Affluent parents have struggled with how to speak to their children about family wealth. Here’s how to focus those conversations toward meaningful ends.
Money has long been a taboo subject in families. Many of us have been taught that talking about money—how much we have, how much we make, how much we spend—is impolite as well as nobody’s business. Moreover, parents have long worried that if children know too much about their family’s wealth, the knowledge will stifle their initiative and ambition, or they might disclose their family’s wealth to others in ways that may be ill-advised or even dangerous.
So it’s understandable why—in an era when some feel that our privacy is constantly under assault; that wealth is demonized; and that our children are vulnerable in all kinds of ways to the pervasive impact of social media—parents today may be even more loathe to talk about money than were parents of earlier times. After all, we live in an age when anyone who knows our address can learn how much we paid for our house and obtain a pretty good estimate of what it’s worth today; if they know the name of our private foundation, can easily get copies of the foundation’s income tax returns; if we work for a public company, may be able to learn a good deal about our compensation and net worth. All using purely lawful means of discovery! And it’s not only nosy friends and neighbors who can figure out all these things; so too can our children and grandchildren, whose online dexterity may vastly exceed our own. To our minds, this reality only reveals the futility of trying to keep our wealth a secret from our children. They may not know the number of zeros or the number that precedes the zeros, and they may estimate dramatically low or wildly high, but, usually, they are able to figure out enough to determine whether their parents are wealthy.
And without denying the magnitude of the challenges this digital age presents, we believe that, while it’s understandable to want to shield our children from knowledge of family wealth, most families would benefit from talking about family wealth a good deal more. While every family of course is different, and advisors necessarily must customize their advice to a particular family’s unique needs and goals, as a general rule, we believe that most families should aim for a level of discussion that makes them slightly uncomfortable at first. In other words, set the bar a little above your natural comfort level.
But don’t misunderstand our point. When we advocate talking more about family wealth, we are not suggesting that clients deliver a balance sheet to their children. Instead, we mean that it’s important and valuable to engage in more qualitative conversations as a family about the nature, meaning, responsibilities, opportunities and challenges of wealth. The question, “Are we rich?,” one that so many of our clients dread hearing from their children, is actually a powerful opportunity to examine, as a family, the bigger, much more philosophical question: What does it mean to be rich? What makes us wealthy? Is our calculus monetary only, or are there other modes of wealth that make us rich? How do we measure? How do we prioritize? Einstein said, “Not everything that counts can be counted, and not everything that can be counted, counts.” What does this mean to our family? Why did we work hard to acquire wealth? What sacrifices did we make along the way and were they worth it? Now that we’ve attained it, what is it for? What responsibilities does it impose on us? Most fundamentally, where are we going together in life as a family and how will we know when we’ve gotten there? How do we stay on our path? When families examine these questions together, they can build the foundation that makes it more likely children will have a healthy relationship with wealth as adults, neither fearing it, feeling ashamed by it, coveting it or being mystified by it.
As essential as these qualitative conversations are, it is often helpful to marry them contemporaneously to a program that seeks to develop increased financial literacy.
By and large, wealth education skills are not widely taught in our school systems nor in colleges (unless a student is studying some form of financial management). Thus, the responsibility for teaching financial literacy largely falls to parents.
But not being financial educators themselves, parents typically wonder how best to accomplish this goal. In our digital world, a huge amount of financial information is available with a few clicks of a mouse. A substantial amount of financial misinformation can also be found the same way. How do we effectively sift through all the websites, apps and online courses that are so easily accessible?
Well-advised clients will turn to their financial advisors for help, either on their own or in conjunction with an experienced financial educator, in building a wealth education program that will give the next generation the necessary knowledge and skills for successful personal financial management. This shared knowledge builds confidence and trust between the generations and becomes the basis for their future partnership in preserving the family legacy.
Crafting customized wealth education sessions for the family creates the opportunity for a dialogue between the next generation of the family, the advisors and the educator. This is a fertile moment in the process of developing effective stewards and their ability to manage their financial futures for themselves and their future generations.
Beginning with personal finance skills is the first step in the process. What does it mean to create a budget? How do I figure out my cash flow? What is cash flow, anyway? What is an emergency fund? These may seem like simple questions, but the management practices behind them really are complex and require understanding of sophisticated concepts that will equip the next generation with life skills to evaluate every new situation. When the next generation in a family is asked what the operating budget of the family foundation is, those basic conversations about the meaning and importance of cash flow will come into play.
Why is compound interest important? Have you given your children an allowance and then offered them compound interest on the money that is left at the end of week? We call this experiential learning, or learning by doing, and it is the pedagogical theory to which we subscribe. Think about your own experience in learning how to make change for a dollar. Was it in a math problem? Or a pretend store set up in your classroom? Or at the actual grocery store with your parents? Chances are that the process did not really sink in until you were actually handing the cashier your dollar and receiving a few coins for change. In today’s world, for most families, physical experience with money is lessened to some extent because of the prevalence of electronic transactions. This bears witness to the importance of structuring opportunities for our children to learn these skills in other settings.
A wealth education curriculum should also include goal setting, how to save, why to save, interest rates, credit scores and history, debt management, identity theft, the tax life cycle, estate planning and home buying. Once we’ve achieved a basic level of personal financial understanding, we should seek to expand that knowledge by focusing on investing, philanthropy, family governance, working within a family business, career growth, entrepreneurship and personal initiatives.
While we believe it is beneficial for families to talk about wealth more often and more strategically, we also believe it’s important to teach children that while we are open about these matters in our family, they are ultimately family matters and are not to be discussed outside the family. Children need to learn boundaries around discussions of family wealth, just as they learn the importance of boundaries in so many other aspects of their lives.
This article appears in Insights & Outcomes, a magazine from Morgan Stanley Private Wealth Management providing in-depth reports, analysis and thinking from our Firm’s leading specialists.
Please contact your Morgan Stanley Financial Advisor or Private Wealth Advisor to receive a print copy.
