The transfer of wealth from one generation to the next is one of the (usually happy) facts of life in an affluent family, but it does not always involve a death and the reading of a will. One of the realities of the post-crash economic downturn is that more adult children are expecting their parents to help them out financially, for a home down payment or a mortgage payment or two, a car or college tuition for the grandchildren.
Not many families can withstand a long-term drain on assets that likely already took a blow during the market meltdown of a few years ago. Some advisors would rather drop clients than sit by idly while they embark on spending sprees that may cause them to outlive their portfolios.
Jennifer Immel, a wealth manager with PNC Financial Services in Naples, Fla., recently parted ways with a family that had more than $30 million in assets because of their inability or unwillingness to rein in their gifts to their children, which reached into the seven figures each year. "They were going to run out of money, and they wouldn't let me help," Immel says.
Even when a financial advisor is able and willing to work with clients on containing and managing requests for financial help from their boomerang children, they can end up squarely in the middle of one of the most perilous kinds of disagreements: family squabbles over money. Susan Moore, founder and president of Moore Financial Advisors in Watertown, Mass., has been on the front lines of these kinds of battles.
One affluent family she advises has suffered a rift over what one grown child saw as his parents' unwillingness to help out with education spending and other costs of living. "The reality was that if they had done what the family member wished, they would not have been able to guarantee that their assets would be enough to last," Moore says.
Her clients began by asking Moore if they could afford to help out. But when the adult child's request became more of a demand, she wrote a letter outlining the family patriarch's financial status and explaining why help wasn't possible. "Leaving aside questions of fairness to other family members, there was no way the wealth would cover anything and everything," Moore says. But the family member didn't see it that way, and is now estranged from his relatives.
While this may be a dramatic example, many wealth managers nationwide say they've seen more grown children make outsize demands on their parents in recent years. It's due partly to the economic slump and the toxic combination of a decline in parents' portfolio values as job woes buffet their children.
In its August issue, Harper's magazine published data estimating that a stunning 85% of this year's college graduates were planning to head back to live with mom and dad for at least a while. A study in 2010 by researchers at Columbia University using the U.S. Current Population Survey found that 52.8% of 18- to 24-year-olds were living at home, up from 47.3% in 1970.
But Tom Sedoric, a financial advisor with Wells Fargo in Portsmouth, N.H., says the problem is broader and more worrisome than young twentysomethings returning to the nest for a year or so. He's even coined a phrase for the phenomenon: Kippers - an acronym that stands for Kids Invading Parental Pockets and Eroding Retirement Savings.
"The challenge is that too many children - even children who are in their thirties and forties and should be standing on their own feet - perceive their parents to have endless resources," Sedoric says. In the current environment, that simply isn't true. Unless your client is on one of those Forbes lists of the ultra-wealthy, almost every family can bump up against limits when it comes to bailing out adult kids, he says.
"My challenge is to keep my clients wealthy, not watch as their children erode their assets to the point where they can't be described as wealthy anymore," Sedoric says. That's far from simple, because it may involve finding a way to step between the parents and the children and serve as a mediator - something many quantitatively oriented advisors aren't accustomed to doing or comfortable with trying.
But when it comes to preserving the wealth of their clients, Sedoric and his peers argue that it's not a task an advisor can avoid. "I have an educational background in psychology, which I admit does help with this kind of discussion," he says. "But it's vital and not that hard to do once you start thinking about it."
Not surprisingly, the earlier parents start teaching their children to be financially literate and responsible, the lower the odds that they and their advisors will find themselves besieged by unreasonable money demands later on. Sedoric has seen eighth-grade kids with credit cards rely on their parents to pay off their debts. "What is that teaching them?" he asks.
When children are already adults and it's too late to inculcate responsible financial behavior, a first step is helping a client distinguish between a reasonable request for assistance and an unreasonable one, says Larry Rosenthal, president of Financial Planning Services, who works out of offices in Manassas and McLean, Va. With proper guidance, you can help clients move to being supporters from being enablers.
Rosenthal cites a case of a retired couple who had about $10,000 in free cash flow a month, and yet never seemed to add to their savings. It turns out, he says, they were helping their children maintain the lavish lifestyle they'd enjoyed as young adults still living at home.
Older advisors can recall watching as thrift gave way to outsize spending amid the electronics boom. A household television turned into individual TVs for every member of the family, along with video players and later DVD players. Gifts of new cars after high school or college graduations replaced contributions to the purchase of second-hand vehicles. Instead of summer jobs, children of wealthier families began pursuing summer experiences, volunteering or traveling abroad on their parents' dime.
That kind of parental indulgence - or simply the wish on the part of parents who had struggled for years themselves to spare their kids that kind of scrimping and saving - may be gratifying for a while, but can have long-term consequences. Too often, advisors say, kids who've just completed college want to live in the same way their parents do, forgetting that the kind of consumer spending their parents enjoy came after decades of earning and saving.
"The entitlement mentality sprang up," says Chris Bixby, a senior financial advisor at Key Private Bank in Burlington, Vt. "For many years, the kids could fund that with credit - including the purchase of the big homes they would otherwise have had to trade up to afford. Now, even when the jobs and the credit limits aren't there any more, they still want that standard of living. One way or another, they're asking the parents to pay, whether it's by moving back home or by paying the bills."
