senior's financial

The Biggest Risk to a Senior’s Financial Plan, Your Kids | Part One

Typically, 80% of widows switch financial advisors within a year after their spouse dies. Obviously, there could be many reasons for this. With elderly couples, even those who have been long-time clients of an advisor, one reason might be their adult children.

Here’s what I have seen many times over the years: One elderly spouse dies—often the husband, given the longer life expectancy for women. The surviving spouse may be declining mentally or physically. The kids step in to help, perhaps taking over financial tasks like paying the bills.

Assuming the couple has worked with a financial advisor like a fee-only planner who is an advocate with a fiduciary duty to put the client’s interest first, the advisor will have everything in order. Powers of attorney, wills, trusts, trustees, insurance policies, investment account information, and everything financial will be on file. The advisor will often work with attorneys and accountants involved in settling the estate. This is a huge help to the surviving spouse because they don’t have to worry about pulling together all the necessary financial details at such a stressful and painful time.

Depending on the capacity of the surviving spouse, this can also be a huge help to adult kids who need to become involved. What often happens is that the kids, who may have never met the financial advisor and may have little knowledge about their parents’ financial affairs, are now thrust into their parents’ financial world. Typically, there is a huge learning curve for them to get up to speed.

What I often see is that their focus narrows to the investments and the flow of money. They want to know, “How is Mom going to be supported?” “Will she have enough money?” And they ask, “How much have Mom and Dad been paying you?”.

With a fee-only advisor, a typical fee on assets of one million dollars would be about $10,000 annually. This dollar amount is invoiced and paid either by check or by periodic withdrawals from clients’ accounts. With advisors who sell financial products, their commissions are often shown in percentages and buried in the details of account statements. Fee-only advisors are required to be very transparent, making their fees clearly visible. Seeing the amount of the fee leads to the kids’ next question: “What are you doing for that much money?”

The bulk of the labor in financial planning is spent on the many nuances of financial planning, from annual reviews of insurance coverage and wills, to tax planning, to working with cash flow and providing information and advice to help clients make a wide range of financial decisions. I estimate that only about a quarter to a third of the fee is spent managing the investments. Yet the kids, typically unfamiliar with the financial planning process and their parents’ financial affairs, often pay attention solely to the investments. Plus, they have little awareness of the parents’ history with the advisor and no relationship with the advisor.

Given these circumstances, the mood can quickly become adversarial. At times kids come in with suspicion, assuming the advisor has been ripping off their parents for years. If the parent is declining mentally, they may be unable to explain what is going on and may take on the doubts of their family members.

The kids’ anger and suspicion may well be protective. I cannot fault them for wanting to take care of their parent; it is admirable that they want to do that. Yet the consequences can still be harmful. Even worse, at times I have seen signs that the kids are more concerned with receiving their share of the money than with their parent’s wellbeing. This is especially disturbing when a family member has the power of attorney to make decisions. It is disheartening for a planner who has spent years looking out for the parents’ best interests.

Over the years, I have seen well formulated, sophisticated investment programs, which have served mom and dad really well, be destroyed by family members who may have good intentions. Too often the money is moved to an advisor who sells financial products. It can go from a low cost, well diversified portfolio into an annuity that just paid that advisor perhaps 10% in a commission.

Thankfully, this does not happen in most cases. We’ve worked with many families where the younger generation is more than willing to learn and to support what their parents have built. I find this is most often the case with those families where elderly parents bring kids into the financial planning relationship before their help is needed. The more that kids understand, the more they can maintain their parents’ financial wellbeing as well as their own.

Check out The Financial Therapy Podcast by Rick Kahler concerning this topic.

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