Jon Foster: Multigenerational Planning and the Psychology of Wealth

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Hello and welcome to Barron's The Way Forward. I'm Greg Bartolis, and my special guest today is John Foster, President and CEO of Angelus Wealth Management. Today we're going to talk about multi-generational wealth planning and the tough conversations that advisors must have with their clients. Welcome to the podcast, John.

Thank you very much. Glad to be here.

Excellent. Let's first start a little bit telling us about your firm and your background.

Sure. So Angelus Wealth Management is a private wealth business focused on ultra-high-net-worth families, generally with between $20 to $100 million of investable assets. And we have approaching $2 billion of assets under management. And our sister firm is Angelus Investments, which is a 25-year-old endowment and foundation advisory business with $35 billion of advised assets. Of which about $6, $7 billion is outsourced CIO. And we combine together to create investment opportunities, research, et cetera, for both institutional clients and families. And our secret sauce on the private wealth side is that anything that we build and create for a billion-dollar institution is available to our families at the exact same terms. So at AngelList, there's no retail versus institutional. It's all set of clients.

Your clients obviously are very different than most. Many are looking to get wealthy. Your clients are there. So tell me about that and multigenerational planning. What's happening nowadays?

Well, let me start with the first thing that you touched on, which I think about a lot, which is that for probably 90% of America, for families, their overwhelming concern is, will I outlive my money? And that's a really, really difficult place to be. And it creates all kinds of anxiety, stretches, and stresses, and sometimes very poor decisions because of that overwhelming fear, which is really difficult. Our families are blessed to have already cleared that. Issue. And, but, you know, in the words of the old rap song, more money, more problems. And it's different kind of problems. So now you're no longer worried about, worrying about, will I outlive my money and have to move in with my kids? It's other issues. It's legacy issues. So, you know, what's your goal? And I think that the biggest tool that we have for those clients is conversation, a conversation with those of us in our firm or other people who do similar things at other firms who have a great experience in helping families think through these issues. And I find that quite fascinating. And when you talk about legacy, that's the dialogue. So first is, you know, what's your goal? Is your goal to be the— is your goal to be the richest person in the graveyard? Is your goal to bounce the check to the undertaker? Or is your goal to create a legacy supporting family, philanthropy, community, et cetera? And those are all good. And the question is, let's figure that out. Let's map that out. And for many of these successful families, especially the ones who are first-generation wealth creators, what they have in their lives are a lot of people that work for them. They don't necessarily have people that they can talk to about this type of thing. And in addition, very few people want to face their own mortality. So by the time we sit with them, very often they're well behind schedule in thinking these things through.

Right. And I'd assume, given that they don't have many people to talk to you, in addition to the obvious wealth management work you do, you're almost acting as a psychiatrist and a sounding board as well.

Oh, 100%. And I think that for many of them, the thought process is, I've been so successful, why am I not successful at home? And, you know, I've had some interesting conversations, especially with first-generation wealth creators. One, one I remember clearly, and he was— the business that he built is so fantastic, so incredible, so valuable. And he was complaining to me about his kids. And I looked at his, and I know his kids, and I looked at their resumes, and these are all industrious folks. But I said to him, the odds that the next generation could be as successful as you are is infinitesimal. Besides the fact what you did and built 40, 50 years ago from modern regulation could not be done today. So don't focus on that they're not you, focus on who they are. And let's see if there's a way for us to bring some of you all back together because you're incredibly wealthy, but you're not happy.

Yeah, and is this fairly common?

It's as if there's no playbook for any of this. Everything is the same and everything's different. I find that part fascinating.

In addition to not quote unquote achieving what they will, which is, as you said, incredibly unlikely, What about the role of devaluing money, right? I mean, how much to give, all of that, I assume. Right. Yeah.

Well, so once you can get a dialogue with the owners of the wealth around let's try to create a legacy and let's try and fix some of these issues, now it's into the toolbox. And there are lots of things in that toolbox. The first thing may be that We all want our kids to be industrious. And my definition of industrious is not making lots of money. That could be one, but it could be— I have a daughter who's a schoolteacher. I have a son who's a jazz musician. They're both incredibly industrious and successful. I consider that to be a win. So the idea is, first is, how do you get this family to solve some of these interpersonal problems that they have? And there are different tools around it. The first one is philanthropy. So something that I like to say is there's nothing that can do more to either bring a family together or tear it apart than the giving away of money. So a good example would be a family has a foundation, mom and dad are very charitable, and the kids are a little bit estranged and they want to bring them back into the fold through the use of philanthropy. And so they sit down and say, okay, Johnny and Billy, you're now young adults, and why don't you go out and we'll allocate some of the family gifting for you to allocate and come back with ideas and talk to the family. So the kids take it seriously, come back, and one says, I care about animal rescue, and the other says, I care about the environment. And mom and dad say, don't be idiots, we care about cancer. You've now just blown the whole thing up. And these are real-world examples that I have lived through. And then I'm the guy there who sits and calls timeout and said, wait a minute, That's not okay. Right? You have to embrace the thing. If you invite them in, you can't tell them they're crackpots. You have to embrace a larger perspective of what are good works.

