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How Financial Pros Teach Their Own Kids About Money

How Financial Pros Teach Their Own Kids About Money
April 03
01:20 2018

There was a famous ad that says: “When doctors feel rotten – this is what they do.” In other words, the best advice is the advice doctors give themselves – or their family. It stands to reason, then, that the best fiduciary advice is the fiduciary advice fiduciaries offer their own children. After all, aren’t parents the ultimate fiduciary?

The just released book From Cradle to Retirement: The Child IRA – How to start a newborn on the road to a comfortable retirement while still in a cozy cradle explains the advantages of giving minor children a head start, then shows how to do it. The book contains case studies of real parents who have taught their children how to save for retirement. Quite a few of these parents happen to be financial professionals. Could this indicate a trend? And how can this trend help parents who aren’t financial professionals?

We surveyed financial professionals from across the country asking them how they advised their own children. These children ranged in age from 7 to 33. The answers we received led to a stunning revelation – one that some might think exposes an unfair privilege. But we’ll let you decide if that’s true or just another round of social hyperbole.

How Real-Life Parents Act As Real-Life Financial Fiduciaries
You’d be amazed how young children can start learning the simple basics of money. “My daughter is 7, and she is ready to start thinking about money,” says Randy Kurtz, Chief Investment Officer for Betavisor, LLC in Chicago, Illinois. “I want her to think about spending, saving, and giving. I have borrowed from a book by Ron Lieber (the opposite of spoiled), where he recommends a ‘three jar’ approach. Anytime my daughter gets money (she just got $5 from the tooth fairy), we split the money evenly into the three jars. One jar is ‘spend,’ where she can use that money at any time on anything she wants. The second jar is ‘save,’ where she has to have a purpose in mind, and she is saving towards getting something in the future. The last jar is ‘give’ where she will give the money at the end of the year to a charity.”

Whether a “jar” or a “bucket,” the concept of dividing up income and assigning each portion to a specific goal is a much-practiced strategy. And, once learned, it’s a habit that endures. “I have found that if you haven’t instilled saving in them as young kids, it’s much harder as young adults,” says T. Eric Reich, President, Reich Asset Management, LLC in Marmora, New Jersey. “I always made my kids (ages 6, 8, and 10) follow the Save-Spend-Share rule. For every dollar they get, they save 30%, spend 50%, share 20%. This allows them to spend half of whatever they get on whatever they want. The savings component is further broken down into 15% long term and 15% short term. My goal is to have them saving 20% of pay by the time they get their first ‘real’ job. The reality is that as long as they save 12% they will be in great shape for retirement by starting so young. Short term goals include things like a laptop, iPad, etc. The 20% to share makes them always remember to give back to their community, etc. By instilling this system from birth, they don’t know any other way and aren’t resistant to the plan.”

Once the 1-2-3’s of finance are “mastered” (i.e., the child starts to get bored), it’s time to liven things up. “As they grow older, the next step is to introduce the children to the concepts of allowance, budgeting, retirement, and living within one’s means,” says Radha Rai, a financial professional with experience in Retail and Investment banking, currently working as a credit risk professional in leveraged finance at Deutsche bank, in North Jersey.

This is a great opportunity to add some fun to the lesson. Each child may respond to different kinds of play, but “play” is the operative word. Rai says, “I play a game with my 8-year-old niece to introduce her to the importance of retirement savings and to practice saving for retirement. I give her a small allowance every month and she generally has full freedom to save or spend it. She however needs to disclose how she is spending this money to me every month. Then, once or twice a year, we have a retirement month when this allowance is skipped. My niece has to now manage during these retirement months without her allowance. After some initial shocks, she has gotten really good at saving for the retirement months in our game. The hope is that when she goes into the outside world, she will use these learned concepts to make wise decisions regarding her retirements.”

Even though it may be a fun game, it has a serious purpose. Of course, you don’t want to make it seem serious, so you’ve got to use “jargon” kids are familiar with. And the jargon kids are most familiar with are toys. Bring those toys into the game. Andy Smith has a 9-year-old son and an 8-year-old daughter. He is a Certified Financial Planner with Financial Engines and Co-Host of “Financial Engines’ Investing Sense” in Indianapolis, Indiana. He pays his kids “in dimes for any chores they complete (above and beyond the stuff they have to do around the house) — for every dollar they earn, one dime goes to their savings; one dime goes to some sort of charity (they can pick, and they each favor different causes). This teaches them quickly about the concept of taking parts of their income and putting it away for later. Talk with them about how a time will come when they WANT to stop working — and when that happens, they need to have some way to pay for everything without a regular paycheck coming in. ‘Save as MUCH as you can for as LONG as you can.’ Don’t hold everything in one place (and right now, place = investments). Use the example of — what happens if you have 1 bajillion LEGOs…but they’re all the same color or shape? Totally useless; so…you want LOTS of different LEGOs so that you can build whatever it is you WANT to build, down the road.”

