How to prevent spendthrift heirs while securing firm longevity

Financial advisors whose clients fear their kids will squander the family’s wealth can solve that problem while solidifying their own firm’s longevity.

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Resolving the common client anxiety that “my kid’s going to set this inheritance on fire” takes a mix of behavioral finance skills, estate planning strategies and a multigenerational firm, according to Mary Clements Evans, an independent Raymond James Financial Services advisor. She is the founder of Emmaus, Pennsylvania-based Evans Wealth Strategies and author of the book “Emotionally Invested: Unlocking the Hidden Drivers of Your Financial Decisions.” 

When Evans realized that, to many of her clients’ children, her advice sounded like either the teacher in a Charlie Brown cartoon or — worse — their parents, she began to look for solutions.

“What happens is, all the things that Mom and Dad didn’t spend money on, the kids do,” Clements Evans said, citing cars, mansions and vacations. “They do not understand the gravity of the money that’s been left to them and how that changes their financial future.”

READ MORE: Keeping the kids: An advisor’s guide to retaining next-gen clients

New hires, new wealth transfers

While worrying about family wealth is an enviable problem for most people, if the heirs to a fortune don’t understand their finances, they may fill that vacuum in knowledge with luxury trappings that diminish a family’s holdings or with aimless or destructive behaviors. From a business point of view, this is also a problem for advisors because many high net worth successors to family fortunes openly state their intentions to find a new wealth management firm upon receiving their inheritances.

In a move that could be replicated by other planners with succession challenges, Clements Evans decided to recruit advisors who are closer to the age of clients’ children. Her firm now has advisors from every generation. That staff structure took shape when she hired a bright intern who helped her to break through to the five kids of a couple who were previously nodding their heads at her like she was delivering a lecture, Clements Evans said.

“And so next time, when we would go to talk to somebody’s kid, they didn’t want to talk to me — they wanted to talk to him,” she said. “And that’s where we got the parents on board to start to transfer their wealth.” 

READ MORE: How this RIA jumped two succession hurdles at once

Strategies to kick-start the wealth transfer

These conversations could evolve from qualitative discussions, like around creating an “ethical will,” into more technical areas that may need customization. For heirs who struggle to stick to a budget, advisors could suggest restrictions such as a spendthrift clause in family trusts or a product like a single premium immediate annuity that distributes only a set amount each year. Or alternatively, simpler strategies could include ensuring that the parents maximize tax-free gifts to their children in the form of Roth individual retirement account contributions.

By the time the future heirs reach their late 20s, Clements Evans and her team present them with financial scenarios for milestones such as paying for a wedding, buying a house, having kids or retiring early. Then they review the financial ramifications of these situations with them each year. By their late 30s, the beneficiaries have amassed up to a decade worth of guidance specific to them and their family’s wealth.

“We do a full retirement plan and show them how much this money needs to grow, how much they need to save. We review their 401(k) if they have one and show them the impact,” Clements Evans said. “They get this phenomenal financial education, and then they don’t do stupid things with it when they inherit it.”

Though some clients might struggle to stop worrying that their kids will squander the family’s wealth, the message behind financial planning usually resonates at a certain point with their children, she said.

“I tell them, ‘Your parents didn’t buy that bigger house because they wanted to make sure you and your kids are OK.’ As the kids get older, they really get it,” Clements Evans said. “I don’t think I have any client who feels 100% certain that all their kids are going to do the right thing with money.”