From the May 2010 issue of Investment Advisor • Subscribe!

The Affluentialist: Raising Responsible Children

Advisors to wealthy families can offer sensitivity and guidance

The toys of the children in affluent families are of a different scale. The two toddlers of one family will likely inherit their Dad's passion for trains, which he inherited from his father. 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 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.

Every advisor who has worked with wealthy families will have observed cases of unhappy children--and parents in need of guidance to help improve the situation. Professionals who counsel affluent families and their children have remarked how parents may want to be helpful, but they are often at a loss about how to be--and when they try, their attempts often backfire to worsen the situation or the relationship with the troubled child. With an advanced planning approach to financial planning, a psychologist would 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.

"Starting those conversations with clients can be one of the most important things that advisors do," says James Grubman, PhD, Family Wealth Consulting, Turners Falls, Massachusetts, a psychologist who specializes in working with affluent families and their advisors. "Advisors can be a tremendous resource for their clients. Most parents and grandparents don't know what's out there for guidance about things like allowances and financial literacy training. 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- 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

Material abundance and privileged access to a private education supports a rarified upbringing for the children of affluence, but any advisor to the wealthy can recount many client stories of kids with drug dependency, emotional issues, and a general immaturity about money matters. 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. Given the highly social lives of these families, such achievements--or lack of them--are highly visible with other families and childhood peers. Prepping at Andover and captaining the football team, graduating from Harvard, then attending Columbia Journalism School to launch a TV anchor career provides the requisite points and trajectory. Sliding through second-level schools and supporting oneself in a low-level publishing job while writing a novel that never gets published does not. Confronted with pressures to perform well in all aspects of life, many children develop symptoms from the stress--insomnia, anxiety, depression, headaches, etc.

When the accomplishments of the parents are spectacular, it may be difficult for the child to live confidently with a less stellar life by comparison. He or she may feel it's not good enough, given the family history, regardless of how appropriate it may be for them. "I hear that a lot from the young people that I deal with of the feeling they're done before they even begin," notes Grubman. "They have trouble living up to very high powered parents. And the level of expectations in the family can be so great that it can affect self-esteem."

Indeed, researchers 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.

"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 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

For middle-class children graduating from college, getting a job to become self-supporting has been a primary goal. That leap to self-supporting individual is also a leap to adulthood.

Children of wealthy families, however, often go through a separate, slower track of emerging adulthood, a phase of extended adolescence between ages 22 and about 27 or 28, that's a prelude to full adulthood. Kids are supported directly by parents during this time; they have their own income from a trust, or access to a custodial account that's now in their name. "The pressures are off to make money, but also that they haven't quite found a purpose in life," observes Grubman. "They go either from academic program to academic program or try various sorts of things. That's not usually what the parents' expectations are."

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.

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.

Next month, we'll examine financial education plans and tips for affluent kids and resources to support parents and advisors.


Lewis Schiff is the principal of Advanced Planning Group, a private wealth specialist for advisors and their clients and the author of The Middle-Class Millionaire. He can be reached at lewisschiff@advancedplanning.org.
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