Children at risk of making parents' mistakes

Wed June 11th 2014

Here is your chance to learn from other people's mistakes.

Here is your chance to learn from other people's mistakes.

This article, by Diana Clement, which appeared in the NZ Herald, provides insights to ensure you or your kids are in the know when it comes to financial literacy.


Diana Clement: Children at risk of making parents' mistakes

Being too conservative or financing adult offspring among problems

Parents tut-tut at their children's financial transgressions. But there are plenty of financial mistakes grown-ups make that their offspring should not copy.

Parents are powerful role models, says Tony Walker, financial adviser at Future History.

"Professionally, I have seen many situations, though, where the problems of the parents have been visited on the children," says Walker.

Surprisingly, one of the big problems is being too conservative.

Although financial security has an important role to play in personal finances, being too conservative is a risk as well. It means that you've not made the best of whatever your resources are.

Robert Oddy, financial adviser at International Financial Planners, listened to his father's overly cautious advice on one property purchase and has regretted it ever since.

"As a young pilot in 1968, I flew into Pauanui on a training exercise and wanted to buy one of the first sections released for sale between $2,000 and $6,000. My father persuaded me not to do so because 'it was an experiment that would probably fail'. I've regretted that decision ever since."

Financial adviser Duncan Balmer of Balmer, Jeffs & Company also saw his parents being too conservative. At a time when they should have owned rental property — in the 1980s and 1990s — they couldn't bring themselves to. They weren't comfortable with the idea of buying shares in a publicly listed company either.

"An interesting indication of just how conservative my parents were came when UK Prime Minister Maggie Thatcher sold off state housing to tenants," says Balmer. "The Conservative Government was offering a massive discount on market value to long-standing tenants but I still had to virtually beg my parents to help my grandmother buy her state house off the Government."

Not making adult children stand on their own two feet is another common parental financial failing.

Many retirees are still giving their adult children money because they don't want the kids to fail. Once you've retired, however, you can't replace your money. And if those children can't support themselves in adulthood it's unlikely they'll look after you financially once all your money is used up supporting them.

A focus group member in an American study by Merrill Lynch in 2013 hit the nail on the head for many retired people. He said: "I thought I would be supplementing my grandchildren's university funds. It turns out I was the university fund."

The moral of this tale is that parents in their 30s, 40s and 50s should be teaching their children to stand on their own two feet.

Likewise, using financial support to control adult children isn't a smart idea. Many parents threaten to withdraw money if children don't make certain life changes. If you want to be lonely when you're older this is a good way to go about it.

Listening to the wrong people is another parental money trap.

Financial planner Michael Cave of Cave Financial Consulting has seen it all when it comes to clients setting bad examples for the next generation. One client was tracking along nicely with a cash-flow-positive business and a good savings plan when he received a call suggesting he invest in a company listed on the Nasdaq exchange in the United States.

"He said [to the caller], 'Put 90 grand on it'." The savings plan had been to buy the commercial building that housed the man's business, but he didn't have the money for the purchase when it came up for sale.

Letting a partner gamble the money away on too-good-to-be-true investments is a common pitfall.

Financial adviser Steve Morris of SW Morris Associates dealt with a family where the mother, after her husband died, was advised to transfer all her major assets into a family trust. The plan was to protect her from future relationships and provide a financial backstop for a disabled child. It's usually children who fall for the most unsuitable partner, but in this case it was the mother who remarried a feckless family friend.

"Unknown to her family she fired the professional trustees so she could add the new husband on as a beneficiary to enable her family trust to lend money to his failing business," says Morris.

"Eventually the bank came calling. By the time she disclosed her predicament to her family the family bach had to be sold and her children had to pitch in to save her home."

Following hot investments is also a no-no. The 1980s was a prime time for parents to throw good money away. They naively bought shares in investment companies that were all the rage at the time but which in many cases crashed and burned.

Some never recovered psychologically from the losses and couldn't differentiate the mistakes they made with their investments then, and the benefits of the stock market for investment, says Balmer.

Another hot investment in the 1980s was becoming a Lloyd's name, or a small-time underwriter. They received premiums for guaranteeing insurance contracts. One of Morris' clients, a relatively successful businessman, became a Lloyd's name and pulled in tidy dividends for a while. "I was very concerned that one day Lloyd's of London would come calling on my client and this was a risk well outside his capacity to meet the potential obligations."

That's exactly what happened. A string of large claims did occur including the Exxon Valdez disaster in 1989. "Lloyd's took everything and my client virtually had to declare bankruptcy apart from the assets that were owned by his family trust."

Buying a lifestyle block as an investment can be trouble too.

Lifestyle blocks aren't usually the world's best investments. You're much better off with regular residential and commercial rentals that have a yield. What's more, says Cave, the price of lifestyle blocks usually means people are sinking too much into a single investment.

Cave had a client who bought bare land on the east coast. The client assumed the price would go up and up. The reality was the price on paper went to an eye-watering $10 million but had dropped back to $3 million when he needed to sell.

The investment wasn't the cash cow the man expected and the money could have been used more profitably elsewhere.

Acting as a guarantor for children's or grandchildren's loans or for some other security is also a risky bet, says Oddy.

"Frequently forgotten and never cancelled, they can cause future financial havoc for the parent/grandparent and devastate their lives and lifestyle when the children or grandchildren strike problems such as employment loss, business failure, medical problems, or issues falling out of relationship property decisions."

Always seek legal advice before signing. The lawyer's charges are small in comparison with the potential loss.

After all the potential money drains, saving too much and not enjoying themselves is another mistake parents can make.

Some elderly people are still scrimping to save off New Zealand Super. Marie Quinn of Marie Quinn Financial Services thinks it's a big mistake for older people to work long and hard and then penny-pinch in retirement.

Financial adviser Liz Koh's father is a classic example.

"My father, who is 93, has been living in a rest home for the past two years and up until a few months ago, he was still saving for his retirement," says Koh.

"Just recently, he has come to the realisation that he is running out of time and advised the family he wanted to come home and 'have a big spend up'."

It is good to be careful with your money, says Koh, but it is important to remember that the purpose of money is to enable us to enjoy life.

"Money can only be spent — if not spent by us, then by the beneficiaries of our estate."

Quinn and Koh recommend better planning in retirement to ensure you have the right balance between spending and saving.

-NZ Herald

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