Few children come by wealth management naturally. For most young children, money just buys stuff. As they age, they think philanthropy sounds good, but it competes with immediate gratification. Real estate and taxes are complicated. Securities and the markets in which they trade are mostly intangible. Despite the barriers, you can teach your adult children wealth management skills and values, and you’re not alone. You can use your financial advisor to assume a coaching and teaching role.
Think of your financial advisor as a partner engaged to reflect your values on your children. A reflection of your values from someone, especially one experienced in wealth management, serves a useful purpose. You’ve seen this before: You advise your children and model correct behavior repeatedly, but it fails to sink in. However, when your children hear the same advice or see the same behavior in someone else, they pay attention! Though this phenomenon can be frustrating, it is a good thing. You share your children’s best interests with other adults capable of influencing them.
Teaching and coaching wealth management seek two outcomes, skill acquisition and knowledge. As learners develop these, values emerge. Emerging values enable a vision. This vision, in turn, enables application to new situations.
Of course, learning starts at home. The ideal venue is not repeated lectures. Rather, as they mature, children witness their parents’ story. They hear about education, work, and sacrifices. They learn how failures contributed to subsequent successes and how persistence emerged from failure. Yet, their first personal experience with money brought only pleasure. It might have been purchase of candy or a toy. And that money-pleasure association repeats itself from early childhood well into adolescence before they learn that money serves far more than immediate gratification.
Re-Learning Childhood Money Associations
Overcoming repeated early money associations can require a creative and concentrated teaching effort. You and your financial advisor must arrange three conditions. First, learners must perform and observe wealth management behaviors. Reading about wealth management can be useful, but performing and verbalizing the tasks enhance learning. For example, children should be invited to participate in meetings to discuss investment strategy. They can contribute to the discussion if only to ask questions. They observe and behave.
The second condition arranges diverse circumstances for performing and observing wealth management behaviors. People and environments define the circumstances, so including children in discussions with lawyers and bankers can supplement time spent with you and your financial advisor.
The third condition delivers consequences for performing and observing. The consequences should include praise from you and your financial adviser. However, consequences also include naturally occurring reinforcement. For example, your children know the moment they understand a critical concept. “Aha moments” reward learners and strengthen their commitment to more learning. Of course, this condition also includes failures. Learners need the freedom to fail. None of us finds failure easy, not ours or our children’s failures. To render it less unpalatable, failure should only occur at a level suitable to the child’s skill level at the time. This means assigning tasks and engaging in conversations commensurate with abilities.
Parents endure a world of multiple competing objectives. On one hand, they want their children to emerge from childhood as responsible, independent adults. On the other hand, failure seems less likely if parents offer support and safety nets. Therefore, most parents struggle over decisions about withholding support for their children. Sooner or later they expect their children to assume all of their expenses. But this cannot happen overnight. It must be a gradual process.
The process occurs more smoothly if there is a meeting of the minds with children about independence. This is a subject suitable for discussion throughout childhood after children start showing the desire for independence. Parents must encourage independence at times, and they must pull in the reins at other times. This gradual process includes small failures and little successes that lead to approximations of adult independence.
Children learn the basics of sharing at early ages. And by the time they are young adults, many have strong feelings about the needs of other people and organizations. In philanthropy lies a fertile ground for parents and financial advisors to teach wealth management.
Children who have not participated in philanthropic activity can start by 1) volunteering their time and talents, and 2) participating in discussions about giving. Ideally, children volunteer their time and talents in activities with friends, parents, or the financial advisor. This “group” approach can make the event or project more pleasurable than going solo. Discussions can involve meetings with the financial advisor to select worthy causes. The ideal outcome of this philanthropy teaching process finds children selecting a worthy beneficiary and making decisions with parents and the financial advisor about the particulars of a philanthropic project.
