CHAPTER 10
Family Education: Building a Culture of Learning and Continuous Improvement

The previous chapter highlighted the importance of family leadership. The fact is, however, that not every member of a family is equipped to be—or wishes to be—a leader. Nonetheless, all of the current and future owners, stakeholders, and beneficiaries of the wealth need to build and sustain a foundation of strategic and tactical wealth management knowledge to ensure multigenerational sustainability and success. If family members possess only scant awareness of such issues as diversification, asset allocation, and long‐term investment plans, and they have only limited skills in communication, the results can be disastrous. They may find themselves the victims of risky, concentrated positions in sectors they don't understand. They may make the decision to value quick gains and instant gratification, which results in the rapid dissipation of the family's wealth. They might insist on greater current liquidity rather than the steady growth provided by a sound investment strategy. They may not understand the importance of their participation in family decisions. All of these deficiencies will damage the viability of the family enterprise.

Education is crucial. Successful families—those that have broken the “shirtsleeves to shirtsleeves” wealth problem—have developed mores that include ongoing education and continuous improvement as a family. This process is not a crash diet or a one‐time event, but a continual process for the entire family, beginning with the youngest members and involving every generation of the family.

In People magazine's excerpt from The Rainbow Comes and Goes: A Mother and Son on Life, Love, and Loss, Anderson Cooper asked his ninety‐one‐year‐old mother, Gloria Vanderbilt, if she had been prepared to inherit $4.5 million when she turned twenty‐one. “Hard to believe,” she responded, “but no one had ever discussed this inheritance with me. I wish I had known then that the greatest gift of money is the independence it can give you The money I've earned through work is the only money I respect.”1

The situation in which Vanderbilt found herself is not unusual. Even today, families often wait too long to prepare future heirs for their ultimate bequests and all the responsibilities and opportunities that come with them.

However, delaying the development and implementation of a thoughtful and well‐designed program of preparation can lead to the exact results families are looking to avoid. In fact, the outcomes from a lack of careful preparation can include confusion, anger, conflict, poor decision making, lost opportunities, and even negative behaviors such as addiction.

Preparing the Kids

Suppose you're a bright but self‐conscious thirteen‐year‐old boy attending a private school in the upper Midwest. You know your parents are, as they have told you, “comfortable,” or “well‐off,” or even “blessed.” But that's all you know. One of your classmates, however, has taken it upon himself to conduct background research on every member of the class. From easily accessible Web resources, he has discovered what your parents paid for your house and even its square footage. He knows what they shell out in property taxes each year. In the financial news, he's read that your mother's father started the business your father has built into a multinational firm employing hundreds of people. He has extrapolated the value of the stock your family holds in the company. He's found an online article that places your family fortune at well over $70 million and decides to share the relative financial standing of every member of the class in a newsletter he places on each desk. Your name is at the top of the list. You are mortified as only a young teen can be. Confused and enraged, you ask your parents why they never told you any of this.

A T. Rowe Price Parents, Kids, and Money Survey conducted in 2015 reported that 18 percent of parents are very or extremely reluctant to discuss financial matters with their kids, and 72 percent are at least somewhat reluctant to speak about them. The reasons for this reluctance ranged from a high of “I don't want them to worry about money” (52 percent) to a low of “It's none of their business” (13 percent). Nearly 25 percent worried that their children would share sensitive family information with others.

Most wealthy parents don't voice these exact sentiments, but many don't talk about their finances with their children because they don't want to sap their kids' initiative and drive by allowing them to know they might not ever have to work for a living.

The reluctance mentioned in the study also may be a hangover from the days when religion, politics, and money were topics not to be discussed in polite society. That time has passed. With the advent of instantaneous online information‐sharing, almost anyone can find out anything. And those referred to as digital natives, a term that includes tech‐savvy children, are among the most proficient information‐gatherers around. They may not always make the wisest use of what they unearth, but they know how to dig it out. Rich children may be far more aware of their situation than their parents suspect, and they may be uneasy about what they know.

Outworn attitudes must shift with the times. Children who are members of wealthy families must be prepared for their financial futures, but it's about more than money. It's also about preparing them for lives of meaning and purpose—and the independence Gloria Vanderbilt mentioned. Depending on how information is handled, great wealth allows children to soar or leaves them confused and at risk.

