The infamous “shirtsleeves curse” is one that has occupied the mind of many a wealthy patriarch on a sleepless night. Affecting 90% of the wealthy, even America’s richest family couldn’t escape its clutches. Could the secret to maintaining family wealth be found in the unfortunate tale of the Vanderbilts?

“From shirtsleeves to shirtsleeves” is an adage that usually pops up when the topic of generational wealth is under discussion. The idea behind this saying is that the first generation of wealth builders in a family will start their journey in shirtsleeves (i.e. not having enough money to afford a coat). Through the hard work of the first generation, the second generation will grow up under better circumstances. Their children, the third generation, will be born into wealth and will eventually squander it, landing themselves and their descendants back in shirtsleeves.

It sounds like a cruel joke or perhaps a myth cooked up by wealth managers, yet the statistics support this theory. 70% of wealthy families are likely to lose their wealth by the second generation. By the third generation, that number can jump to 90%.

Case study: the gilded Vanderbilts

Before he became the richest man in America, Cornelius “Commodore” Vanderbilt was a school dropout hustling on his father’s ferry in New York Harbour. At the age of 16, he borrowed $100 from his mother in order to purchase a two-masted sailing vessel. From there he set sail as a captain on a Staten Island passenger boat. Riding the waves of success, he steamed ahead (literally) into the steamboat business before laying the tracks for his legendary railroad empire, New York Central.

Stretching his reach across the nation, Vanderbilt’s iron veins connected every corner of the United States, monopolising rail services in and out of the Big Apple. By the time of his death in 1877, Vanderbilt’s riches had skyrocketed to $105 million, outshining even the coffers of the US Treasury.

While $105 million in 1877 was enough to make Vanderbilt the richest man in America, the equivalent $3 billion in today’s money (grown at inflation) would make him a relatively small fish in a very rich pond. For reference, Elon Musk, who currently holds the title of America’s wealthiest man, is worth $251 billion.

If Vanderbilt’s riches had been invested wisely, they would surely have grown by more than inflation in the 147 years since their patriarch’s death and there is a good chance that the family would have held onto their position as one of America’s wealthiest. Unfortunately, Cornelius Vanderbilt made the cardinal mistake that often leads to the downfall of the rich: he left his money to his children.

“Any fool can make a fortune; it takes a man of brains to hold onto it,” Cornelius is said to have told his son William Henry “Billy” Vanderbilt, according to a family biographer. The same Billy would go on to inherit the family’s 87% stake in New York Central, with comparatively tiny allowances left to his 12 siblings. His father’s words of wisdom clearly struck a nerve in Billy, who endeavoured throughout his lifetime to protect and grow his father’s fortune. By the time of his death in 1885, Billy had almost doubled the Vanderbilt fortune to $200 million.

Despite the fact that his father had encouraged him to leave his wealth to one heir, Billy’s stake in the family business was divided between his two sons, Cornelius Vanderbilt II and William Kissam Vanderbilt. Combined with the dawning of the Gilded Age in New York, this division of the family’s wealth was the beginning of their downfall.

Divide and don’t conquer

Third-generation heir Cornelius Vanderbilt II managed the railroad business until his passing in 1899 but did little to innovate or otherwise grow it. His brother, William Kissam Vanderbilt, assumed control for a few years but soon retired to focus on his passions for yachts and thoroughbred horses. According to the Vanderbilt biography, William is quoted as saying “Inherited wealth is a real handicap to happiness. It has left me with nothing to hope for, with nothing to define, to seek or strive for.” Talk about the proverbial golden handcuffs.

New York’s Gilded Age ushered in extravagant spending in the Vanderbilt family and relentless pursuits to maintain appearances. Among the family’s prized possessions were an extensive art collection featuring old masters and a string of opulent residences, including The Breakers in Newport, Rhode Island, and ten mansions gracing Fifth Avenue in Manhattan.

It was around this time that the Vanderbilts also embraced philanthropy, with the third generation donating $1 million for tenement housing in New York City. Substantial contributions flowed to institutions like Columbia University, the YMCA, the Vanderbilt Clinic, and Vanderbilt University. This was the point where the family’s wealth accumulation came to a standstill. William’s philanthropic endeavours and lavish lifestyle eventually balanced his estate, reportedly matching the inheritance he received in 1885 upon his father’s demise.

By the fourth generation, things had truly started to spiral. Cornelius II’s son, Reginald “Reggie” Claypoole Vanderbilt, was an avid gambler and playboy who drank and gambled his inheritance away. His brother, Cornelius “Neily” Vanderbilt III, spent vast sums on maintaining his high society appearance. Beyond the open wallets, questionable business decisions took bigger bites out of the family fortune.

The transport business had peaked in the late 1920s, but freight soon declined and by the end of World War II, trucks, barges, aeroplanes and buses had cut into its industry. Instead of adapting to these changes, the family chose to unlock cash by selling shares in New York Central to the Chesapeake and Ohio Railway, allowing their competitor to become a major shareholder.

At one point, New York Central stood as the second-largest railroad in the United States, boasting an extensive network of 17,000 km of track across 11 states and two Canadian provinces. By 1970, the company faced financial turmoil, culminating in bankruptcy. Subsequently, federal intervention led to the transition of passenger services to Amtrak in 1971.

While a handful of Vanderbilts have managed to make names for themselves over the years (fifth generation Gloria Vanderbilt became a famous fashion designer, while her son, sixth generation Anderson Cooper, is a CNN news anchor), the business that once made them one of the most prominent families in America has disappeared without a trace – as has the wealth it brought them.

Is there a cure for this curse?

A recent survey by US Trust targeted high-net-worth individuals possessing over $3 million in investable assets. Its aim was to explore their strategies for preparing the next generation to manage substantial wealth. 78% expressed concerns about the financial readiness of their heirs to handle inheritance. Even more striking, 64% confessed to divulging minimal to no information about their wealth to their children.

The reason behind wanting to hide your wealth from your children seems obvious: parents are probably worried that children who know that they have a juicy inheritance coming to them will grow up to be lazy and entitled. But then what happens when parents pass away and children receive a vast inheritance that they were never adequately prepared for?

Conversely, talking to children about money from an early age – including how to grow it, donate it and spend it wisely – puts them in a far better position to be able to handle a large inheritance when the time comes.

The reason why a family fortune might survive in the second generation is often because that generation is involved in the family business from a young age. They therefore work side-by-side with the founders, witnessing their passion and drive, as well as familiarising themselves with the intricate details of the business and its industry. This explains why Billy Vanderbilt was able to double the family fortune after his father’s death.

Perhaps the greatest gift that you could leave your children – worth far more than their actual inheritance – is a roadmap and a plan to preserve it. Educate them on the wonders of compound interest and guide them in understanding when their spending will start to affect the overall capital. Most importantly, make sure that your children are prepared to do the same for their own heirs somewhere down the line.

And as a final comment, you may also want to enjoy some of the money yourself. The stats tell us that even if you don’t spend it, your kids’ kids probably will.

About the author:

Dominique Olivier is a fine arts graduate who recently learnt what HEPS means. Although she’s really enjoying learning about the markets, she still doesn’t regret studying art instead.

She brings her love of storytelling and trivia to Ghost Mail, with The Finance Ghost adding a sprinkling of investment knowledge to her work.

Dominique is a freelance writer at Wordy Girl Writes and can be reached on LinkedIn here.