Family finances: breaking down the emotional barriers
The British aren’t very good about talking about money. We would much rather seek advice online than discuss our personal finances with friends or even family. The main reasons for this reticence are shame, embarrassment and not wanting to burden others.
Moreover, says Greg:
Money always comes with attached ‘emotional labels’ that affect any discussion about finance. One hundred pounds that a person has earned carries more psychological weight than one hundred pounds simply given to them. Recognising that the generations will place differing emotional values on money will help family conversations progress more smoothly.
Attitudes towards the use of money also vary widely, as Greg explains:
Some people are more naturally spendthrift, others very careful. Indeed, there is a psychological personality measure called the spendthrift-tightwad scale. There can be sharp variances within couples and families. Naturally, discussions around the subject can soon become heated and many people simply decide to avoid it.
There are certainly plenty of news stories currently about intergenerational conflict, with the young reportedly resenting the ‘baby boomers’, many of whom have benefited from rising house prices and secure pensions.
As Greg argues:
When children are struggling to get on the housing ladder and they see their parents living in a large home that’s too big for them and is worth a lot of money, the potential for resentment and division is clear.
Yet parents and grandparents may harbour justifiable concerns that simply handing over cash could have a negative effect, sapping the young’s willingness to study hard and build careers or businesses.
Timing the sweet spot
Greg believes that gifts to children should ideally be used to invest in a secure platform from which they can explore new opportunities and grow their human capital. Money could be used to pay for education, a property, life or medical insurance, rather than just enabling more consumption or lifestyle spending. The timing of a gift can also prove problematic. Handing over cash to immature adults who spend impulsively holds obvious dangers. But delaying the gift until those adults are too old to maximise its full potential is also a mistake, unnecessarily handicapping the lives of younger generations.
Acting as the family counsel
Despite the difficulties involved in raising the subject, Greg believes it is a very good idea for a financial advisor to get all the generations of a family around a table for an open conversation about subjects such as equity release, inheritance planning, annuities and protection products. But don’t dive straight in!
The adviser can act as a mediator, but I recommend having individual discussions first. You can then establish what each person regards as a vital interest and identify the emotional buttons and associated triggers.
Greg adds that Oxford Risk has in the past deployed psychometric financial personality assessments to profile family members and establish where they share perspectives or have very different preferences or attitudes. Or an adviser could develop their own questions to explore these differences.
Gather the family together and show them the different answers they have given to the same questions. Talk through the issues gently and slowly, allowing everyone to express their views. That encourages an objective understanding of the issues at stake, and helps the generations plan the best collective way forward.
Very wealthy families often create a written document that describes how decisions will be made. That is probably excessive for most families, says Greg, but writing down points of agreement is an excellent idea:
The document clearly has no legal force, but the act of writing alone can clarify thoughts – if I can’t easily put an idea down on paper, maybe it isn’t a good one – and helps avoid misunderstandings years down the line. It is possible recollections of a conversation that took place several years ago will vary.
Overall, a family conference with an adviser can be a good way of bringing people together to agree a long-term financial plan. But laying the groundwork is vital, concludes Greg.