Do you, in such a situation, where you have three disparate interests, do you ever almost look at it like a Venn diagram and try to find common denominators amongst the three to see where they might all be in alignment? Is that often a Is that a step you approach, or is that not part of the playbook in such a situation?

I think it's being able to have a dialogue with each family member individually and then have— be given permission to share some thoughts together and then get them together.

But you're kind of almost the ambassador for each one, if you will.

Right. And I think that the— sometimes it's too far gone. But generally speaking, there's a really keen interest to to come together in some form or another. And, you know, so philanthropy is certainly one tool. And I'll tell you another thing that comes up, which is with, you know, first-gen families of wealth. And let's say the next-gen is used to having all kinds of money and the mom and dad are worried that they aren't really taking their responsibility seriously or taking their wealth for granted. And so sometimes I'm asked to call in, asked to come in to to give the talk, which is what I call the law of subtract and divide. I don't know if you've heard this before, but you sit down, you have mom and dad, and then you have 3 kids, and you talk to the 3 kids and say, so I need to talk to you about the law of subtract and divide, which means that when your mom and dad die, subtract for estate tax and then divide by 3. So if in fact you want to continue to live the life that's been provided for by your parents, you either have to live smaller or you have to build wealth on your own to keep that going. And that is always a shock. Like, I don't think I've ever done that and found that the next-gen folks have really thought that through. But it creates, you know, a response. And it's been a very valuable tool because, honestly, all your wealth is not yours. Some of it belongs to the government. And they're gonna get a piece of it, and you have to think about that.

I'm not surprised that you said it's highly effective because I can imagine that for many of these people who are wealthy, it's abstract, it's directional. Oh, I'm rich. I have an open checkbook to spend as much forever. But you put a hard number to it, it becomes very real, and suddenly that number, there's a number A and B, it's probably smaller than they had imagined,, but it'd be almost infinite, you know, an infinite amount of wealth. So I imagine it's very sobering and a wake-up call. And I think that's, they're gonna, I mean, that's the reality. So of course it's helpful too.

Right, and so it's not so easy to go from, I always fly first class to now I'm in the middle seat in the back of the plane, right? And that does in fact happen. There's an old expression, shirt sleeves to shirt sleeves in 3 generations, right? It happens all the time. That's taxes and distribution. And next generation of families that aren't focused on making money, which is fine, right? I, you know, for example, you look at the Rockefeller family, there's generations there that have been focused on philanthropy or politics or public service. That's terrific. There is a result from that, which is you can't necessarily lead the lifestyle that your parents led.

Yeah. What are you hearing from clients? Are there any themes that are popping up?

There has been this move of some families to try to move from high-tax states to lower-tax states. So I think on the East Coast— and I'm an East Coaster initially, even though now I live in California— there's always been a natural migration of Northeast to Florida for weather. Because we think of the tri-state area as really New York, Connecticut, New Jersey, and Florida, right? Because the people are connected there. There's been a move in California to Texas. So I find that interesting, and I find it disturbing, actually, which is that it can't be all about money. Right? Money is, you know, money is— it's a terrible thing not to have. It's a nice thing to have. But the decision to pick up and leave the place where it helped you create your wealth, like if you're in Silicon Valley and you're a place where they created your wealth, and then California created all these opportunities, and then you decide to move to Texas so you don't have to pay them. I've actually seen some families reverse that plan. They moved to Texas, they changed their mind, they moved back.

Yeah, yeah, I've heard that a lot too. I mean, it's—

It's hot there.

Yeah, yeah, I mean, if you've ever been in Austin in July, August, that could be pretty tough.

Now, I say that, and we have an office in Houston. I love Texas, and I love native Texans. I think that tax fugitives are not my favorite people, but I— Matter of fact, our biggest market for clients is certainly the West Coast and the New York area. And the third market is Texas. And it's a wonderful place. We have a wonderful staff there and wonderful clients there. And I think that they might feel the same way about these tax fugitives coming into town.

