Commentary: Talking Finance With the Kids

If you want to make people uncomfortable, suggest they start talking finances with their family. Many accomplished people dont want to reveal their assets and expenses to their children. But not communicating to them about wealth can lead to those hard-earned assets fading away.

Today, new wealth is being accumulated at younger ages, thanks to the success of organizations such as Facebook, Microsoft and Amazon. We know that 80 percent of wealth today is first generation, which means those earners havent necessarily observed, first-hand, success in wealth transfer.

And many wealthy individuals question how long their assets will last. A 2011 study found that roughly half of wealthy individuals believe the next generation is not prepared to handle money. But there are best practices relevant to earners of any income level:

Dont assume financial literacy. Only 14 states require high schools to offer financial literacy courses. A recent study found that more than two-thirds of college students do not understand the terms of their student loans. If the next generation is expected to be good stewards of a familys wealth, it needs to be educated about how money works. Many firms, including ours, offer literacy courses for their clients children. But any family can begin these conversations by discussing budgeting, the power of compound interest, cautions regarding the use of debt and an understanding of costs.

Actions speak louder than words. Children form opinions about family values and priorities based on their personal experiences. Its important to let children see you discussing the family finances and, when they are old enough, to be brought into financial decisions. Let them see you live below your means. Let them see you plan, prioritize, delay gratification and negotiate around financial decisions. Whatever relationship the senior generation exhibits with their wealth, lifestyle choices, philanthropy and work ethic will establish a tone for wealth stewardship.

Have The Talk early and often. Many clients worry that telling their children how much money they have will create a disincentive to work hard. There will always be a healthy tension between sharing too much or too little. But this doesnt have to be an all-or-nothing situation. Slowly drawing back the curtain on the financial picture, in age- appropriate ways, is extremely effective. Young children benefit from earning an allowance and having some autonomy with their spending. Teenagers can be brought in on family philanthropic decisions. Older teens can begin attending family meetings and become cotrustees over trusts for their post-college benefit. In the case of family businesses, young adults can become co-managers of a family partnership. As each step is taken, the next generation learns the familys financial values and priorities and demonstrates its abilities to manage resources effectively.

Plan ahead. It is absolutely fine to prioritize aspects of your familys financial plan, particularly for young families. Nothing has to happen all at once. Begin by assuring your children that their near-term needs are planned for. Follow this step by providing for the educational needs of your children or grandchildren. Ensure adequacy for your own financial independence with healthy cushions of safety. Only then should you consider what money should be passed on.

It is possible to perpetuate wealth through multiple generations. As long as the family has realistic expectations, a clear articulation of success, an understanding of the cause-and-effect implications of todays actions, involvement (not guessing) of both generations, an educated group of participants, clear definitions of roles and responsibilities, and an actionable plan, then well-stewarded assets should flow successfully for generations to come.

Kenneth Hart is the CEO of Cornerstone Advisors (buildbeyond.com) in Bellevue, one of the top registered investment advisers in the country.