Coaching clients to teach their kids about investing

Talking to kids about money is hard. Letting them fail is even harder. But if your clients want their children to develop good financial habits, they’re going to need to do both. You can help.

For more than a decade, T. Rowe Price has been running an annual survey on Parents, Kids and Money. In this survey, they ask parents and kids to each answer a series of questions about financial responsibilities, communication and behavior.  Details change from year to year, but the following three findings are fairly consistent, and we can learn a lot from them about how to prepare the next generation for success.

Talking about money is hard, but kids need (and want) to hear it.

Year over year, the survey shows that parents are reluctant to discuss financial topics with their kids, and that when they do bring it up, they find it very uncomfortable. In 2019, for example, parents ranked talking with their kids about financial topics as more uncomfortable than talking about politics, climate change and death.  At the same time, more than half of their kids said that they wished their parents talked with them more about money.

Parents need to get over the reluctance to broach the topic. Maybe they are afraid they don’t know enough to serve as great examples, but it turns out they don’t have the luxury of using that as an excuse. Why? Because of finding #2.

Kids’ financial behaviors are heavily influenced by their parents’ example.

The kids in the survey who had good financial habits (saving money, etc.) were heavily influenced by their parents’ example. This may worry parents who have made a lot of mistakes, but it turns out that kids can use those mistakes as cautionary tales.

For example, in 2017, kids who were aware that their parents had filed for bankruptcy were twice as likely to report being ‘very’ or ‘extremely’ smart about money themselves, compared with kids who were not aware that their parents had filed for bankruptcy protection.

All parents want to set a great example, but sometimes letting kids know about our failures can help them make better choices than we did. It takes courage, but I’m reminded of the story of the old sage on the mountain who, when asked how to make good decisions, replied, “That’s easy! Lots and lots of bad decisions.”

By talking openly about money with kids – the good, the bad, and the embarrassing – we give them the opportunity to avoid learning the same lessons the hard way. This brings me to finding #3.

Kids who managed their own money had much better financial habits.

In 2017, the researchers compared the group of kids who were allowed to make their own spending and savings decisions with the kids who were not. Those who were given more freedom were less likely to spend money as soon as they received it (40% vs. 53%), less likely to have lied to their parents about how they spent money (29% vs. 49%), and less likely to say they expect their parents to buy them whatever they want (52% vs. 65%).

Notably, only a small minority of kids involved in any of the surveys were given the chance to invest (10% in 2019 had an investment account) and I assume only some of those kids are given the freedom to decide how their money was invested. This, to me, represents a huge opportunity for financial advisers to serve the needs of clients and their clients’ kids by helping them learn the basics of investment at a young age, and letting them do it with real money.

When we look at these three conclusions, it’s pretty clear that ⁠— for better or worse ⁠— kids rely on their parents as both financial educators and role models. But parents are still reluctant to broach the topic, so advisers can help support them in this task.

The advice industry could be more supportive of clients in this area by embracing the idea that kids can and should be allowed to manage their own money from an early age, giving them a chance to learn, grow, take risks, fail and recover, while they still have the safety nets of youth and parental supervision.

My own child began learning about investments when she inherited $5,000 at age 12. I let her spend $1,000 however she liked (she chose an iPhone), but the remaining money had to be invested (80% in funds, and 20% however she wanted). She is also learning to understand asset classes, fundamental analysis, and how to manage a long-term portfolio in a way that is truly relevant to her because it’s her money ⁠— and that matters.

My daughter was fortunate enough to receive a windfall of $5,000, but a child could build a diversified portfolio with just $500 if they were given some simple instructions about how to select and buy ETFs, for example. Why isn’t it a regular practice to have smaller, investment training accounts for kids? What a wonderful chance childhood presents to teach the fundamentals of long-term investment!

Helping a client manage their own money well is valuable, but helping them guide their children’s financial education is priceless. It’s hard to talk to kids about money, and even harder to let them make mistakes. But if parents can overcome their own hesitations and embarrassment, they can put their kids on a better path, and give them a chance to fail now, so they can succeed later.

With advisers' help, parents might just find the courage to start the conversation.

Sarah Newcomb is a behavioral economist at Morningstar