Sure, sure. Absolutely. They're like, yeah, no, absolutely. There's some— I don't know if resentment is too strong a word, but whatever.

Yeah. No, it's— yeah, resentment is too strong a word. But I would say it's— modest irritation.

Yeah, that's a good way to put it. Yeah, and I've heard so many stories too. People just uproot. So I think when you have that much wealth, the dollar amounts are much larger, obviously, right? Every percentage is a lot more dollar-wise, but many people go there and they find they're lonely. They don't know anyone, or the culture is not to their liking, and they're bored or not mentally stimulated, or depending on what, they're just like a fish out of its bowl. Doesn't matter where they are, and they often go back to—

Yeah, and that's not a function of of any particular state. It's a function of where are your friends and where is your family.

Exactly. Your network. Yeah, it's irrespective of geography. It's simply going from point A to point B, wherever B may be.

Zoom is a tool. It's not a solution for human contact, right? Yeah. So the other things on sort of family wealth is obviously thinking is tax. You know, so I go to sleep at night thinking about tax and I wake up thinking about tax. And even the way we manage money for these families, what I say to them is, when you show up to be our client, and you've had a big capital event, and you have $50 million in cash, I feel like the captain of a speedboat. But 5, 10 years later, I feel like I'm pushing a barge down a narrow river because of the embedded gains in what you have. And so part of the education with— with families about the long-term compounding of money in a tax-aware manner. And because one thing I know for sure is the government is probably the least efficient allocator of moving money for causes. Fantastic for safety, fire, some health, et cetera. But if you want to support certain charities that are close, near and dear to your heart, I'd rather have you do that through charitable giving. Do that through a very comprehensive, very well-thought-out plan, either upon your death or during your life. I mean, I'd rather have you do it during your life because then you can at least enjoy watching your philanthropy at work.

And tell me about the process of transferring money to the next generation, and of course with minimal tax consequences. You know, what can you add there? I mean, that's a constant, but given that taxes are probably going to go higher, it's probably more of an acute of more relevance, let's say, at least going forward?

Well, yeah, so the math doesn't work right now. You look at the— we have these endless budget deficits, and the money has to come somewhere. And so everybody yells and screams about waste, fraud, and abuse. But when you think of the— when you go through the social programs, you go for the interest and principal on debt, and you go through the defense, there's not much left to argue about, right? There's maybe 5 or 10% left to argue about. So something's got to give somewhere. Either we have to tax more, or do less. And the basic policy is always, let's tax the other guy. So whatever your net worth level is, your income level is, everybody votes in favor of taxing the person who's next bracket up, right? That doesn't necessarily work. I mean, tax policy in its best construct is designed to to direct behavior. The reason that there is a lower rate on long-term capital gains taxes is to encourage long-term investing, which is to the benefit of all. But if you have collections, if you have expenses running in the government at 5% above collections, Houston, we have a problem. Something has to get fixed there. I don't see a solution where there aren't higher taxes coming and where social programs do not get cut. I don't see us cutting defense spending, especially in this crazy world we're in now. And we have to pay interest and principal on debt. And we have higher interest rates now, so everything's more expensive. So it's coming. So, you know, use the tools that are provided to reduce your tax liability. And very often, that results in also being able to allocate some of that capital towards good works.

Given all this, how is that affecting your investing decisions?

It affects it a lot. I'll give you an example. I had a family where I had 3 generations of the same family, and the elder stateswoman of the family was in her late 90s, and I would visit her on a on a regular basis, because I'd go see her because she wasn't that mobile, but still sharp as a tack. And all her money was invested in stocks, 100%. And I said to her, that's the right allocation for you. And I could talk honestly with her and say, because everybody tells you that you should be more conservative as you get older, but at this point, you have generated so much wealth in your life that you're not investing for yourself, investing for your kids and your grandkids. So if you go and reallocate and reduce your exposure to stocks now, you're going to pay capital gains tax. And then you're going to pay Obamacare tax and state tax. And then upon your passing, you're going to pay federal tax, state tax, Obamacare tax. And then upon your passing, you're going to pay a state tax. Leave it for the kids. But what's interesting is that the grandchild who will never run out of money, I can barely get to invest in the stock market.

