The MSRP on a 2002 Ferrari 360 Spider is $166,679. A new Beech 400A “light” jet runs about $6.4 million, a 50-foot Beneteau power boat around $500,000. Some people just have to have these things.
It’s up to the advisor to condone the purchase, protect the client from his foolishness, utilize creative means of “ownership” if outright purchase isn’t feasible, or find other toys that serve as workable alternatives. Prior to making any recommendations, however, the advisor must first calculate the toy’s real cost, including maintenance and operating extras. And before that, he must discern the client’s true reason, from a psychological perspective, for wanting to make the purchase at all. It’s not as easy as it sounds.
Frank Gleberman, an RIA and principal of the Century Benefits Group in Marina del Ray, California, is in a unique position to appreciate toys. A past commodore of the California Yacht Club, he has owned and chartered numerous craft and sailed all over the world. He has clients who do the same. Because Gleberman’s brand of comprehensive financial planning embraces lifestyle planning, when it comes to client toys, the first thing he endeavors to discover is how important these toys–the planes, the boats, the cars, the third homes–are to the client, and what the underlying reasons are for wanting to own them.
“If you know your client well enough, get beyond the sharp pencil and the calculator,” says Gleberman, “and find out what the root reason is to consider a toy.” He adds, too, that if a client wants two hours of his time “at $500 or $600 to go through this in depth, that’s cheap insurance vis-?-vis making a mistake.”
Revealed in client discussions are whether toys are important in and of themselves, as status symbols, or are meant to facilitate a lifestyle. As Gleberman puts it: “Why does the client want to buy a Mercedes? Is it for safe transportation or is it to tell people he’s arrived?” Sometimes there are better ways of telling people you’ve arrived, and better uses for the money. Over the years he has observed that many people buy a yacht for reasons similar to those for having a child: to devote a part of their own life to something other than themselves. “Some of the folks who have the wherewithal for these toys are a little on the lonely side socially,” he says.
Aesop’s saying, “Wealth unused might as well not exist,” applies nicely to those high-net-worth clients who purchase their whimsies with cash–and despite the depressed market, there are many of them. They, too, need guidance. Jerry O’Halloran is an RIA and partner with Koch, Dees & Teets 1:1, Inc. in Punta Gorda, Florida. Like Gleberman, he is in a position to understand his clients’ toy needs, since he owns a plane and boat. Most of O’Halloran’s clients are retirees with assets north of $1 million. They relocate to Florida with $50,000 to $250,000 set aside for major toys–sailboats and motorboats mostly–and few make monthly payments.
In a pre-purchase sit-down, O’Halloran says to these clients: Here’s your net worth; that toy is an expense; most boats will depreciate in value; when you sell it you will lose money; and you will spend money along the way. Period. “They know it, we know it,” he says. Since most of his clients pay cash, the only potential problems lie in ongoing operating expenses.
According to O’Halloran, you can purchase a used, 36-foot ChrisCraft Cruiser, like the one he owns, for $40,000 to $50,000, and for up to $250,000 for a new one, depending upon features. A popular sailboat line is the Morgan, which new and at around the same size, costs about the same. A 36-foot ChrisCraft will sleep four to six, and hold 100 to 150 gallons of fuel–enough for a run from the east coast of Florida to the Bahamas, a distance of less than 100 miles. At present, boat fuel in Florida is $1.35 to $1.40 per gallon. Boats larger than 36 feet tend to use diesel fuel, which runs $0.25 to $0.30 less per gallon. Using regular fuel, a round trip from Florida to the Bahamas will cost upwards of $400. Then there’s insurance, which on O’Halloran’s cabin cruiser is $1,200 per year, and maintenance fees, which tend to be about 10% of the cost of the vessel. Insurance costs have changed little in recent years, O’Halloran says, and clients tolerate fluctuations in fuel prices. “It’s not going to change my lifestyle, and it’s not changing their lifestyles, either,” he says. That’s not to say, however, that an exploration of factors such as these might not convince a prospective purchaser to consider a different model or type of craft or another toy entirely.
If yachts and sailboats are mainly about pleasure and spending quality time, aircraft are about pleasure and saving quality time. It’s bad enough that a Beech 400A or Citation V Ultra light jet, the latter the most popular private business jet in aviation history, costs $6.4 million to $6.5 million. Small jets while in use also cost an additional $800 to $1,300 per hour, per person, for fuel and maintenance and miscellaneous expenses. For some people, however, this is a small price to pay for the convenience and hours saved by not flying commercial.
Prop planes don’t come cheap, either. A new Cessna 182, like the one O’Halloran owns, carries four passengers plus baggage, cruises at 155 miles per hour, and costs $220,000 to $240,000. Fuel runs anywhere from $2.40 to $3.40 per gallon. Airplanes also undergo a mandatory annual inspection. While this usually costs between $1,500 to $2,500, last year’s extra-work requirements drove O’Halloran’s tab to $8,000. Insurance on the Cessna runs about $1,200 per year, while hangar expenses are $250 per month.
After gaining an understanding of a client’s motivation, and its underlying importance, the financial planner must then calculate the toy’s real cost. As noted, relevant factors beyond purchase price include equipment maintenance, hourly fees, possible pilot or captain fees, and depreciation. When the tally is too high, a “very real approach” and viable alternative is fractional ownership, says Gleberman.
In a nutshell, the fractional ownership concept–as applied to multimillion-dollar personal or business jets–works like this, according to NetJets, a Berkshire Hathaway-owned company in Woodbridge, New Jersey, formerly called Executive Jet. “If you want to fly 50 hours a year in a light jet that has a cost of $6 million for the entire aircraft,” reads NetJets’ promotional literature, “you can purchase 1/16th ownership interest for just $375,000 rather than buying the whole aircraft–and save over 93% of the cost, or $5.625 million.” Monthly management and occupied hourly fees are extra. (Sikorsky Aircraft Corporation’s Sikorsky Shares, based in Wappingers Falls, New York, offers a fractional program for its six passenger Sikorsky S-76 helicopter, which new costs more than $8 million [See www.sikorskyshares.com].)
As Kevin Russell, a NetJet senior VP, explains, the fraction size (and corresponding annual usable hours) available to would-be owners runs incrementally from a minimum 1/16th (providing 50 annual hours) to a maximum 1/2 share (400 hours). The acquisition cost is a one-time investment based upon the fraction size and type of aircraft purchased. For example, a 1/16th ownership in the Citation V Ultra model mentioned earlier is $350,000, or $2.8 million for a 1/2 share. At the upper end of the jet size (and cost) spectrum is the Boeing Business Jet, with an acquisition cost of $3.25 million for a 1/16th share, and $24.6 million for a 1/2 share. The monthly management fee on a 1/16th share for a Citation V Ultra is $5,420. This covers indirect operating costs such as pilot salaries, training, insurance, hangaring, and administrative support. The occupied hourly fee for a 1/16th share of this Ultra is $1,343, which includes fuel, maintenance, catering, and landing fees. A 7.5% Federal excise transportation tax is levied on the hourly fee, which is the same tax paid on any commercial ticket.