Children, even siblings, may have very different understandings of money. Trey,* a college student, watched his father struggle for fifteen years to maintain and build a family business established by the young man's grandfather. Many of Trey's attitudes about money probably were formed by watching his father work days, nights, and weekends. Perhaps he has come to value that kind of dedication and the resilience his father showed when things weren't going his way. On the other hand, he may believe that his father sorely neglected the family, and his feelings about the acquisition and use of wealth may be tinged with resentment about his dad's absence from many special family occasions.

Three years ago, when Trey entered college, his father sold the business for more than $70 million. Trey's youngest sibling, Melissa,* was eight years old when this liquidity event occurred, and since then she has had the opportunity to spend lots of time with her father. She is generally unaware of the disappointments and setbacks Trey witnessed as he grew up. Her father is able to attend her soccer games and school events. Melissa has everything she wants, including a relationship with her dad that Trey sometimes envies.

Trey's family's wealth came quickly, a situation that offers a different set of challenges from those experienced by families who have managed wealth as a group over several generations. No matter how the wealth was gained, however, sustaining it requires care, patience, and education.

Money and Values

“While parents may have good intentions for raising money‐mature kids, they often fail to succeed because they don't move from soft intentions to a realized program of financial education tailored to the age and interests of the children,” said Lewis Schiff.2 That program must begin while the child is young, continue into adulthood, and, as Schiff says, be wrapped around the student's particular interests. Children are different in temperaments and passions, and nothing engages them more quickly than seeing how the family wealth can help them achieve what matters to them, whether that's philanthropy, artistic pursuits, an MBA or other professional degree, worldwide ecotourism, a career in public service, or, for youngsters, even paying for their own bicycle.

Of course, any type of education must be age‐appropriate. Some experts suggest that the first money talk take place before the age of ten. Naturally, children that age won't understand the ins and outs of wealth management, but most of them, even of relatively tender years, understand that they have more than many other people. Lectures about money itself usually aren't very effective, but casual conversations around the dining room table or on a family outing can introduce important family lore about how the privileges the children enjoy came to be.

Children love stories, and most wealth histories have some exciting elements: the family's arrival in the United States, the renegade uncle whose creative idea saved the company during an economic downturn, the great‐aunt who reared six children alone and kept the business going after the death of her husband, or the cousin who donated all his land as a nature preserve. When parents talk about money in the context of family's values such as perseverance, loyalty, unity, and generosity, it helps children learn that money is a tool to make things happen, not an end in itself.

Such an introduction to the positive aspects of wealth serves as the foundation for slow, steady continuing education based on the child's social and emotional readiness.

Financial games can be the springboard to conversations about wealth. Board games such as the classic Monopoly can teach children the risks and rewards of both aggressive and conservative approaches to acquiring and managing wealth. They can also learn about borrowing, lending, and mortgages, all in a fun, engaging way. Of course, a worldwide digital version of the game is available, but to encourage conversation and family understanding, nothing beats a face‐to‐face contest, unimpeded by a screen. Often, children who scoff at “analog” games end up enjoying the interchange with parents and become eager to play.

In a Bloomberg Advantage radio podcast, Kathy Lintz, managing director of Matter Family Office, talked about educating children as young as four to five years of age and providing “skills, values, communication programs, and knowledge that create the infrastructure … that helps wealth become sustainable.”3

Lintz's family education about allowances, for example, helps children understand the concept of allowance and additional earnings. “Allowance is not to be confused with family obligation It's not tied to behaviors, (sic) it's a way to share in the family resources, values, and money management practices.”4 Earning money, on the other hand, is linked with behavior: chores for younger children and jobs for those who are older. The download for this teaching and learning program includes a sample allowance contract and interesting ways parents, if they choose, can enhance children's earnings and teach them about banking and credit.

Many other programs are available to give children a wider understanding of their financial lives. Themint.org offers an array of activities in Fun for Kids, Tips for Teens, and Pointers for Parents. For computer‐literate kids (and that's most of them), a plethora of age‐appropriate apps help children and adults converse about money in a way that is comfortable for both.5 The well‐known ThreeJars program “is built on the idea that kids can learn to manage money in an easy, useful, even fun way.”6

Among the most common requirements of a financial literacy program such as ThreeJars is that money the youngster is given as an allowance, earns through household or neighborhood chores, or receives as gifts be divided into three categories: spend, save, and share (or donate). Others may add a fourth category: invest. By choosing what amounts go into which categories, the child learns the value of thrift, the impact of saving, the rewards of delayed gratification, and the pleasure of helping others. If the children choose the invest category, the parent may add a small percentage to demonstrate how investments grow.

