The Rich Need Help Talking Money With Kids
Parents who worry that their children don’t appreciate the value of a dollar have been known to lay out the family’s financial situation to minors, in hopes of instilling responsibility. Some parents even reveal their income to their kids. Two highly trafficked articles, one in The Wall Street Journal and the other in The New York Times recently advocated that parents should be frank with kids about family finances.
But elite wealth managers would do well to offer clients more nuanced, effective strategies, experts say. The average minor either won’t understand the sums or won’t be able to resist telling outsiders. Although it’s sometimes necessary to have these talks at a young age, it’s usually safer to introduce kids to financial topics gradually. Clients can begin talking about what money means to the family when children are as young as five, advisors say.
These discussions should reflect the parents’ philosophy of wealth, suggests U.S. Trust wealth strategist Susan Peterson. The Seattle-based advisor handles complex planning needs for clients with assets over $10 million. “The ideal is for the parents to have clarity about what they expect of their kids, and then to consistently seek out ways to educate those kids over time about how money works,” she says.
Since the topic is a difficult one that many clients fret over, advisors who help plan and facilitate talks provide a valuable service, Peterson says — including meeting young heirs well before they inherit.
Yet if parents feel strongly about doing so and are confident their underage child is ready for the talk, the discussion can dramatically increase a young person’s knowledge base, Peterson says. Clients should make sure to discuss outflows as well as inflows. An income figure means little unless it’s balanced against taxes, insurance and household purchases. By the time children are approaching high school graduation, these talks should help them see money as a limited commodity that must be shared between wants and needs, Peterson says.
When corporate executives’ compensation packages are public record, clients may find themselves discussing family money with kids far sooner than they meant to, according to Alexandra Lebenthal of Lebenthal Holdings. Several years ago her young daughter, browsing online, found a proxy statement listing her husband’s compensation. “We were really unhappy that she saw it,” says Lebenthal, whose New York-based firm provides underwriting, asset management and wealth management services. Its advice arm oversees nearly $2 billion. But Lebenthal believes the sooner children learn about saving and investing, the better. She taught her kids the basics of how stocks work when they were in elementary school, by referring to companies like Disney and McDonald’s.
These kinds of lessons are crucial when clients name children on accounts that bestow assets upon them as young as age 18, Lebenthal points out. For example, the Uniform Gifts to Minors Act (UGMA) requires accounts holding securities for children to bestow those investments once the recipient reaches the age of legal majority, which varies by state.
In general, the younger the child, the more clients should focus talks about family money on specific purchases that affect the child, says Bob Fragasso of Fragasso Financial Advisors. His Pittsburgh firm manages around $1 billion.
There’s no harm in telling preteens how much their clothes and toys cost each year, he says. Teenagers can hear what the family budgets for vacations and new automobiles. And clients should explain to any child nearing college age just how much money is available for higher education. For each scenario, clients who want their children to grasp the meaning of these amounts should let their children participate in decision-making, Fragasso says.
“I tell clients they should give children demonstrations about how to make choices with money, income and assets,” he says.