They're young. They're affluent. And they don't know the first thing about managing money. They're the children of first-generation wealth, and chances are their parents haven't broached the subject of their family's finances, let alone taught them how to nurture the nest egg after mom and dad have passed on. Enter the wealth manager.
"We recommend getting the children involved as early as possible-we've seen children as young as six," observes Charles Massimo, president of wealth manager CJM Fiscal Management of Long Island, NY. "It's important to talk early about how they should communicate their wealth to their children, and help them teach the kids how to manage it."
In the next generation, between $12 billion and $18 billion will be bequeathed from parents to children, according to the annual World Wealth Report. And, yes, this is a concentrated batch of affluence: In 2006, the number of millionaires hit 8.7 million (a 6.5 percent increase over 2005), holding assets of more than $33.4 trillion.
Banks dominate personal trust-fund management, with more than $1 trillion held in coffers in 2006, more than double the $504 billion in assets in 1995, according to SNL Financial. Banks with trust-and money-management divisions are increasingly being asked by affluent parents: How do I teach my children the value of money, so they won't mismanage it when I'm gone? The issue is a delicate one for both parent and child.
Howard M. Weiss, a wealth management consultant for Bank of America, agrees that the sooner the child is brought into the money- management arena, the better. "If you don't start early enough, you might lose them for good," he says, noting that he tries to convince parents to begin educating their children about management of the family money no later than senior year of high school. Wealthy parents who have spent more of their adult lives building a business rather than raising their children may find junior has adopted the money values of his friends, not his parents, no matter the intent, says Weiss. Massimo says more than 40 percent of money problems for children of first-generation wealth can be remedied by more communication between parent and child. "Children are very perceptive, which you can see by the types of questions they ask," he says. "Children often know a lot more than their parents think they know."
Between 15 percent and 25 percent of all children he sees don't share their parents' money values. "But after we have a few meetings, they develop a trust where there might be a lot of clauses-the child has to finish college, maybe has to donate regularly to a charitable cause, has to have children-and, eventually, they come much closer," says Massimo.
Teaching children to understand investment risk and reward, as well as charitable giving through a family foundation, can stoke enough interest in money management to make family funds last generations, says Weiss. "We tailor-make everything to help families teach their children their own values about money," he notes. "If the [children's] interest is not there, it's more challenging. But if there's a moderate amount of interest, whatever the aptitude, they can be taught." At the very least, parents should introduce their children to the family's advisors.
If the child is young enough, the most logical place to start is a weekly allowance, says Massimo, who urges children to keep a daily spending diary to determine their spending niches. "Parents realize there might be a limit to money," he says. "Children don't. ...Verbalizing the thought process behind the spending can be very enlightening to parents. ...Our clients are very nervous that their children aren't going to learn the proper way to invest their money. And what we're finding is that parents are not teaching them the value of a dollar."
Once the child has about $500 to invest, Massimo urges him to meet with the wealth manager every two months so they can discuss whether investment decisions have made sense or not. "The biggest problem is if the parents die before the children have learned how to invest the money," he says. "The parents, of course, want them to invest for many generations, for the money to last as long as possible."
Even with a great deal of hand-holding, success can be elusive. Between 10 percent and 15 percent of all parents in first-generation wealthy families will never see eye-to-eye with their children on money values, suggests Massimo. "It happens," he says. "But we find it that it's often all about communication. The more the parents and the children talk, the closer they come to an agreement that makes them all feel comfortable."