An advisor can face a range of scenarios. At one end of the spectrum, an otherwise responsible adult child is facing a financial crisis and the parents simply can't help. At the other, a child who's overindulged consistently is demanding that his or her parents do even more, without being willing to make any adjustments. The parents, while able to fund the kid's excessive spending, have become fed up. Most cases fall somewhere in the middle.
A first step in dealing with clients' financially demanding offspring is the simplest: Ensure that your clients realize what is going on. When advisors broach the subject, they are largely relieved when clients are willing to discuss the situation.
"They'll ask, 'Junior wants me to buy her that expensive ring or other piece of jewelry. Is that normal?'" Immel says. "Sometime, the parents are giving the kids a lot of money to pay doctors' bills. Intuition tells them they might not be legit, and an underlying substance problem comes to light when we ask for copies of all the bills."
Often, she says, these clients don't believe this is a topic that should be raised with a financial advisor. That means it's up to the wealth manager to find a tactful way to start the conversation.
One logical way is to ask about estate planning. During that talk, it may become clear that a son or daughter has already been drawing down his or her inheritance. Asking one or two simple questions about what the child is doing with that money: Is he or she building a business, or taking the kids on safari? - may trigger a broader discussion if the clients are already uneasy about the way that child is handling money.
In addition to serving as a sounding board for parents, an advisor can also check on financial consequences and proper procedures. "Be creative when documenting and drafting terms around big gifts, like a business investment, or a loan to buy a home," Immel advises.
"For instance, instead of making it an outright gift, parents can provide the 'mortgage' at rock-bottom rates that can be as little as 2% today for loans of less than 10 years," she says. If the child later encounters a problem making the full payments, the Bank of Mom and Dad can make concessions a major bank wouldn't - for example, forgiving up to $13,000 in loan payments per person, per year, under gift-tax allowances.
If adult children are turning to parents for help for the first time, that's no reason to sound an alarm, many advisors agree. But if it's to bail them out of a financial mess of their own making, most planners - accustomed to working with next-generation heirs to prepare them for the responsibilities of managing the wealth they will inherit - will offer to work with the child on basic financial skills.
If adult kids are repeatedly lining up for a loan (that realistically are gifts), that's a problem, says Dan Yu, managing director of EisnerAmper Wealth Advisors in New York. In one case, one of a client's three children was returning repeatedly to his parents for support in pursuing fantasy careers. Yu recalls the parents were increasingly stressed out "because they felt they weren't being fair to their other two children who had been able to get on with their lives independently. It wasn't as if they couldn't afford it, but it grated on them. And it was becoming a major unexpected expenditure, year after year," he says. "The kid finally figured out what he wanted to do, though, and it turned out fine."
Even very wealthy clients, who may have investments tied up in illiquid assets, such as hedge funds or investment pools, can have trouble meeting demands for financial help from their children when they come out of the blue. After all, wealth managers build portfolios for their clients around events that can be reasonably anticipated: retirement, vacation homes, college tuition and weddings, for example. A sudden request for $200,000 for a new business could force a parent to liquidate assets prematurely, or at a loss.
If the request is impossible, the wealth manager must become the bad guy. But when it's an advisor who says no, it can be less emotional for the client and child.
Sometimes, spelling out the long-term consequences is all it takes. Bixby recalls meeting with a couple who were adamant about paying full tuition for an Ivy League college for their child. After the clients didn't listen to his explanation that doing so would erode their assets, he asked their 16-year-old son to join them. Bixby then said that a decade after the student graduated from college, the parents would run out of cash and would have to come to live with their son. The alarmed teen told his parents he'd be happy to attend a state college or help pay for his education.
MAKING IT WORK
Taking as much emotion as possible out of the discussion makes it simpler for a wealth manager to guide a conversation to what is possible for a parent to do. "I will work hard to say 'yes' to what clients want to do for their children, but I'll do it in a way that won't cause damage to their portfolio or their financial plan," Sedoric says. "Rarely do I have to say 'no' outright; mostly it's about the right strategy."
Setting up education trusts for grandchildren is one common tool; transforming gifts into low-interest loans is another. One of Sedoric's clients, a wealthy doctor, was ready to take $350,000 from his portfolio to buy his newly divorced daughter a house when the advisor suggested that, instead, she move into his rarely used vacation house and pay modest rent.
"It went from a blow to the portfolio to actually increasing his cash flow," Sedoric says. Just as satisfying, Sedoric helped ensure neither father nor daughter saw the other as the "bad guy" at a stressful point in their lives.
The best scenario is for advisors to work closely with their clients while their children are still young to ensure that they understand the value of money. Sedoric says that's how he and his wife raised their own children. His stepdaughter is now living at home, but paying rent. "It's going to work out better if someone teaches them that a nest egg is a privilege, and not a right," Sedoric says.
Suzanne McGee, a former Wall Street Journal reporter, is a New York freelance writer and the author of Chasing Goldman Sachs.