Financial enabling is a problem that many—if not most—financial advisors often help their clients deal with. It is so widespread that it’s almost always included in money psychologists’ lists of the most serious financial problems that people face. In his book, “Mind over Money: Overcoming Money Disorders that Threaten Our Financial Health,” Brad Klontz, who has a doctorate in psychology as well as a CFP designation, describes financial enabling this way: “Giving money to others whether you can afford it or not; giving when it is not in the other’s long-term best interest; having trouble saying no to requests for money; and even sacrificing one’s own financial well-being for the sake of others. A common example is when parents support adult children who should be able to support themselves.”
While most of the time financial enabling happens with adult children or spouses, in our consulting work, we’ve found it’s also prevalent in small businesses—including advisory firms—between employers and employees. It’s also quite prevalent (as you might imagine) in the large number of advisory firms that are multi-generational businesses, as well as those in which the owner-advisor’s spouse is employed.
Financial enabling of employees in advisory firms (whether they are related to the owner or not) is particularly troublesome in that it usually serves to magnify underlying problems, leading to low morale, high turnover and absenteeism, and greatly suppressed firm profitability and growth.
In our experience, when an employee asks for more money, it’s almost never about the money. In fact, it’s almost always about an issue that either isn’t work-related or isn’t financial at all. Here are the six most common reasons we see employees ask for more money:
1. Living a lifestyle that’s beyond their means. This, of course, is the most pervasive reason behind financial enabling, whether it’s by an employer or a parent. In today’s society, there’s no end to “stuff” for us to buy, and virtually no end to our options to borrow money to get it. Just think of all the things that have become “necessities” within the past 20 years or so: smartphones, computers, travel, private schools and multiple TVs, cars and even homes. At the same time, we seem to have forgotten the importance of self-discipline, creating mega-pressure on people of all ages to live beyond their means. Unfortunately, employees of financial advisory firms and even financial advisors aren’t exempt.
2. Pressure from a spouse about the amount of time they are working. This is also a very common issue, especially among young professionals who are motivated to get to the next level. It’s also pretty obvious, once you see it in print or hear it out loud, that additional compensation isn’t going to solve the problem. Sure, a nice raise might mollify the spouse for a short time, but sooner rather than later, the new money will become part of the couple’s lifestyle, and the work-time issue will still be there. Ultimately, this isn’t an issue that can be solved by anyone other than the couple (who both need to buy into the sacrifices required to become a successful advisor). However, we find that firms can reduce home pressure by doing two things: including spouses and significant others in frequent firm-wide social events (where they can find support from other spouses, including the owner’s) and allowing employees flexibility in their work schedules to help maintain happy home lives.
3. Simply not liking their job. Often employees tell themselves, “If I just got paid more money, I could tolerate it longer.” Again, when you say it out loud, it’s pretty clear that more money isn’t going to solve anything. Instead, without jumping to conclusions, firm owners (or the employee’s manager) should try to get employees to open up about how they feel about their jobs. Sometimes, of course, it’s just a bad fit, but we find more often than not that employees have legitimate concerns about their jobs or working environment that can be quickly solved—but not with more money. Quite often, just the willingness to listen goes a long way toward solving the problem.
4. Lack of motivation to do their job. Once again, employees sometimes believe more money will somehow better motivate them. And, once again, it’s pretty obvious that it won’t. Instead, understanding the cause of the problem—by both the manager and the employee—is the key to solving it. Usually it’s a fairly easy fix, once the issue is out in the open.
5. The firm is overly dependent on them. Then there’s the situation where key employees try to exploit the fact that the firm will suffer financially if they leave. In these cases, it’s particularly hard for owner-advisors to say no to demands for more money. In part, that’s because it’s often hard to determine whether the demand is warranted. This is especially hard when the employee is one of the owner’s children or a junior advisor who someday is expected to succeed the owner. Yet, for both the health of the firm and the learning curve of the junior advisor to become an owner, it’s important to pay them fairly: no more and no less than they deserve. To arrive at this figure, we combine industry averages with assessment of the employee’s actual contribution to the success of the firm to determine what it would cost to hire someone to fill their role—and then maybe pay them slightly more.
6. Major life events. Finally, there’s the “change in lifestyle” when an employee has a change in their financial circumstances such as getting married, buying a house or having a baby. This is perhaps the most emotionally difficult issue for owner-advisors to deal with. Our natural inclination is to help out, especially if we can afford to do so. The problem is that doing so sends the wrong message and establishes a very wrong precedent. Each of these changes are events in a child’s or employee’s life that are part of becoming an adult, and are the responsibility of the employee and his or her spouse—not the owner’s or the firm’s. (I should add that while I’m not a big fan of firm loans to employees, especially to relatives, which are all too easily forgiven, they can be a compassionate alternative in cases such as serious illnesses or other unexpected, major expenses.)
In each of these situations, firm owners tend to give employees the raise they are asking for because they think they are solving the problem. (I also suspect there’s more than a little personal guilt for becoming more successful than they thought possible—but that’s the owner’s problem.) In our experience, though, that’s almost always a mistake: It fails to recognize the real problem and then it fails to solve it, which means it will have to be addressed again later.
As Michelle Crouch wrote in her article “Financial Enabling is Help that Actually Hurts” on CreditCards.com: “Financial enablers give money in a way that keeps the receiver from having to take responsibility or become independent. [A better approach would be to] think about whether each gift will help or hurt. The next time you’re asked for money for something, decide if it will make the receiver more independent or more dependent.”
In our experience, it’s a firm owner’s responsibility to pay a fair wage that reflects the employee’s contribution to the success of the firm. It’s the employee’s responsibility to manage his or her own financial life. We find asking both parties to live up to these responsibilities creates the strongest employer/employee relationships, the healthiest parent/child relationships and the best businesses.