkably similar ways:

a) A patriarch had one great idea (started a steel mill, for example), which took off;

b) He then sold the company to a major competitor for a large sum of money, say $100 million;

c) He then set up a trust fund for his 6 children. The fund throws off a certain amount of cash each year (say 6 percent, or $6 million if it's a $100 million fund), and each of the six children get $1 million a year to live on.

But because of the events of last year, when all asset classes got clobbered, the pie for wealthy families is considerably smaller today.

So, for example, instead of $100 million, there is now only, say, $70 million in the fund, and instead of getting $1 million this year, each of the 6 kids only get, say, $600,000.

While this may not elicit any sympathy from anyone, it does create intra-family conflicts. Some simply wanted to eat into the principle (not always possible, and certainly not a good idea), but most simply cut back their spending.

Instead, family members and their representatives directed much of their ire at investment advisors who presented at the conference, and their asset allocation models.

The families were puzzled over why their assets turned out to be so closely correlated. Why, they asked, when we had investments in timber, commercial real estate, and global bonds and stocks, did everything drop? What is the value of asset allocation?

While faith in a diversified global portfolio was clearly lower, in the final analysis there was little alternative to some kind of asset allocation model, so the families dutifully listened to several advisors and hedge funds outline various models.

Not surprisingly, the World Gold Council gave a long presentation that amounted to a victory lap, since gold was one of the few asset classes that did not strongly correlate with the market drop. They showed charts indicating that interest in gold--in the form of phenomenal success with the gold ETF (GLD--which they created) as well as gold bar hoarding.



Questions? Comments?