Performance figures for each account are calculated using time weighted rate of returns on a daily basis. The Composite returns are calculated based on the asset-weighted monthly composite constituents based on beginning of month asset mix and include the reinvestment of all earnings as of the payment date. Composite returns are as follows:

Are Your Children Ready?

By Paul Gleeson, BBS, QFA & Warren Miles-Pickup, BA

Wealth is rarely instantaneous. It often takes a great deal of hard work, sweat equity and time. So after a life of careful saving and thoughtful planning, and with an estate ready to be passed on to your children, how can you be sure that your children are in a position to handle whatever you determine will come their way? How can you be sure the inheritance you leave behind to protect your family’s security for generations to come isn’t frittered away by a son or daughter who is unprepared to deal with the complexities of your financial plan? How can you be sure your legacy is safe?

A recent study by Ipsos Reid (commissioned by BMO Harris Private Banking) revealed that 22% of high net worth individuals with a Will in place were very concerned about their children’s ability to manage their estate responsibly. 31% have included suggestions in their will on how to care for the assets and 42% intend to create a trust. At the end of the day, however, only 38% – a considerably small proportion – have discussed this issue with a financial professional.

Preparing your children for the inevitability of their inheritance, and the weight of responsibility that carries, is a challenge every high net worth individual must meet. We value the education our children receive, from music lessons and sports to university and beyond. So why do we take their financial knowledge for granted?

In this issue of Tactics, two of our Financial Advisors, Warren Miles-Pickup and Paul Gleeson, tackle this concern. In Part I, Warren explores the impact of being exposed to finance from an early age and why it is so important for parents to ensure their children understand the legacy being left to them. Paul guides us through Part II, where he examines how to approach this discussion and what efforts can be made to communicate this crucial message to the next generation of wealth builders.

PART I: Why Is This Important?

Having grown up with a father who has always worked in finance, I was never short on advice in my early years, sometimes even when I didn’t want it. Being financially aware gave me a huge leg up while going to university (and the few years after) before starting my career. I was able to walk away with no debt and enough savings to put a down payment on my first home. Of course, this came from a combination of intelligent financial decisions and spending my summers labouring in a fishing lodge, but if I had not had the wherewithal to make those decisions, I’m sure I would have wound up like many of my close friends from university: broke and owing the government a huge amount of money.

One of the major reasons that I decided to follow a career path in financial planning was the prevalent lack of understanding that most people have about their finances and the absence of any financial education provided to today’s youth. Many of my friends, with their master’s degrees and PhD’s have no idea how to manage their own finances. They’ve never been taught to properly budget or how to calculate their monthly cash flow needs. They have no idea what an RRSP is or how the Canadian tax system works. Even with all of their courses and seminars at school, no one has taken the time to teach them about managing their own wealth. Statistics from the U.S. Census Bureau have proven that a university graduate is likely to make more than $2.1 million dollars more in their lifetime than a non-university graduate, but that won’t make a whole lot of difference if they have no idea how to manage their wealth.

The importance of having received this knowledge in my early years was recently cemented in my mind following a conversation with a colleague. A client of his had passed away and he was requested by the two surviving sons to settle the estate. Neither of the deceased client’s sons had financial plans, let alone financial planners, and neither was overly inclined to take the time to speak with their late father’s advisor. Their father, in his time with this advisor, had taken an incredible amount of care and concern to structure his investments and estate in such a manner that was not only tax-efficient, but also capable of providing an income for his sons for the remainder of their lives.

In their haste to get access to the funds, the sons requested that their advisor liquidate the majority of the accounts (against his recommendations) and withdraw everything. Not only was this the worst way to deal with the estate in terms of tax efficiency, but they just so happened to be selling the investments in what had been the worst two months that the markets have seen since the Great Depression. Obviously, for confidentiality reasons, the advisor did not go into details with me, but he did say that the two sons lost tens of thousands, potentially hundreds of thousands, because of their haste and lack of understanding. On top of that, they took all the hard work that their father had done to both raise that money and to protect it for them, and threw it right out the window.

This colleague told me that watching this occur was both a frustrating and frightening experience. It was frustrating because despite his best efforts to explain to the sons exactly why they should not take the actions they were insisting upon, they completely ignored his advice. And short of tying the boys down and forcing them to see things his way (not really a recommended practice in the financial planning world!), there wasn’t much he could do. It was frightening in that he is now fearful for other clients: without action now, this may also be the way their estate is handled.

A large concern in many parents’ lives (including my own) is what will happen to their children when they are no longer there to provide the advice that, in many cases, has seen their children through numerous rough patches and hard times. Children can be impetuous and wind up making poor financial decisions. These poor decisions can take many forms, whether it involves investing in scams, spending savings frivolously or being poorly protected from marriage dissolution or creditors. These are only a few of the many events that can wind up severely damaging your children’s lives. By taking this opportunity to educate our younger generation about their financial well being, we can feel more secure in saying “that won’t happen to my kids, they know better than that.”

It is important to us as a firm that we look after a client’s financial affairs even when they are no longer able to. You have worked hard for the wealth that you have built. If you intend to pass this wealth on to your children, ask yourself this: what have you done to ensure that they are ready to handle it?

PART II: How can I start preparing my children?

