Wealth Destruction and How to Prevent It (2Q25 Chairman's Newsletter)

April 15, 2025

Chris Weil

I considered a number of subjects for this newsletter, each of which could (and has) filled bookshelves, before settling on “Wealth Destruction.” To give you a flavor of what I might otherwise have chosen, here are the titles of subjects I considered.

1. “Waste, fraud and abuse.”

2. “Tariffs: When no one understands their longer term consequences, proceed with reckless abandon.”

3. “Power tends to corrupt, absolute power corrupts absolutely.” (Acton)

In my sixty-two years of experience with investment management, the provision of financial advisory services, deal structuring, business formation and business management, I have had some, usually brief, exposure to the specific implications and consequences of subjects one, two and three. Therefore, I could be said to have opinions (often strong opinions) but not wisdom (where “wisdom” means a state of deep understanding of the matter at hand). 

Side Bar. It turns out, at least in my experience, that there is an inverse correlation between the passion with which people express their opinions and that with which they express their wisdom. Opinion is often passionately defended; wisdom, not so much. In a perfect world, wisdom does not need to be defended. Elucidated, yes. Explained, yes. Argued for, no. When it is not self-evident to listeners/readers (and often it is not), wisdom simply says “perhaps my timing is off, or perhaps I haven’t done a good enough job of communicating. I’ll just keep trying.”

If someone says to me “what is your opinion?” I am (as people who know me will agree) more than happy to respond. But I wanted to use this particular commentary to reflect some degree of wisdom and none of these three subjects would allow for this.

So I chatted with some of my coworkers and thought about where in my life I could be said to have some deep understanding and where such understanding, when communicated, would have some relevance in the lives of the people with whom we do business.

“Wealth Destruction?” Perfect. Why? Three reasons …

First, addressing and countering wealth destruction has been and is one of the fundamentals of our advisory business for as long as we have been around. As this is a foundational element in any client relationship we have always assumed that concerns about wealth destruction are a given, the importance of which need not be highlighted. However, as with all good companies, voices in the firm that have been emerging for some time have made an argument for being considerably more explicit when talking to clients, and they are absolutely correct.

Second, in my career I have been an observer of, participant in, and responder to more incidents of wealth destruction than your average bear, which means an untold number of such incidents. (For clarification: as an observer, I see with some frequency, as we all do, examples of wealth destruction; as a participant, fortunately my experiences have been limited to the first twenty or so years of my career but they were brutal and I remember the lessons learned well; as a responder, our advisory team is periodically called on to anticipate, educate, and/or deal with the fallout from wealth destruction events.)

 I would like to believe that these experiences, as well as the experiences of our advisory and investment teams have worked to forestall what otherwise would have been disastrous financial outcomes in some clients’ lives. This means, among other things, that we are good at saying “no” as well as “yes.” I’m not sure of the numbers, but I am sure that an unknown number of disasters have been avoided by our timely “no.”

Third, while big events (think Enron) garner the headlines, as far as individuals and families are concerned, the greater number of wealth destruction events are not one time hits (although many are), but a series of “mini acts” which compound. There are a ton of examples, some relatively rare, some relatively common. Consider the family with a troubled adult child who is using the family resources as his/her financial support system. Mother and father are in a pickle. Continue to support their child with periodic, and often substantial, remittances and erode their resources (“wealth destruction”) or stop the support and face the risk that the child will end up on the streets. And if the adult child has their grandchild or grandchildren? Don’t even go there.

There is some good news. We are in the business of providing financial advisory services. I have stopped counting the number of individual/family circumstances involving more or less complex investment/estate planning/tax/risk management/estate transition issues, including the many ways in which wealth can be destroyed. But I can tell you that our Team has experienced them all. And if you are not exploiting our knowledge and experience you are leaving material benefits on the table.

Can the potential for wealth destruction be identified in every case? Not by you, not by us. But the odds that such identification will happen are in our favor - if only because we have “been there, done that” with a frequency few others can match. And even if we don’t immediately see the potential, we often have an intuition or a sense that something in the “story” is amiss.

I said above there are tons of examples of wealth destruction “opportunities.” Here are just two of them.

Undue concentration of investment in one “favored” stock or real estate holding. 

Let me stress that this is not a sure fire way to lose money. Quite the contrary. It might prove to be a whiz bang winner if you have made the right call. Of course, if you make the wrong call, the consequences could be disastrous. Like so much in life, the options come down to choosing which path to take. If you are comfortable making big bets with both big upside and big downside potentials (that is, you are willing to tolerate the risks in exchange for the possible rewards) then, arguably, this is an “opportunity” you could choose. As an advisor we would ask you a series of questions, the answers to which would help us (and you) determine the “suitability” of your decision. “If you sustain a large loss are you in a position (age, earning power, emotional maturity) to recover?” “Do you have obligations, other than to yourself, which would be undermined in the event of a significant capital loss; that is, while you might be able to afford the risk, are they?” “Are you in a position vis a vis this asset to stay current with its operations such that you might detect timely any prospective deterioration in its viability?” And in relation to this last question, “Are you sufficiently cold blooded to sell an asset that has served you well (usually with a significant tax cost) if you detect evidence of deterioration, or will you convince yourself that this is merely a temporary aberration which will all turn out well in due course?” 

