A cure for affluenza

How to handle wealth transfer to the next generation

Deanne Gage 16 December, 2013 | 7:00PM

The word affluenza sounds like a medical illness. Not quite, but it is an illness just the same, just of the financial variety. It means inheriting considerable wealth and not knowing how to manage it.

Wealthy parents worry about their kids frittering away their inheritances and not having a purpose for their lives. Their worries are for good reason. According to The Williams Group, a U.S. consulting firm, 70% of families not only lost significant assets but harmony within the family unit after the wealth transfer.

Many share Warren Buffett's point of view about wanting to give their kids "just enough so that they would feel that they could do anything, but not so much that they would feel like doing nothing."

At last month's 10th annual Distinguished Advisor Conference held in California, a panel made up of a financial advisor and parents had some advice on how to help people navigate money issues with their children. (I was the moderator.)

Affluenza is more likely to happen when kids have everything handed to them, said panellist Kevin Gebert, a financial advisor with Greenrock Financial and author of Financial Fotographs. Kids who have complete financial security are more likely to have trouble delaying gratification. They generally have difficulty setting and sticking to goals and aren't as ambitious. Gebert says the problem lies with the fact that children may not see the struggles parents experienced during their wealth-building years.

Unfortunately, children are often not brought into the financial planning loop. Panellist Deborah Kerbel, who co-wrote Money Savvy Kids with her father, financial guru Gordon Pape, noted that their own advisor has never offered any advice on family wealth management. Nor has the advisor asked about registered education savings plans (RESPs), she adds.

 
Kevin Gebert

"He's never even mentioned my children, although he knows we have them," said Kerbel, who now realizes it may be time for a new advisor who will better meet their needs. "As parents, we all know that we should be teaching our kids about money. But the problem is we don't know where to start, how to do it, what to say or not say what they're ready to learn at each stage, and how to move forward."

Things that would have been helpful to parents like her? Any suggestions on financial literary for children, and tips on how to help kids distinguish between needs and wants.

Parents should start the process early. One suggestion is to complete a financial self-quiz that rates their aptitude for personal-finance issues. There's one featured in Money Savvy Kids. As Deborah's husband, Jordan, said on the panel, you can't teach what you don't know. "A quiz will help parents better understand their own strengths and weaknesses so they're better prepared in starting their kids on the road to financial literacy," he said.

Next, break down the money taboos. If kids ask questions about the family finances, don't change the subject or avoid answering. "As with everything, if a child is old enough to ask the question, she's old enough for a thoughtful, informed answer," said Deborah Kerbel.

Make learning about money more fun for the kids. If you treat financial issues like a classroom exercise, the kids will groan through every experience. Instead, if parents use interactive websites, apps, games and kid-oriented books, the kids may not even realize they are learning in the process about needs versus wants, interest charges and how the banking system works.

Deborah Kerbel sees kids' allowances as paramount since they get first-hand experience using money themselves. "Having a small amount of spending money of their own will get a kid making financial decisions from an early age," she said. "An allowance will get them questioning their purchases, thinking about want versus need and budgeting."

 
Deborah Kerbel

Take her 10-year-old son, who just started receiving an allowance when he had a movie night at his school. Kerbel decided that her son should pay for this social event out of his allowance. Beside the movie, he had the option to purchase popcorn. He went back to the organizers to inquire about the size of the popcorn and the flavours available.

In the end, the boy decided against buying the popcorn. "The point was he was deciding whether it was worth his money or not," says Deborah. Had she just paid, the questions probably would not have even come up.

As kids grow into adults, they can develop a relationship with the parents' team of professional advisors by sitting in on the occasional meetings. Doing so can only enhance the lessons of setting goals, and creating and maintaining wealth, Gebert said.

Most advisors welcome family meetings, especially as the parents retire and formalize estate plans. Understanding why certain decisions were made can help prevent family squabbles down the road, Gebert noted.

About Author

Deanne Gage

Deanne Gage  Deanne Gage is a Toronto-based writer who has specialized in personal-finance issues since 1999. A recipient of several journalism awards, including one from the Investment Funds Institute of Canada, she is also a former editor of Advisor's Edge and Advisor.ca. She can be reached at deannegage@gmail.com.