As kids start getting to the age where they work (mid-to-late teens), they develop a broader sophistication. (The same is true of young adults.) It’s time to start arming them with the financial knowledge that will make them retire in comfort.

Sally Brandon is a Senior Vice President Client Service & Advice at Rebalance IRA in Palo Alto, California. Her kids are 16, 18, and 20. She says, “I’ve explained to my kids the power of compounding and show them how small savings today can be significant downstream.” Sally tells them about the advantages of diversification and mutual funds “are inherently less risky than individual stocks.” She also explains the concept of time diversification as well. “Because they have many working years ahead of them, we discuss how they can afford to take more risks, leading them to invest in emerging markets and small cap funds as well.”

It turns out time may be more important than any specific investment. Robert (Bob) Gibson, Fiduciary Consultant, Centurion Group in Plymouth Meeting, Pennsylvania, says of his three children (ages 15, 20, and 22), “I’ve spoken to all of them about the importance of starting early and deferring as much as they can as early as they can. We’ve had a discussion about compound interest and historical market returns over time.”

Eventually, the conversation needs to begin to include the types or and appropriateness of various savings vehicles. This can be done with or without the knowledge of the child (depending on the age). One thing is certain, though, if the child is a minor, only the parent or guardian can sign the paperwork necessary to establish and IRA in the child’s name.

Rai says, “As my niece grows older, I would like to help her open a Roth IRA account so that she can learn and understand the power of compound interest. She will learn that if she invests $1000 today, she will get back $12,000 in 50 years (@ 5% interest rate). As she invests her savings in the Roth IRA and it grows, she will have a head start in terms of preparing for retirement.”

And it’s never to soon to start. While his children are now grown adults, (ages 26, 29, and 33), F. Michael Zovistoski, Managing Director at UHY Advisors NY, Inc. in Albany, New York started working with them at age 16. He “started young when my children were teenagers working their first job. I talked to them about the importance of saving for retirement. They contributed half of their gross pay to a Roth IRA and I matched the other half (up to the limit). From the half they got to keep, half of that they saved for a long-term goal and were able to spend the other half. This process helped teach them from an early age how to budget, allocate their paycheck and start on a path to saving. I then showed them how to log into their accounts and watch the funds grow.”

Notice how Zovistoski incorporate some of the same elements of the other financial pros in terms of splitting up the use of the money earned. Also note how he gifted a portion of the IRA contribution. This is a critical role all parents can play as they help their children save for retirement.

The Difference Between Teaching Minor Children and Advising Adult Children
First, notice the phrasing of the subtitle. One doesn’t simply “advise” young children. They need to be taught. On the other hand, adult children prefer a suggestion rather than a command. There are other important strategic and tactical differences when its to acting the good fiduciary for minor and adult children.

Never underestimate the power of developing good habits early. To instill good financial sense, Smith says “talk a lot, now, about ‘deferred gratification’ – if a 9- and 8-year-old can understand it and want to put things off NOW so that their LATER can be a lot more fun…surely an adult child can remember that, too.”

Zovistoski found the time spent working with his kids when they were young paid off when they became adults. He attributes this “largely because we worked together teaching them how to invest and the benefits of the Roth IRA. Habits start early, regardless if they are good or bad.”

It also possible the inertia of childhood enthusiasm may push them along in the right direction. “They totally get it,” says Smith. “Any time that they receive a gift for their birthday or a holiday, they don’t want to spend it: they want me to put it in their piggy-bank for later. And they love participating, each year, when we empty the piggy-banks and put their savings into the investment accounts.”

This inertia becomes a momentum that lessens the need for the parent to continue nudging the child along the right path. When the adult child becomes independent, the parent can breathe a sigh of relief. “Once they got older and graduated from college, they already had a good base line for saving,” says Zovistoski. “I stopped supplementing their retirement, but they have also increased their contribution. They are all still contributing to the Roth 401k option and are still investing fairly aggressively. They know that as they get older they will eventually need to reduce the risk in their portfolios, but for now, they are in the accumulation phase.”

Even in the absence of momentum, the thrill of victory can create its own perpetual motion machine. “Though difficult for them to think about ‘saving for retirement’ when so far off, they are more receptive to the thought of saving for their future, especially given the cost of living these days,” says Brandon. “As soon as they got started by making their first investment, and experienced gains, they truly began to understand the power of investing and this motivated them to want to save more.”

Still, sometimes things will need to be explained. Older children will have a greater capacity to understand the implications of their actions. And they are more comfortable with the math, too. “I think the best way to get young adults on board is to show them the future value of each dollar saved,” says Reich. “A dollar saved today at 8% for 40 years is $21.72 in the future. Want that new $600 bike? It just cost you $13,033 at retirement! The $30,000 car? That’s $651,600!! This starts to put their future into perspective. Another example is a hard life lesson- maybe a family member who is still working well past retirement age because they can’t afford to retire.”