Warren’s story of two sons recklessly digging into their father’s estate is a frightening prospect. It is a cautionary tale that shows us the consequences of not preparing our children for the legacy they may receive.

But before we can prepare our families to deal with what we leave behind, it is important that we do our own planning first. We must begin with the end in mind and determine what kind of legacy we want to leave. By making that a part of our personal financial plan, we can communicate more effectively with our children regarding the wealth we’ve built and how they can use it to their advantage after we’ve passed. Granted our own mortality is not a topic we might want to discuss on a sunny Saturday morning, death, unfortunately, is a part of life and will happen to us all some day. It is up to us to be financially prepared for this eventuality.

Let’s assume you have taken the time to put an estate plan in place and you have worked with your advisors to do this in as tax-efficient a manner as possible. What next? Assuming you are leaving some or all of your estate to your children, it is crucial that they are ready to handle this when the time comes. 

“Being ready” on the part of your children falls into two categories:   

  1.  Working to their own financial plan so that they, too, can make sound, well-informed financial decisions, achieve their own personal long-term financial objectives and build their own wealth, independent of what they may inherit. This is all about your children becoming financially aware and improving their financial knowledge so that they get into the habit of making smart financial decisions long before they need to deal with any inheritance. Working to their own financial plan will do this.
  2. Having the wherewithal to be able to manage and put to good use the wealth that they may ultimately inherit from you, their parents. If your children fall into the first category, then chances are they will be more than capable of properly managing and benefiting from any inheritance that you may leave them.

We believe that achieving both of these results starts with clear communication. By communicating your estate plans with your children, not only are you taking steps to ensure that your hard-earned wealth will be well managed and possibly benefit several generations of your family, you are also educating your children and making them more financially aware, which will probably result in them making better financial decisions on their own long after you have shuffled off this mortal coil. 

So what exactly do we mean when we use the word communication? Ask yourself this question: have you ever sat down with your children and spoken to them about your net worth and your estate plans, about buying their first home, about how the tax system works or about the likely size of the estate they will inherit and how they should manage this? Obviously if your children are quite young this may not be completely appropriate, but as Warren mentioned earlier, the fact that he was financially aware even before he went to college has helped him get off on the right financial foot early in his career. 

The level and type of financial communication you have with your children will obviously depend on their age; we’re not suggesting you sit your 13-year-old child down and start talking to them about an estate freeze. However, explaining to them how to budget their money, how to open a bank account and how the banking system works, might be of interest to them if it means they can buy those new designer jeans two months earlier. Or talking to your 22-year-old son or daughter who has recently graduated from university about how to buy their first car or perhaps save some money for a deposit on a home, may well be of interest to them. The actual financial knowledge might not be of interest to your children, but the tangible results achieved by applying this knowledge will probably perk their interest. 

In Warren’s example, unfortunately, the client who passed away never communicated their estate plans to their children. They did the first part right, which was actually taking the time to do the financial planning and structure their estate tax-efficiently, but they never communicated this planning to their children. Obviously Warren and I were not privy to their personal details, but from experience, I can tell you that a simple series of meetings with these children (who were likely young adults in their late 20’s), would have helped them avoid making the mistakes they have made. These meetings would have made them aware of why their parents had structured their affairs in the way that they did, they would have been included in the planning process and would have been advised in advance of the best course of action to take in the event of their parents dying. 

On a softer note, they would also have begun to form a relationship with their parents’ financial advisor and so probably would have felt comfortable dealing with that advisor when the time came. Thankfully I am not speaking from experience, but I would imagine having people around you whom you can trust and get good advice from, especially people who knew your parents and understood their plans, is probably invaluable at the time of their passing. 

Alternatively, there are families who do not wish to leave any money for their children, believing that the idea of a “pay day” for their kids will beget complacency and remove any ambition to work hard and earn their wealth. In this case, financial communication and education is even more important. If you plan to assist your children in your living years by paying for their higher education or funding a business venture, isn’t it crucial that they understand how to handle their own finances? 

The reality is that we all have to make financial decisions at various points of our lives. Being financially aware will not only help us make better decisions and avoid the mistakes that so many people make, but these improved financial decisions will have a huge bearing on our long-term wealth accumulation over the course of our lives. So really, financial communication with your children can never start too early, it’s just a question of what level it should start at, which will obviously depend on your children’s age. 

The general lack of financial education in our school system and lack of widespread financial knowledge is something that has caused concern for many of us at Nicola Wealth Management for some time, so we have decided to do something about it. We have started the NWM Financial Mentorship Program. 

Financial Mentorship is a series of recurring sessions designed by several of our planners to help young adults navigate the road to financial independence. Whether they are a part of an intergenerational business, or a young professional seeking guidance, these sessions cover topics essential to basic financial readiness and offer young people answers to their questions about saving and investing in an open and accessible forum. To learn more details about the dates and content, please visit our Financial Mentorship webpage. There you can find links to our Facebook group and a PDF invite you can print out or forward along that outlines the program and material covered. If you have any further questions, you can always contact your Nicola Wealth Management advisor for more information.

As you know, building your wealth is not about how much money you earn, it’s all about how much money you keep. For many people, the difference between the two will come down to the application of superior financial knowledge.