Being a parent in the 21st century means taking responsibility for your child’s investing education. Since financial literacy is not part of the Common Core educational standards, it falls to parents to teach their children how to be financially responsible adults.
That education often requires being more open with your children about your own finances, which can be a frightening prospect. “Talking about money is really scary for parents,” says Michael Farrell, managing director for SEI Private Wealth Management in Oaks, Pennsylvania.
You start with the basics of saving and spending, but whereto from there? Although your kids should know how to invest, would telling your children what you invest in be too much information?
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Farrell says there’s a lot of value for young adults to understand what’s inside their parents’ portfolios. But before sharing what you invest in, you should explain why you invest in the first place. Framing the conversation in terms of your financial plan and the goals you have will help ensure your kids are prepared to not only assume ownership of your assets when the time comes but also to continue your investment legacy.
Work up to sharing your portfolio with your kids. At SEI, the idea is that parents should teach their kids about finances throughout their upbringing in a three-phase process. Phase one is giving your kids the building blocks of their financial education, such as teaching the three pillars of saving, spending and giving. That’s something most parents try to instill in their children beginning in elementary school.
In phase two, the conversation broadens to one of shared values. This is when parents explain why money matters to them. Sharing what you hope to accomplish with your wealth can help your kids understand the reasoning behind your financial plan.
“You want to make sure you understand what your goals are for you as a couple and for you as a family,” says James Nichols, head of customer solutions at Voya Financial in Windsor, Connecticut. “If you understand those overarching objectives, then you can more easily explain why you are invested the way you are.”
He says sharing your financial plan with your children as they grow into adulthood can benefit them in several ways. First, a shared understanding of why you invest can help diffuse the emotion in financial situations. For instance, if your child asks for help with a down payment on a car and you don’t feel you can afford it, Nichols says your financial plans can add context to your refusal.
You can explain that your money has to last you a long time and you can’t take a loan out for retirement. Meanwhile, your child has many years to save for retirement and can take out a loan to buy a car. “Most kids don’t want to put their parents in a tough spot,” Nichols says. “Setting an example for prudent financial management is only going to benefit [your kids] in the long run, both in terms of how they interact with you and your money and hopefully how they one day manage their own finances by emulating your good practices.”
Prepare them for their inheritance. According to a September survey from Personal Capital, 97 percent of affluent parents plan to leave an inheritance for their children, with 91 percent planning to bequeath at least $100,000.
Discussing your financial plan with your children is “essential if they are set to inherit your assets so they know what they’re dealing with and why the portfolio was structured in a certain way,” says Michelle Brownstein, vice president of private client services at Personal Capital in San Francisco. Brownstein says parents should share “where their accounts are held and how to access them, including the contact name and phone number of an advisor or brokerage firm” if applicable.
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Leave a financial values legacy. We often think of a financial legacy as a transfer of wealth, but equally important is the transfer of financial values. A rule Nichols loves to share is “money is a means to an end. It’s there to help you achieve some goal; it’s not an end in and of itself.”
Make your adult kids co-trustees. “What happens over time is a curiosity on the part of children,” Farrell says. They start to ask more questions, and that is usually when the portfolio is revealed to them as a natural step in the education process.
The time for this to happen is when your kids turn 25, he says. By then, they typically have had enough education to understand the intricacies of an investment portfolio. In fact, they are probably working and making their own financial decisions, so seeing the culmination of your planning process can help shape theirs.
This is particularly important for clients with trusts. “We encourage our clients to allow their children to become co-trustees at the age of 25,” Farrell says. The kids will then spend 10 years with another trustee learning how to be responsible for a trust. Trusts are great for estate-planning purposes because they are “harder to challenge than a will, and can clearly lay out who is to receive which assets,” Brownstein says. “This will help avoid probate, which can be an expensive, lengthy process for your heirs to work through.”
She says that “talking about the pros and cons of different asset classes and the rationale behind your portfolio can help children make sense of the assets down the line.” You can show them how the trust they co-manage may be more aggressively invested than other parts of your portfolio because you plan to pass the trust assets onto them one day. Meanwhile, another part of your portfolio may be invested more conservatively because you hope to live off of its income in retirement.
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Thanks to the foundation of financial goals and values that you’ve given your children, they will understand why your portfolio is structured the way it is, making the act of sharing your investments with them more meaningful.
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Should Your Adult Kids Know What You Invest In? originally appeared on usnews.com
