It is not uncommon for boomers to ask their financial advisor for help in dealing with spendthrift loved ones or business partners.
That can put the advisor in a tight spot, says Sarah Kaplan, a partner in Kaplan Financial Group, Bethesda, Md.
“You want to get a system in place to fix the problem, if they’re willing,” she says. But, if they are not willing or if the people involved are at odds over the problem, that can be a “difficult place” for the advisor to tread.
How best to deal with the situation depends on the particulars, say advisors interviewed for this article.
“A lot of boomers are very concerned about their money management, to the point that they save every penny like their parents did,” Kaplan points out.
But others spend a lot, and this too is often learned from the parents, she explains. Among couples, spending can be a “deep issue,” she says. Some spendthrifts say things like, “This is how my father did it,” and they don’t want to hear about other ways, she adds.
In fact, one speaker Kaplan heard recently said his mother had taught him to buy expensive things because they last longer. “You have to wonder, where does that line stop?” she ponders. “Are there no caveats to it, no questions?”
In her experience, if spenders are ready to talk about it, then she will try to provide some guidance. If they know they need help, she will refer them to a “daily money manager” (a professional counselor who helps people put their daily finances in order–a process that also frees up funds for planning purposes).
She says she won’t bring up the topic of spending herself, but if she notices something that suggests a potential problem, she might touch on it lightly, saying something like, “Gosh, you guys are spending a lot. Do you want to see if there are better ways to help you reach your goals?”
If there is no response or no willingness to address the spending, she tries to work around the issue as much as possible.
Many spenders are unaware they are spending beyond their means, observes Margaret Jones, chief executive officer of WCMI, a Minneapolis money management firm.
“They don’t even think about it, or about their (financial) future. They live in the immediate and have no projections for their retirement income.”
But when Jones shows spendthrifts some projections of how their portfolio will run out before they do, she says many “get it.” Once they recognize the problem, she says, she points out the damage they can cause to themselves by continuing this way.
Seeing that is often enough to motivate changes that will produce a better future, she says.
For example, Jones will recommend that the spender have a separate checking account to use as desired, no questions asked. The spender will have no access to the household account, which will replenish the spender’s account on a set basis. Then, if the spendthrift depletes the account in a week or two, only to encounter an unexpected need, “the money will be gone,” Jones says, and “the spender goes without.”
This way, “it’s the spender’s problem,” Jones says. This helps the person see how spendthrift ways actually hurt themselves, she says.
The approach works, she says, but only if the people are willing–if the saver does not put extra money into the account, for instance, and if the spender is willing to participate.
But some spenders balk. Jones recalls one high-net-worth couple that came for counseling, in preparation for the husband’s retirement. The wife was the spender, going through $12,000 a month for personal expenses alone, and the husband was worried. When Jones presented them with a picture of how retirement would be without some modifications, the husband was “shook up” but the wife became very angry and refused to change.
Jones decided not to work with them.
In general, she says, “if they don’t see the difficulty, I’m not going to get in the way of a family feud.
“After I’ve shown how soon the money will run out in retirement if they keep on spending like this and how modifying habits will make things better, what more can I say?”
Sometimes, couples come to agreements over what to do. For instance, Kaplan recalls one couple in which the man was the spendthrift. The wife got him to sign off, giving her authority to develop a financial plan for both.
In some cases, curbing spending “is our idea, when we see what is important to the person,” Kaplan says.
But other times, boomers come in point blank asking for help with spending. For instance, they may be spending a lot at Christmas and birthdays, but now they want to impact the future of their grandchildren and they don’t know how to swing it.
Or they may come with a check, saying, “Get this away from me before I spend it.”
Others come in worrying about possible spendthrift ways on their child’s part. They want to give money to their children, but they say, “I don’t trust them yet” or “I don’t believe they’re ready yet.” They want creative ways to deal with this.
In the latter case, Kaplan may advise holding money in a financial product (like a 529 college savings plan) or setting up generation-skipping trusts for the grandchildren. But no one product is a save-all, she says. “It depends on the individual goals and situation and on whether the people can get a handle on the cash flow.”
Often, the problem is not that one person is a spendthrift and the other is a saver, cautions Jones. The problem may be that one partner does not value what the other person spends money on and so thinks the person is “throwing money down the drain,” she says.
“You need to see if this is the case” before developing a plan, she says.
If it turns out one person really is living beyond what their liquid assets will support, “that is the time to look at whether you can get buy in.”
When the spender is a child or spouse and the other person is bringing in the money, it’s easier to get leverage, she indicates. “But in a business situation, look for negotiation–or a board of directors that votes it down.”