Foregone Wealth Accumulation Opportunities

Beyond concentration risk, wealth destruction also occurs when potential wealth is simply never accumulated. This happens when the opportunity to save and invest is consistently traded away for immediate consumption.

Consider a common scenario: a couple, perhaps influenced by societal pressures or habits formed incrementally over time, establishes a high-spending lifestyle. Despite a substantial income, their commitments – often including a mortgage disproportionate to their earnings, expensive car payments, frequent high-end travel and dining – consume nearly all their cash flow. There's simply little or nothing left over to channel into a serious investment program designed for long-term capital growth.

In some cases, this pattern is rationalized with thoughts like "raises will cover it" or, more pertinently to our theme, "we'll inherit significant wealth eventually, so we're just enjoying some of it now."

As advisors, we would point out the stark trade-off being made: the enjoyment of a high-cost lifestyle today comes at the direct expense of potentially accumulating millions in wealth over the long term through consistent investment and compounding. While wealth you could have had but didn't isn't always labeled "wealth destruction," the financial outcome is functionally similar to having had wealth and lost it. Is this trade-off fully understood and intentional?

In some circumstances the rationale for spending is the anticipated inheritances: this is a particularly risky assumption. This thinking overlooks several hard realities. For starters, parents may live much longer than expected, potentially leaving heirs near retirement themselves before any inheritance comes through. Moreover, the parents' own financial situation isn't static; unforeseen circumstances, particularly the substantial costs associated with late-in-life care, can significantly deplete the very wealth being counted on. And beyond the practicalities, family dynamics can evolve, and relationships sometimes change, meaning inheritances anticipated today don't always materialize tomorrow as expected.

Essentially, choosing excessive current spending over saving isn't just deferring wealth building; it's often forfeiting it entirely, a subtle but potent form of wealth destruction.

The Multi-Trillion Dollar Question: Is the Next Generation Ready?

There is another side to this coin, one that becomes painfully relevant when significant wealth does change hands, like in the massive "Great Wealth Transfer" underway. The question that keeps advisors like me focused is whether the recipients are truly ready to steward what they receive.

This isn't about their intelligence or professional success, mind you. It’s partly about the stark difference between earning a living and managing substantial capital. They're different disciplines entirely. When someone inherits significant wealth without the specific financial literacy, mindset, or frankly, the experience needed for that stewardship role, that wealth is genuinely at risk. It often happens not through bad intentions, but simply being unprepared for the transition.

From what I've seen, a primary danger unfolds right at the start: confusing the total inheritance amount – the corpus – with cash flow available for spending. It's a fundamental error. An heir might see a multi-million dollar figure and mentally adjust their lifestyle based on that total, rather than understanding it as an asset base designed to perhaps generate a sustainable income stream representing only a fraction of that total each year. Unlike the scenario in point number two where spending prevents saving before inheritance, here the inheritance itself fuels a level of spending the underlying capital simply cannot support long-term, leading directly to the erosion of the principal.

Beyond that core misunderstanding, this lack of preparedness can also make heirs susceptible to poor investment decisions – maybe chasing unsuitable ventures or failing to diversify properly – or lead to unstructured 'generosity' that drains resources without accountability. And compounding this, the very real costs of managing wealth, like taxes and fees, along with inflation's quiet erosion, are often underestimated, putting further pressure back on that inherited principal. Every dollar of that principal spent, especially early on, carries the heavy, often unseen cost of forfeited future growth.

This isn't an insurmountable problem, but it requires deliberate attention before and during the transition. Open family conversations about responsibility, tailored education focused on stewardship and the practicalities of managing capital (not just earning income), and objective professional guidance are critical pieces in ensuring inherited wealth has the chance to last and serve its intended purpose for the next generation(s).

So, if there’s a moral to this story, perhaps it’s simply that wealth destruction, in its various guises, is an ever-present possibility. It’s not something that just happens to 'other people' or only in dramatic, headline-grabbing events; the risks are often quieter, more insidious. Complacency, I find, is usually the real enemy. Getting ahead of these potential issues – whether it's the danger of concentration we touched on earlier, habits that prevent accumulation, or ensuring the next generation is truly prepared for stewardship – is, in my experience, the necessary approach. And you can certainly expect this won't be the last time you hear from us on this subject. It’s simply too important an issue, for families and the Team here at WEIL, to address just once.

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