However, all the talk in the world means nothing if parents don't model the values they purport to espouse. A child who overhears an adult tell a lie learns that honesty is important—except when it isn't. A child who witnesses a parent breaking a confidence as she gossips about a friend will learn that secrets are not inviolate. A child who sees a parent mistreat a housekeeper or the waitstaff in a restaurant learns that manners are dispensable.

Parents' attitudes toward wealth influence their children, too. Why should a child not request $300 shoes or the most extravagant kindergarten birthday party in the city if Mom replaces her entire wardrobe every three months or Dad buys a new Ferrari in even‐numbered years? Conversely, if parents are involved—and involve the children—in philanthropy or impact investment and share the reasons why the adults have made these choices, it's more likely the kids will see the use of money as a tool for good rather than simply a source of instant gratification. Children learn what they live, and parents are the most powerful role models of all.

As Helene W. Stein and Marcia C. Brier said in a 2001 article that is still applicable today, “[Parents] must take a look at how they spend their money … and ask, ‘Is this what I want my children to do?’ If the answer is ‘No,’ parents may need to make some changes in their own financial life and in their own behavior.”7

As the children mature and show a desire to understand what the family values, parents may involve them more directly in organizations they support. For example, if the family underwrites a large local hunger initiative, children can help bag groceries at a pantry, meeting face to face with recipients who deal with food insecurity every day. Those who would rather be outside could work at a community garden that supplies fresh food for those in need. Ten‐ to twelve‐year‐olds often love to serve or clean up at a weekly dinner for those who otherwise might not have a meal. These types of hands‐on experiences give them an up‐close‐and‐personal understanding of issues they otherwise might have seen only on the news.

Some wealthy families expose their children to the problems of the wider world as well. Philanthropic parents who have established organizations to dig wells, build schools, or provide health care in underdeveloped nations sometimes take their children with them on visits to these locales, perhaps halfway around the world. The effects are at least eye‐opening and sometimes overpowering, and the children may grow up to take an active role in these endeavors.

When they are old enough to understand the lesson, children also should spend time in the business that has provided their wealth. This familiarization with the family firm helps them understand that the money they enjoy is not happenstance or a lucky fluke but the result of a great deal of effort by family members and others who work for the company. They will learn to prize the contributions all these people have made to the family's financial well‐being, which may make them better, more appreciative company officers if and when they take their place in the family business—or even if they are passive owners. Parents should model an attitude of humility and kindness toward employees during these encounters so the children don't develop an attitude that “all these people work for me!”

Managing Money: Younger Children

Some advisors suggest that all children be given a modest allowance and that it be increased over time as the child grows and demonstrates greater maturity. Sometimes parents tie the allowance to chores, but that may be a difficult concept for children to understand if they are being reared in a family with a household staff. Others may give the allowance solely to encourage financial education.

Managing Money: Older Children

When young people are learning lessons about money, they must be permitted to fail. Perhaps they've been saving for the highest‐end video‐gaming system or putting aside money for an over‐the‐top designer prom dress. If they blow those savings on first‐row tickets to the hottest concert of the year, the parents must resist buying the saved‐for items, even if their first instinct is to rush in and salve the kids' disappointment that they can't everything they want. Actions have consequences, but if natural consequences are not allowed to run their course, these adults‐in‐training learn nothing except that Mom and Dad will rescue them every time they make a decision they later regret—and that's the beginning of an entitled attitude.

If the next generation has absorbed earlier monetary lessons and is demonstrating sufficient maturity and responsibility (which usually occurs around the age of majority), many parents introduce their children to the family's financial advisors. Working with the parents, these advisors can become part of a structured program of education in investment, philanthropy, the roles of trustees and beneficiaries, and more. If they are careful listeners, interested in the children's hopes and dreams for their futures, good mentors and teachers, highly skilled in their areas of expertise, working together as a team, and dedicated to the entire family's best interests, these professionals can go a long way toward helping the family realize its goal of wealth sustainability and amity over many generations.