Really? What is that, if I may ask, what's that person—

I see you smiling. So it's when someone asks me, and these are people of great wealth that are asking this question, what's the right allocation for me? How much should I have in stocks? And my answer is, I don't know. The answer is the right allocation in risk assets is the maximum amount you can own and never get scared out of no matter what happens. And I'll use my own example, which is that I do this for a living, and I am not 100% in equities, because I can't take the volatility. So that— and then on top of that is, is the tax layer. Sitting down with clients and saying, here is where we wish your portfolio were allocated now, but here's where you actually are, because you have such huge gains that if I was just trying to perfect my performance record, I would make all these sales, you'd pay millions of dollars in taxes, and then you'd be right in line with my model, but that's not my job. My job is multigenerational wealth management. So the only thing I know for sure is that once you pay tax, I cannot get it back. So if I think that US large-cap growth stocks are overpriced, which, by the way, I do not, but I think they're overpriced, I better be right because the tax cost could be 40% to reallocate you in a taxable account. So the idea is just try to get close to the target. Because, you know, eventually, upon your death, you get a tax break. You only have to pay tax once. If you sell it now and then die tomorrow, you're just paid tax twice. And that's the ultra-high net worth space, which is a—

It's a different dynamic than for most people.

Yeah. So I didn't— I have— I don't remember ever having a conversation with one of these clients where they say, how am I doing versus the benchmark?

They're not looking year to year. Like what benchmark? Certainly a long-term focus, for sure.

Yeah. Right. It's the, you know, it's the old quote from Einstein that the most powerful force in the universe is the compounding of money. Well, if you try to, if you, if you're trying to compound money and then you're paying tax along the way, it's a big bite.

Right, right. Exactly. Throttling it too.

So these families, these very wealthy families have a better ability to think multigenerationally. I know my colleague, Michael Rosen, our Chief Investment Officer, put up a graphic in a presentation we did last month or so ago. $1 invested in the US stock market with dividends reinvested 200 years ago is worth $16 million today. So we're dealing with families that actually had wealth in the 1800s. Yeah. So they know this because great-grandpa Josiah put money away back then that they're still reaping the benefits of today.

Fascinating stuff. Before we wrap it up, are there any other final things, anything else you'd like to add we haven't touched on that you think is worth sharing?

Yes. So I, I mean, I had a fascinating recent conversation with a new incoming client who's been very successful. And, you know, they said that they're giving all their money away. That's not that uncommon. You know, I think that the world looks at very wealthy people— you know, there's the old expression from Flaubert, which roughly translated says, "Behind every great fortune lies a great crime." That's not true. The compounding of money and being successful, multiply generations, and being careful and frugal and making decisions around tax, you end up with some great benefit. And there are people that are saying, I have enough. I'm going to give the rest away. Now the question is, where do I give it? And that's really fun to work with those people.

And you're seeing more of that?

Yes. Yes. And I think that, you know, it's— and I think even look at my own situation where I feel quite, I feel quite lucky to be where I am. I look at my Social Security statement where I've paid in a lot of money and they're going to pay me a lot of money out. I don't need it. I'd rather contribute that to other people who do need it because the Social Security system is going to collapse unless there's contribution. So I don't need it, let me give it back. And I think that there are a lot of people that think that way. Not everybody is trying to burn down the house. Some people still believe in the US and our system and our democracy and our experiment. And I think that's really rewarding to work with those people and see how charitable people really are.

So given that the stock market is near an all-time high, or thereabouts. So we've had a long bull market if you widen the lens going back several decades. I mean, so that in a way helps explain partly, I think, why there's so much wealth. But what's driving— I mean, we've had bull markets in the past and we've had previous all-time highs, but what's really contributing now to an increase in people thinking this way, would you say?

You know, so there have been some good things that I think have really occurred. I mean, there's a, you know, there's been a greater reduction in world poverty than any time in history now. The problem is that all we read in the press is bad news. And that's because if it bleeds, it leads. Bad news is what makes people want to read. As a matter of fact, there's a survey out that I saw which was fascinating, that if you look at the amount of press that's, you know, bad news versus good news, The percentage of bad news is much greater now than it was during the Great Depression.

Ooh, that's fascinating.