Children must re-learn money associations to acquire wealth management skills and knowledge. To learn well, children participate with parents and the financial advisor in wealth management behaviors (discussions, volunteering, even statement reviews) that are rewarded. In the beginning, rewards should be immediate and tangible. However, as learning progresses, less tangible rewards become primary motivators. For children with strong feelings about the needs of other people and organizations, learning can take place in the course of developing and managing philanthropic projects. That is, they can learn in a context that children value (i.e., philanthropy). If the children do not have strong philanthropic ideas, there might be other meaningful contexts like portfolio management, security selection, and economic analysis.
The following paragraphs offer specific tools and advice. In all of these, the financial advisor can reinforce with your children your values, and they can teach skills and knowledge.
The single most important fact underlying the discipline of finance reveals that money’s value is not simply its nominal value. Rather, money has time value. A solid grasp of the time value of money is essential for competence in wealth management because this principle underlies most financial decisions involving capital assets.
Several websites offer time value calculators; MoneyChimp delivers some of the best collections of financial calculators at http://www.moneychimp.com/calculator/ . At http://www.moneychimp.com/calculator/compound_interest_calculator.htm the calculator solves for future values; http://www.moneychimp.com/calculator/present_value_annuity_calculator.htm solves for present values.
The FINRA “Fund Analyzer” offers a more sophisticated education in time value at https://tools.finra.org/fund_analyzer/. First, the Financial Industry Regulatory Authority is the industry self-regulatory organization with which most financial advisors and their firms are associated. Second, the calculator enables comparisons between investment funds on the basis of expense. Though the calculator serves a narrow purpose, it serves as a broadly applicable teaching tool because it incorporates expense into time value calculations.
The Securities & Exchange Commission website has links to other useful calculators and tools including a tool that reveals the true cost of debt and a “Scam Meter” designed to help investors evaluate whether prospective investments might be a rip off. Peruse the links at https://www.sec.gov/investor/tools.shtml.
Of course, this is only a small sample of reliable online tools. Your financial advisor can add significant value by exposing your children to these and other tools.
Five Mission-Critical Teaching Tips
- Start “where they’re at.”: A child who wants to write novels for a career might not identify well with wealth management. It seems like finance is just not in their DNA! So it is useful to teach with a focus on values shared between the child’s passion and wealth management. In this example of an aspiring writer, “efficiency” is an important value shared in writing and in finance. Polonius expressed the writer’s value in Shakespeare’s Hamlet: “Brevity is the soul of wit.” That is, the best writers write only necessary words; unnecessary words dilute the message.
- Start with fundamentals: Budgeting helps discipline cash flows. “Pay yourself first” aids savings. Pay off the entire credit card balance each month. These are all fundamentals you know and practice. Even though your financial sophistication has grown far beyond these fundamentals, without some of them, you wouldn’t be where you are today. You had to learn the fundamentals sometime, and so must your children.
- You are the example: That’s a tall order. Parents are imperfect. And that’s okay. It just means that parents must pay close attention to their own behavior and only rarely expect their children to do what the parents are unwilling or unable to do.
- Having skin in the game matters: No formula can tell a parent when to stop paying rent, cell phone charges, and all of the other expenses children incur. It is a process, a balancing act. In any case, until children assume the work and risk of achieving their objectives, success is unlikely.
- Teach wealth management as an expression of your values: Have you known people whose wealth has apparently caused them to lose sight of what is really important? Money does that to some people. But parents’ first responsibility lies with their children. Wealth can be viewed as a medium for serving their parental role. This parental role in no way diminishes the need to assume financial risk and capitalize on opportunities. In fact, strong values drive wealth management much better than simply accumulating or preserving wealth for its own sake. The values define a greater purpose.
Wealth management requires skills and knowledge that go beyond investment, laws, and taxes. Rather, well executed wealth management serves your values. To help your children learn and apply your values, engage your financial advisor to help in the process. Teaching good financial stewardship is one of the best lessons a parent can teach their children—it is never too late to start.