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Lewis Schiff
Lewis Schiff
Raising Responsible Children Surrounded by Wealth
Advisors to wealthy families can differentiate their practices by the sensitivity and guidance they offer parents.

February 17, 2011
by Lewis Schiff

The toys of the children in affluent families are of a different scale. The two toddlers of one east coast family will likely inherit their Dad’s passion for trains, something he inherited from his father’s hobby. In this case however, Dad isn’t constructing elaborate scale railroad sets with plastic buildings on a plywood platform in a corner of the family room. These trains are full-size locomotives and historically important Pullman cars stored in a very full-size warehouse and brought out for special private trips up and down the east coast.

Just as these kids will need to grow up and receive special training to operate this inheritance, they and all children of high-net-worth (HNW) families need a financial education to manage the more traditional aspects of wealth. When that doesn’t happen, adolescents and young adults can develop difficult and immature relationships with money matters that can amplify emotional problems from a challenging childhood. Psychologists who have studied wealthy young people and their emotional development have observed several roadblocks to a fulfilling life: lack of motivation, difficulty with self discipline, low self-esteem, general boredom, suspiciousness, difficulty using power effectively, among others.

Whether they’re mature and grounded or insecure and impulsive, the children of wealthy families will be part of a comprehensive financial plan in some way — and that participation will change over time as the kids become adults. Advisors need to understand each child’s emotional dynamics and relationship to money in order to determine what roles they can or can’t play in managing an inheritance, participating in charitable giving and taking an active part in the family business, among others.

Opportunity for Advisors

Every advisor who has worked with wealthy families will have observed such cases of unhappy children — and parents in need of guidance to help improve the situation. With an advanced planning approach to financial planning, a psychologist can join the team if the client family requires counseling. When the children are younger, advisors can also incorporate the topic of financial education as part of the discovery process. Simple, direct questions can help launch a conversation: “How are your children learning the skills they’ll need to manage an inheritance later?”The parents’ answer identifies whether they’ve already addressed the issue with teachable moments, they’ve thought about doing something but they’re stuck about how to proceed or they haven’t done anything or feel it’s not important.

“Starting those conversations with clients can be one of the most important things that advisors can do,” says James Grubman, PhD, Family Wealth Consulting, Turners Falls, MA, a psychologist who specializes in working with affluent families and their advisors. “They need somebody who can point the way. Some of the best anecdotes I’ve heard from advisors have to do with when they did have those conversations and particularly for client kids say in the 10-year old to 13 year-old range. Then they hear stories maybe five, six years later about how that teenager or college age kid is down to earth and much more responsible compared to his peers. The clients are just so proud to know that they helped their kid be prepared for adult life.”

Without Life Skills

When Grubman works with families, he often sees problems with children in their mid-twenties. “The 20-somethings have done a variety of things and they’re having some trouble finding their way in getting established with some purpose in life. It’s stressful and confusing for the young person. It’s also very frustrating, worrisome and sometimes irritating for the parents. They often need to reach out and get a consultant to help figure out what’s going on, make some recommendations and facilitate getting things back on track again.”

Parents who are first-generation wealthy, having created their wealth by their own drive and talents, often exert that same determination when taking on the task of child raising — with sometimes less success. Psychologists have noted the highly competitive lives of many wealthy families—and that performance in all pursuits (academic, sport, art, etc.) — success is the expected norm, average is not acceptable and true failure is unfathomable (F.S. “Pittman, Children of the Rich,” Family Process, 1985, 24:461-472). Given the highly social lives of these families, such achievements — or lack of them — are highly visible with other families and childhood peers. Confronted with pressures to perform well in all aspects of life, many children develop symptoms from the stress — insomnia, anxiety, depression, headaches, etc. (S. Gilbert, “For Some Children, It’s an After-School Pressure Cooker,” The New York Times, August 3, 1999).

Researchers have also identified the connection between parents with the drive for competitive success and the desire for children to be outstanding among their peers. The kids learn to define themselves in terms of their accomplishments, not their values as individuals (F.S. “Pittman, Children of the Rich,” Family Process, 1985, 24:461 – 472).

“Very successful parents sometimes forget that they became successful because they had a lot of skills or they developed skills in business or creativity or other things that led to their success,” observes Grubman. “And they forget that those skills have to be taught. They don’t naturally necessarily grow just through osmosis, being around somebody who has those skills. And the main focus of most programs and activities in raising financially responsible kids is the idea that you have to begin from a very young age to actually teach the kid the skills and many parents don’t do it. And then later, they’re surprised when the kid doesn’t have any skills. It’s certainly about skills more than personality or heritage or other sorts of stuff.”

Failure to Launch

Grubman worked with a family whose wealth was based on substantial real estate holdings. The daughter was attempting to follow her father — a very successful, hard driving entrepreneur who could make deal calculations in his head and fully grasp all of the details. The daughter went to college and studied economics like her dad, but actually hated it. She still graduated with a degree in it, but had trouble focusing on a career. Her parents set her up with a house that she was supposed to help rehabilitate and she dabbled in other pursuits that didn’t work.

When the parents asked Grubman to get involved, he quickly discovered that the daughter had a mild case of ADHD and was dyslexic, which she covered through her school years with high intelligence. For a dyslexic, working with numbers or studying math and statistics would certainly not be the ideal path. Upon further discussion, she identified a more visual milieu, graphic design, as something she wanted to pursue, so she went to graduate school to study design and fine arts. After working on her sculpture, she discovered that for her, entrepreneurial drive wasn’t in real estate, but art, so she ended up running an art gallery.          

“It was one of those things where she was just simply on the wrong track,” notes Grubman. “She was trying to live somebody else’s passion, but it didn’t quite fit her. Until we could work on her own life and see what would fit her, she could not launch.” One might expect that a dyslexic person with a more modest background might have had to confront the condition earlier in life at school or at a job. This girl, however, could get into a good school and had plenty of support to make it all the way through college without this ever being discovered.

In an upcoming article, we’ll examine financial education plans and tips for affluent kids and resources to support parents and advisors.

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Lewis Schiff is a senior managing principal of Advanced Planning Group, a family office network for advisors.

* The AICPA’s Personal Financial Planning Section is the premier provider of information, tools, advocacy and guidance for CPAs who specialize in providing estate, tax, retirement, risk management and investment planning advice to individuals and closely held entities. The Personal Financial Planning Section is open to all Regular Members, Associate Members and Non-CPA Section Associate Members of the AICPA. If you are a CPA who wants to demonstrate your expertise in this subject matter, become a Personal Financial Specialist Credential holder. Visit www.aicpa.org/PFP to learn more.