Yeah, I'll send you that chart later. Yeah, that's great. And so, it's not— and that's not true. I do think, though, that the anxiety around families trying to deal with, you know, with this radical change that's happening in the world around technology, et cetera, and it's a lot of people are worried about being left behind. And that's that same thing about Will I run out of money before I die and have to go move in with my kids, and can they take care of me? And it's a desperate feeling. So I think there's going to have to be more reallocation of certain things. There's no choice. I mean, we're not going to default on our debt. So these changes are coming. And I think that let's not vilify the people who've created capital, because in general, it's a pretty good group. You know, I remember, and I still think that the stock market at an all-time high, I don't know. I've been doing this a long time. I remember sitting at a trading desk in New York as a young man watching in amazement as the Dow crossed 1,000. So, if you add in dividends reinvesting as well, what would that index be now? Be 50,000? So, some ways, if you're a true long-term investor, it's like being— maybe we should all be Rip Van Winkle, put money to work, go to sleep, never touch it, not try to decide whether we want to own Bitcoin or Ethereum, and be a long-term investor in capitalism. So I think it doesn't matter what government comes or goes, as long as you fundamentally believe in capitalism and people who, with access to capital, who are smart, will find a way to make money and build value. It's all about growing earnings. Yeah.

I mean, it's a little bit of Bogle and Buffett I'm hearing, just kind of buy it, own it, let time and compounding do its thing.

The only thing that I would change is that is that I don't pick stocks anymore. Right? You know, so yes, maybe you could have picked Apple, but maybe you picked Polaroid. But you can pick markets. Sure.

And even if you didn't pick Apple, if you owned an index fund, you're part— you know, given that it has been the top holding for a long time, you're kind of riding that coattail to some extent.

Right. So a lot of conversations we're dealing with these multigenerationally wealthy families is let the compounding of money do their thing. For a lot of them, what's quite interesting is, look, we've had this big increase in inflation and in interest rates. For the ultra-high net worth community, they are unaware that there was inflation. For the average person, it's been a desperate problem. And I really feel that. When you talk to the ultra-high net worth community now, what they do is they look at their portfolio and they see that their bond portfolio has yield on it.

Not to mention cash getting a nice yield too.

That's right. Exactly right. So, but my thought on that is that this long period of low interest rates was all an aberration. We're back to normal. I mean, money is not supposed to be free. The result of money being free is huge deficits, because somebody's paying.

The government paid. And distorted valuations, or at least it's harder to figure out what's what. A lot of the traditional, the more the bearings of the market, if you will, came undone for a period, and now it's a little bit back to the old ways.

Yeah. Yeah. So, I mean, a 7% mortgage is a good deal if you look at a long enough lens. The fact that, you know, mortgages were under 3% a while ago, that's not reality. So now the decision to buy a home is more rational because you can't do it all with leverage. Investing in business, private equity investing is much more rational now because the cost of levering up a deal is too high. I think that a lot of the things are positive. What's not a positive is financing our national debt. That's an issue. Going back to your question before is that the taxman cometh. There's no way around it. What we do for a living, which is think about tax day and night. I think will become even more important.

In terms of the national debt, I mean, there's been more and more concern, it seems, from different corners of the market and government. You're hearing more, the numbers keep going up, and you've seen gold has been doing quite well. What's your assessment of that? Is there going to be a— might there be a tipping point where this comes to the forefront much more? Are we going to continue what we've had in recent years of people talking about it, and yet it kind of glides higher? And of course, it's, you know, vis-à-vis as a percentage of GDP, how you look at it.

But I don't pretend to be an economist, but I think that the increase in the national debt's been sort of scary in just the last year, from pre-COVID till now, it's been remarkable. I think it does not affect commercial enterprises, but it affects government. And no one seems to have the stomach to actually stand up and wave their hand and say, We've got to do something different. I don't know if we keep whistling past the graveyard forever, or if somebody stands up and says, okay, timeout. I am concerned about that, but the most thing I'm concerned about is deploying capital into businesses and industries that are being successful. There's so many good things going on. This incredible new wave of technology coming in that's making our lives better and making things more efficient. Just the effects of AI on medical research is astounding, things that make our lives better. So on balance, I'm still an optimist. I'm still a bull. And I like to think we'll work this all out, but stay tuned. Okay.

Well, I guess that's an ideal way to wrap things up. Thank you again for joining.

Thanks so much.

Great. My guest has been John Foster. For more podcasts and the latest wealth management news, visit barons.com/advisor. For The Way Forward, I'm Greg Bartalus.

This podcast was brought to you by Wells Fargo Advisors. Looking for a firm your clients can't outgrow? Wells Fargo Advisors offers financial advisors full balance sheet solutions with wealth planning, investment products, banking, and lending that meet the needs of affluent to ultra-high net worth clients. Build your practice your way and on your schedule with independent and employee model options designed to meet your needs today and tomorrow. Learn more at joinwfadvisors.com.