April 2007

Rich people aren’t more likely to go broke than poor people. But when they do, their falls are likely to be more dramatic.

Runaway spending, over borrowing or unscrupulous investing have laid low many a luminary.

In 1990, Donald Trump was $900 million in debt and had to part with his yacht, private jet, some real estate and $155 million to appease his lenders.

Boxer Mike Tyson parlayed $400 million in winnings into a $27 million debt, according to bankruptcy filings in 2004.

Barbara Hutton of the Woolworth and E.F. Hutton fortunes, once one of the world’s richest women, died in 1979 with $3,500 in her bank account.

The harder they fall
Clearly, having a fortune doesn’t protect you from financial folly. It may even predispose you.

Being aware of the forces at work is the first step in protecting yourself from ruin, according to Nancy Wieboldt, vice president in the Wealth Management Group at Northern Trust. For instance:

• People who make great wealth are often willing to take more risk than others. “Those who come upon money quickly or through high-risk ventures are more likely to see it go the same way,” Wieboldt says.
   
• The wealthy are often targets for investment schemes and requests for charity.
   
• A cadre of others who depend on their continued success – employees, family members and often friends – may exert undue pressure.
   
• Psychological issues related to having more than others can interfere with good judgment.

“Greater wealth can have greater conse-quences,” Wieboldt says. “And it requires so much more work to preserve.”

Hang on to your money
Here are some of the ways to extend the life of your wealth:

Seek expert and disinterested advice. People often make the mistake of turning to people they trust personally – a brother-in-law or family lawyer – who may not have the credentials to manage significant assets. This requires people who know trust law, estate planning, income tax, as well as investing.

The 850 people who let Reed Slatkin invest their money learned that business successes don’t necessarily make an investment advisor. Slatkin, who helped bankroll EarthLink, filed for bankruptcy in 2001, listing debts of more than $500 million and assets of less than $45 million.

Establish a governing board or committee to manage your wealth. Four or five disinterested parties can guide you and warn you when you stray into danger zones. These can be as formal as corporate boards or as informal as peer meetings between billionaires Warren Buffett and Bill Gates.

Set up a family office to protect yourself. If you’ve got more than $50 million, these offices provide a buffer from notoriety. They can handle everything from investing your money and finding the best health care to doing background checks on employees to bailing your kids out of jail.

One branch of the Cornelius Vanderbilt family has used a family office to out-perform other descendants. The William A.M. Burden & Co., pioneered the family office concept in 1949 and is now worth half a billion dollars.

Don’t make spur-of-the-moment spending decisions. You need to take a deep breath, stand back and make not just a financial plan, but also an estate plan. You should have regular meetings with your advisors to review and rebalance your plans and respond to changes in your circumstances.

Too bad so few sports figures follow this advice. Basketball great Kareem Abdul-Jabbar and boxers George Foreman and Mike Tyson all spent their way to ruin. Tyson reportedly could spend $500,000 an hour in jewelry stores – and did.

Set aside a core you won’t risk. If you want to preserve money over the long run, you can spend only a small percentage to make it last for future generations. Few who win big in lotteries recognize this. About one-third eventually go broke, according to a national study by Ronald Reno.

William Post won the $16 million Pennsylvania Lottery in 1988. Since then, family members badgered him into bum business deals, and a former girlfriend sued him for a share of the winnings.

He now lives on Social Security and food stamps.

Beware not just liquor, but leverage. Over-borrowing felled the likes of John DeLorean, creator of the Pontiac GTO and the eponymous stainless-steel sports car. His car company collapsed in 1982, and he declared personal bankruptcy in 1999. In the 1930s, William Randolph Hearst lost both control of his publishing empire and his precious art collection, which was auctioned off to pay his debts.

And don’t count on your fortune to provide a sense of worth. People with enduring relationships to their riches often look to family, accomplishments, religion and service for fulfillment.

The late Sam Walton of Wal-Mart epitomized the well-rounded billionaire who was able to weather huge market swings with aplomb. When asked how it felt to lose half a billion dollars in one day, he replied, “It’s only paper.” What motivated him was hard work and being the best at what he did.

Easy come, easy go, easy come again?
And, if your wealth should diminish, take heart: Once you’ve been rich, the chances are good of reaching wealth again.

Just ask The Donald.