In some instances, RIAs describe highly successful professionals and entrepreneurs who simply don’t grasp the basics of managing their day-to-day finances. In other cases, it’s how some of their most successful clients are reluctant to engage in meaningful conversations about money with their children for fear of dampening their personal ambitions or changing their values.
The importance of the financial literacy topic to RIAs was underscored at the 2018 Barron’s Top Independent Advisors Summit, held earlier this month in Orlando, Florida. My colleague, OppenheimerFunds Senior Investment Strategist Brian Levitt, led a breakout session on financial literacy titled, “Building and Maintaining a Family Legacy.”
That topic takes on added urgency in light of the fact that the greatest transfer of wealth in history is already underway. An estimated $30 trillion of wealth will be passed down from the Baby Boomer generation to their heirs over the next 30-40 years,1 with $16 trillion of that being transferred to the next generation of high-net-worth and ultra-high-net-worth families.2
I had a chance to speak with Brian after his session at the Barron’s Top Independent Advisors Summit and ask some questions about how advisors might be able to initiate necessary conversations with their clients and members of their clients’ families regarding financial literacy.
Matt Straut: Why do you think financial literacy is such a big issue among RIAs?3
Families should think about their wealth and legacy more like a business. And just like workers in a business, everyone in the family, including the children, has an important role to play. The heads of the household, typically the parents, may be like co-CEOs who develop the vision and investment strategies. But the next-generation leaders are the children, and they need to be guided and educated and become financially literate. That means involving them in family meetings and financial decisions so they understand the family’s vision, values, and how to allocate capital accordingly when they are in charge.
Matt: In the presentation you gave at the 2018 Barron’s Top Independent Advisors Summit you talked about the basic framework of a conversation about financial literacy. What is that framework?
Brian: It boils down to three key topics: Accumulating, Protecting, and Distributing wealth.
Matt: Can you elaborate a bit on all three?
Brian: Accumulating is the process of how to start acquiring money. It’s really an educational process, and children should begin learning early on about the value of money. Parents should pay them for chores, have them use the money they earn for what they want, and show them how saving and investing help them accumulate money.
The second piece is about protecting that money so it’s there when it’s needed for things that really matter, such as purchasing a home or paying for a college education. One of the most important lessons here is that people need to learn to delay gratification. That means living within their means and not taking on mountains of high-interest debt to pay for things they may not actually need and probably can’t afford. We’ve all heard about celebrities and athletes who, in some cases, earned hundreds of millions of dollars during their careers but ended up bankrupt, often because of overspending. And while most people aren’t buying private jets and islands, avoiding unnecessary expenditures is important no matter what a person’s income level is. Budget conservatively, save money, and invest.
And the third is distributing. That means developing a well thought-out retirement and estate plan for passing down wealth. An estate plan should also define the purpose of someone’s wealth and what they want their family legacy to be. That cannot happen without thoughtful, meaningful conversations about wealth with family members and heirs.
Of course, RIAs have a critical role to play in all of this, working with their clients and their clients’ families and children. When RIAs develop financial plans for clients, it’s important to help them and their families stick with that plan. Warren Buffet summed it up nicely when he said, “Someone is sitting in the shade today because someone planted a tree a long time ago.”
Matt: Beyond creating a financial plan and helping clients stick with their plans, how might RIAs help improve the financial literacy of their clients?
Brian: There’s no one-size-fits-all answer. It will differ from client to client. RIAs have a good sense of what their clients know and don’t know, and they should begin with that. For some clients or the children of clients, it might start with something as basic as explaining the difference between a stock and bond, and the potential pros and cons of each as an investment vehicle.
For other clients, it may be useful to explain investment principles such as why it makes sense to diversify your holdings, what a mutual fund is, and how mutual funds can help with diversification.
If an RIA has a client who is spending too much in the context of his or her financial plan, a discussion about expenses may be in order. In my presentation, I talk about being aware of unnecessary expenses and how they can add up. I use the example of spending $2.95 a day on coffee. It doesn’t sound like much, but in five years, that adds up to over $5,000, more than $20,000 in 20 years, and so on. That’s a lot of money for something you can make at home for a fraction of the cost. In the example we use, we show that if the $40,000 someone spent on coffee over the course of 40 years were invested and generated a hypothetical 6% annual return, it would be worth more than $177,000.
As I say, it really depends on what an RIA perceives to be the financial literacy needs of specific clients and their families. Two things are certain, though. There is no shortage of financial literacy topics to discuss and the need surely exists.
For more information on how to initiate financial literacy conversations with your clients and gain access to financial literacy insights and resources, visit our Financial Literacy web site.
- ^Source: “Promises, problems on horizon as $30T wealth transfer looms,” CNBC.com, 2/16/17.
- ^Source: “World’s Super Wealthy to Transfer $16 Trillion in Inheritance Over Next 30 Years,” U.S. News & World Report (usnews.com), 1/14/15.
- ^Source: “70% of Rich Families Lose Their Wealth by the Second Generation,” time.com/money, 6/17/15
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