No matter how long it takes, adult children will soon flee the nest, and hopefully with a sizable and growing nest egg. Does that mean the parents’ job is done? Not if you’re a financial professional. “They still seek my advice on portfolio structure, but all three are on their way to a comfortable retirement,” says Zovistoski.

Do Children of Financial Professionals Have an Unfair Advantage?
Gibson compares his efforts with helping his own children look out for their best financial interests with that of his parents. “I think I can help them understand the value of saving early, for the long-term benefit,” he says. “Understanding basic principles like compounding and different types of investments, style box, etc. I think that I can help them have a better understanding of how the whole plan works and why it makes sense. My parents never even spoke to me about a retirement plan.”

Others also noticed this generational difference. “My kids got exposed to investing and its benefits a lot earlier in life than I ever did,” says Brandon. “We talk at dinner about ways to invest and why it is important to start saving at a young age. We guided them to set up a brokerage account as soon as they started earning money and got them to commit to saving a certain % of their paychecks.”

Does this give the children of financial professionals an edge that can accrue over their entire life? “Fortunately,” says Reich, “I think an advisor’s kids have a tremendous advantage because we understand the importance of starting early better than most.”

Of course, this is true no matter what profession you talk about. Children of carpenters are more likely to know the difference between a dado and a half-blind dovetail joint. Children of mechanics tend to be more familiar with accelerator pedal linkage, a bi-level purge valve, and how to change an oil filter. Likewise, it’s only natural for children of financial professionals to know the ins and outs of high finance.

“It’s a bit more front-and-center to them,” says Smith. “They know how I help others fix mistakes or stay out of bad situations. The lessons started early and continue – this isn’t a ‘you’re 18 now and this has to happen’ thing…or it’s not a ‘read about this once and now you’re going to do this for 7 months’ thing. I support them immediately when they show an interest in saving. They know that there really is no ‘secret sauce’ (i.e., one magical investment; one magical firm that can manage your money), but that the way to success is through ‘saving as much as you can for as long as you can’ – so THEIR benefit comes from being able to get an 18-year head-start on their peers. They may also be at a disadvantage for them: what other parent can use thousands of examples as to what NOT to do when faced with a deferred-gratification scenario?”

And just as cars are getting more complicated, so, too, is the world of finance and investing. “Financial instruments are growing increasingly complex every day,” says Rai. “With the advent of crypto-currencies and explosion in financial technology, even the most educated adults find it difficult to keep pace with changing financial landscape. As a financial professional, I do think that the children around me – my son, nephews and nieces – would have an earlier introduction to financial concepts as a result of the money conversations I often have with them. As a financial professional, I saw a gap in the market for a children’s book that opens up dialogue between the parents and their children and hence I wrote Liktoon’s Boat – a book that introduces the concepts of earning and saving money for a goal.”

While it’s easy for professionals to recognize this knowledge gap, it’s not easy to get non-professionals to do anything about it. This may present a disadvantage to their children. “My children feel comfortable in asking me about financial questions and situations,” says Zovistoski. “They know that this is what I do for myself and others. Parents who are not financial professionals may not feel comfortable in teaching their children about finance and retirement. If the parent is uncomfortable, they may not seek out the assistance from a professional to advise their children. Having a financial professional as a parent significantly helps guide the children to financial security.”

Zovistoski may be on to something. Do you think all parents might benefit from these lessons offered by parents who happen to work in the financial services industry? Buy the book From Cradle to Retirement: The Child IRA – How to start a newborn on the road to a comfortable retirement while still in a cozy cradle as a gift for someone you’d like to help. Use it to show them how other parents who aren’t financial professionals were able to accomplish the same thing as these pros.

Think about it. Newborn babies keep their parents up all night. Knowing your adult child has a sizeable nest egg means being able to sleep soundly. And chances are you’ll spend your waking hours with less stress, too. Teaching your children to save early for retirement can achieve this healthy (and wealthy) goal. There’s no reason why financial professionals should be the only parents who know this little secret.

Christopher Carosa is a keynote speaker, journalist, and the author of  401(k) Fiduciary SolutionsHey! What’s My Number? How to Improve the Odds You Will Retire in Comfort and several other books on innovative retirement solutions, practical business tips, and the history of the wonderful Western New York region. Follow him on Twitter, Facebook, and LinkedIn.

Mr. Carosa is available for keynote speaking engagements, especially in venues located in the Northeast, MidAtantic and Midwestern regions of the United States and in the Toronto region of Canada.

 

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Christopher Carosa, CTFA

Christopher Carosa, CTFA

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