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Financial Advisor Client Education: Improving Financial Literacy for Multigenerational Planning

Lindsay Robinson, CFP® April 4, 2023

Hands holding paper that says Legacy

As a financial professional, you are likely aware of what the media is calling the Great Wealth Transfer—where $84 trillion is set to be passed to younger generations over the next two decades.But have you been putting any effort into ensuring you will continue to work with the heirs of this wealth when your older clients hand it over?

While your clients may spend time and money to get their estate properly organized, there are additional steps financial professionals can take to help them prepare their children to receive their inheritance. Financial advisor client education can play a crucial role in providing the knowledge and life skills they’ll need to oversee and sustain their inherited wealth.

The Impact of Wealth Transfer

Wealth transfer and its subsequent retention are not easy. One of the surest ways to mishandle wealth is a lack of preparation. Even if the clients you’ve been working with manage to build a significant level of wealth, it is estimated that 70 percent of it will be lost by the second generation and 90 percent will be lost by the third.2

Begin by understanding that the challenges in managing inherited wealth are not just about the numbers. There’s a significant psychological aspect to receiving a large monetary windfall. If your clients are self-made, they have earned that wealth—their heirs have not. Earning your own money instills confidence and those receiving an inheritance may need help building their own financial confidence.

Solutions to this dilemma involve addressing the nuts and bolts of managing the money both physically and psychologically. Financial professionals can help by opening the lines of communication with clients and their families. Without early and frequent communication, your clients’ children could find themselves overwhelmed and underprepared when they receive their inheritance.

Building a Complete Client Relationship

According to a 2021 Cerulli report, only 59 percent of high-net-worth practices have built relationships with their clients’ spouses and only 45 percent have had limited interactions with their clients’ children. This same report noted that more than 70 percent of heirs are likely to change financial advisors after inheriting.3

Financial professionals who hope to avoid being on the firing end of the transfer of a client’s wealth must look for opportunities to deepen relationships and establish trust with their clients’ spouses and children. Improving the entire family’s financial literacy is an important step in preserving a legacy.

Steps to Improving Multigenerational Financial Literacy

While financial literacy includes the basics of financial education, in the case of preparing someone to receive a large windfall, it should encompass much more.

Provide Basic Financial Education: Financial professionals can provide improved financial literacy while establishing a relationship with their client’s children by offering instruction on money basics to younger children. Subjects like saving, compounding interest, and the benefits of asset diversification can become increasingly more complex as the children age and mature.

Beyond basic instruction, financial professionals can help clients set aside funds to give children to use as they see fit. This practical application will help them learn about how to handle money and can also be increased in complexity as the child ages.

Start Estate Planning Early: It’s an important step in creating a legacy where taking the right approach and creating a specific structure can improve the likelihood of its success.

Financial professionals should stress the importance of getting an early start with estate planning. Having difficult conversations with clients is an inherent part of being a financial planner, but don’t let the discomfort derail you from broaching the subject. After all, 91 percent of clients want their advisor’s estate planning advice.4

Where estate planning has an impact on financial literacy is in the conversations clients should be having with their heirs as that planning takes place. They should be encouraged to share their goals—as well as listen to the goals and ideas of their heirs—when it comes to their wishes for the inheritance. The estate can then be structured to meet the needs and goals of both parties, giving heirs time to further prepare.

Discuss Changes in Family Finances: Depending on the size and nature of a client’s wealth, fluctuations in net worth are inevitable and could be significant. Financial professionals can provide clients with age-appropriate information about their wealth and talking points on how it will affect the heirs in the future.

Much like the funds used for educational purposes described above, the advisor can also help the client involve heirs in having a small say in wealth management by allowing them to choose a charity to receive a donation. Being allowed to act as a steward of the family’s wealth will instill a sense of responsibility while at the same time resonating with the younger generation’s desire to give back.

Allow Heirs to Build Their Own Wealth: Preparing children to understand the impact of significant wealth means addressing both logistical and emotional challenges. Your clients will want to ensure their heirs respect and value the opportunity they have been given. Help clients achieve this by suggesting milestones over a set period to grant the children an ever-increasing amount of control over the inheritance. Their understanding of the amount of money they have to work with will change and improve over time.

This can be accomplished by assisting clients in establishing a trust that gives the children increased access as they get older. It will encourage them to choose and become established in their own careers while providing the financial experience necessary to direct larger amounts of wealth responsibly as they get older.

Start Building Multigenerational Relationships with Your Clients Today

There’s no time the like the present to begin building relationships with the children of your clients. By providing financial advisor client education, you’re not only improving the financial literacy of the next generation but also of your client. Demonstrating your ongoing commitment and expertise in this way will provide opportunities for improved client retention and growth to build your own legacy.

The means to expanding financial advisor client education are vast. For more on how to set up a program for your firm, read guest contributor Erin Voisin’s recent blog Pro-tips for Using Client Education to Boost Financial Planning.

Sources:

1. Cerulli Associates. “U.S. High-Net-Worth and Ultra-High-Net-Worth Markets,” January 2022.

2. Kleinhandler, David. “Generational Wealth: Why Do 70% of Families Lose Their Wealth in the 2nd Generation?” Nasdaq, 2018. October 19. https://www.nasdaq.com/articles/generational-wealth%3A-why-do-70-of-families-lose-their-wealth-in-the-2nd-generation-2018-10.

3. Cerulli Associates. “U.S. High-Net-Worth and Ultra-High-Net-Worth Markets 2021: Evolving Wealth Demographics,” December 2021

4. Spectrem Group. “Focus On What Investors Want,” November 1, 2021.

DISCLAIMER: The eMoney Advisor Blog is meant as an educational and informative resource for financial professionals and individuals alike. It is not meant to be, and should not be taken as financial, legal, tax or other professional advice. Those seeking professional advice may do so by consulting with a professional advisor. eMoney Advisor will not be liable for any actions you may take based on the content of this blog.

Image of Lindsay Robinson, CFP®
About the Author

Lindsay Robinson, CFP® manages the Financial Planning Service and Research Team, which focuses on providing the highest level of financial planning services for our clients. In this role she leads research initiatives on key planning trends and industry updates. Lindsay is a CFP® professional and has a Master of Science in Business Administration with a concentration in financial and tax planning.

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