The most important lessons our children learn are from making bad decisions. Enormous parenting energy is spent warning our children of the dangers of life and preparing them to make good decisions. The odd bad financial decision – like buying the fancy car instead of the practical one – is unlikely to have a detrimental impact on their lives. But how then do we prepare them for making large financial decisions, particularly when the consequences of a bad decision can have a significant impact on the wealth of future generations?
Telling is not learning. You wouldn’t dream of telling your children how to ride a bike then sending them off to the shops on their own, but this is exactly what many parents do when they don’t involve their children in financial decision making. They will need a few pushes down the path, someone running behind giving encouragement and the odd fall and quick brush off. Children – of all ages – need the opportunity to learn for themselves.
If you are ready to help your children in this journey, some key considerations are:
Check current understanding and skills
Don’t underestimate their ability, but do consider their maturity, education, profession and personal circumstances. (If they have just started a family or about to backpack around Europe, now might not be the best time). This might start with a casual conversation about the state of the economy or if they have ever thought about buying shares. Remember too, that all of these aspects will change with time and it’s important to revisit the situation every few years.
Set an objective
Let them know why you want them to learn. Where do you want them to be in one, three or five years? Is it to be a part of the decision making team, as an informed observer or with a succession plan in mind?
Let them see you in the process of financial decision making. Talk over what it is you are considering, who you seek help from and why each of the elements are important to you. If possible, give them exposure to the decision making process of others too. Let them read reports and financial advice that you receive. The greater variety of information they have been exposed to, the better prepared they will be.
Give them a chance to practice
This is a difficult one. It is still your money, however, in all likelihood, it will one day be their money (or they may be controlling it for future generations) and you don’t want it lost to bad decisions. Options you might consider include:
- Convening a family council once a year: In the beginning this may simply be about providing exposure to the financial process, but can easily move on to small projects like researching and providing opinions on investments.
- Providing each child with capital to establish a small portfolio of their own: If you are still unsure about handing over control, this can be in conjunction with a parent as joint decision maker. Alternatively, the parent can direct the child to a trusted financial advisor.
In choosing a trusted financial advisor, keep in mind that the one you have relied on for years may not always be the right choice to offer a seemingly independent opinion to your children. It is likely, however, that your advisor will be in a position to recommend a colleague.
(This takes me back to the days of learning to drive, where my driving was perfect with the instructor and terrible with my mum in the care. An independent advisor can also help by taking any angst in the parent/child relationship away from the learning process.)
Assess, and give them a benefit from doing a good job
Be sure to keep them on track and accountable. An integral part of financial decision making is review and an important discipline to introduce from the start. A small benefit, such as receiving some of the income from a portfolio, could make the difference between a fleeting interest and a longer term commitment to learning.
Any journey involves risk – it is how we mitigate risks that make the difference. The rocky road of creating, managing and growing wealth can be evened out with the right assistance and advice. Partnering with a trusted advisor can ensure financial decisions made by you and/or your children can be a rewarding and learning exercise.