Super Wealth

CINCINNATI BUSINESS COURIER
April 15 – 21, 1991

Investments
By Charles D. Vaughan

SUPER WEALTH. 
The rest of us can learn lesson from super rich.

Most people can only imagine what it is like to have a net worth of $100 million. Since there are few people in that league, only a few ever have a chance to find out how they think.

The most significant point separating them from mere mortals is their attitude about money. The super wealthy have two overriding planning concerns: control and access.

Control is essentially the equivalent of freedom. There is a cynical twist of the Golden Rule that says “He who has the gold makes the rules.” The super rich understand that ownership does not always equal control. In reality it is he who controls the gold who makes the rules.

History is replete with examples of confiscation of wealth. In many parts of the world today the risk of outright political appropriation of property is very real. The United States has a great appeal as a safe haven for many foreigners.

There are other more subtle forms of confiscation. Taxation is the most obvious. At one time, a few decades ago, the top marginal federal income tax rate in the United States was 90 percent. Not too subtle. No wonder the super rich found ways to avoid paying. Federal estate and gift tax rates hit 55 percent at the $3 million level. There is currently no limit to the generation skipping transfers that can be made by immigrants bringing wealth into this country.

The most important meaning of control is this. One’s material wealth should be used to maintain the family’s quality of life regardless of what happens. Having wealth cannot assure that no bad things will happen in the family. But it will allow the greatest number of alternative solutions to make the best of any situation. Why shouldn’t we all take this view in our planning? The real purpose of our wealth is to help us control our lives the best we can for as long as we can. Taking this approach would cause many people to completely reorder their planning priorities.

The second issue of importance for the super rich is access. Some illiquid investments may be acceptable to assure diversification and increase returns, but not to excess. We have all known people who were worth a lot “on paper,” but were unable to raise cash. Many of those who have been wiped out in the recent real estate crash were in just this situation. The new wealthy immigrants know that money sometimes has to be moved to be preserved.

Too many lesson-lightened investors forfeit access for the sake of taxsaving strategies. This is especially true of estate tax planning. In order to save estate taxes many moderately wealthy people tie up substantially everything in ways that forfeit both control and access. Saving taxes is a worthwhile goal, but should be a distant second to having wealth at one’s own disposal.

An easy way to remember the strategies of the cosmopolitan investor is to think of them as SLY. That stands for Safety, Liquidity, and Yield. Safety in the broadest possible meaning first. They have an awareness of all the different types of risk and plan to mitigate them. That means control. Liquidity is the ability to get as much capital as may be needed as quickly as may be necessary. That is access.

The surprise for most people is that Yield is the last consideration. Yes, a good rate of return is desirable. But it is not worth risking a significant loss. More importantly, it is not Worth giving up control or access to any large measure.

An old saying goes, “I don’t need to be really rich, I just want to live like it.” Maybe we could change this to say, “I don’t have to be super wealthy to handle my money as if I were.”

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