Adults, Too

It's not only rising generations who require education. If the wealth creators and their families are not steeped in financial expertise, the adults also need to learn about every aspect of wealth management, not once and for all, but continually. The economic and business environment changes rapidly, and high‐net‐worth families should have financial advisors who teach them how to be effective stewards of their wealth and how to navigate conditions that are sure to change.

The advisor/advisee relationship is a two‐way street. Good advisors do not take control and ramrod their strategies through the family. Instead, they listen to their clients' wealth objectives, what values they want to personify, and what unique issues and challenges the family faces. They work as partners with the family to design and implement the strategies that will ensure the goals are met, consulting with the family often and keeping them informed every step of the way. They maintain relationships with other advisors to avoid duplication of efforts, risky asset allocation or unintended concentrations, and other unpleasant surprises.

To develop a well‐structured, generationally specific, ongoing educational program, families and their advisors must consider both qualitative and quantitative elements. Here are seven of the key strategic elements:

  1. The meaning of money: Education surrounding the meaning of money takes into account the fact that money is neutral. It becomes positive or negative based on the family's use of its resources and whether that use is in accord with the family's stated values and beliefs.
  2. Spending, saving, and giving: The family may have adopted the ThreeJars approach for children, but as a collective entity, the family should be educated as to best practices in saving, spending, investing, and philanthropy. The educational program should include tactical dimensions such as the tax ramifications of every type of financial decision, as well as the importance of the strategic aspects.
  3. The history of the family and the wealth: As discussed previously, an understanding of the wealth story is often the glue that holds the family together, and the family members could either hire someone to do the work and provide a family history or they could, with some assistance, research records themselves and become responsible for learning and sharing the family lore.
  4. The family enterprise: Much of the education in this sector depends on whether the family is still a business‐owning group or a financial family.
  5. Entrepreneurship and the role of private capital: Most family fortunes are built on the entrepreneurial genius of the wealth creator. Advisors can help the family recapture or polish the legacy by educating the family as to how private capital can be used to seize entrepreneurial opportunities.
  6. Family roles and responsibilities: Education around these issues should include discovering the strengths of all family members, whether they choose to be active or passive participants in the family enterprise. Opportunities for continuing education can be explored and succession planning initiated or expanded.
  7. Family vision and values: The family will need to learn best practices in creating and maintaining the common vision and mission and how to handle disagreements if decisions appear to be violating these foundational principles.

The more tactical issues include:

  • Cash flow and budgeting
  • Banking
  • Investment management
  • Tax planning
  • Estate planning
  • Philanthropy

Each of the tactical pieces of the puzzle is considered in greater depth in Chapter 12.

As indicated earlier in this chapter, the programming must be customized for each generation and the specific requirements and circumstances of each family. The Family Office Exchange notes that in creating a family education plan, “respect for individual readiness, learning styles, and unique needs, balanced by the imperative to be ‘on a journey’ will help ensure success for family learning and legacy.”8

As long as the family education plan is carefully created to be ongoing and coherent, there's nothing in the Great Big Book of Wealth Management that says the educational opportunities have to be dull and boring. In fact, learning that takes place in the context of enjoyment can be much more lasting than sitting at a family meeting with a notebook full of graphs and charts. A family retreat featuring age‐appropriate fun and lots of opportunity for multigenerational conversation creates understanding and an atmosphere conducive to inquiry and decision making. Education can take place during family retreats or meetings in locations as varied as the Appalachians, the Andes, or the Alps. The very wealthy have considerable choice in when, where, and how they learn what they need to know.

As part of their governance structure, many families set up an education committee comprising a few family members, or they retain a coordinator to develop the program. Their professional advisory team also may help design and implement the curriculum. During their experience of working with the family, the professionals may have gained insights into the family's knowledge gaps; they can then suggest what issues should be addressed to boost the levels of understanding and create educational offerings that reflect the learning styles and financial sophistication of every family group.

However the family chooses to structure its education plan, it's a vital part of the wealth management process and should not be ignored.

Notes

 

 

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*The examples with an asterisk mentioned in this chapter are composites of cases the author has encountered in his wealth management career. Names and all identifying details have been changed to protect privacy.

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