It is easier for parents to buy into funding this operation because it is an “investment” not a gift so a return is expected. Clients who would never put so much money in the stock of one company can think bankrolling Junior’s project is not terribly risky.
We financial planners know that starting any business is very risky. A strong majority fail. The odds are even worse with the big break scenario. The kid couldn’t keep a job but is now going to run a small business?
I’ve had success slowing the process down by insisting that the kid present a business plan. After all, what good businessperson would not have a plan? I share what a good plan entails. Most of the time, the whole thing grinds to a halt right there. Other times, the plan is clearly weak. In rare cases, the plan is good. It is still risky, but there is some chance the kid could pull it off.
The variety of scenarios is vast and, unfortunately, some are far worse than a parent providing financial support. Most studies I have seen indicate that the most frequent perpetrator of exploitation and fraud against retirees is a family member, usually a child. Dad is often the alpha male. No one would ever ask him for money. When he passes or his grip loosens as he ages, Mom is much more approachable.
These kids play on maternal and paternal instincts and family dynamics to gain trust and get money out of their parents. In the case of fraud, the offending kid often becomes a caregiver to get access to the financials. Any cognitive decline in the parent makes it all easier. The justification used by the children is, often, that they would get the money eventually as an inheritance.
My obligation is to my clients. It is incumbent upon me to understand what my clients want and help them achieve those goals. Safe withdrawal rates are relevant, but my work has also included discussions of widowhood and dementia and heart-to-heart talks about their kids.
Most parents have a pretty good handle on the strengths and flaws of their children. Some clients do not want any of their kids to know anything about their finances. Others want them actively involved. Some of the alpha males know their spouse needs some protection from becoming the Bank of Mom.
We may hold a family meeting. The client may want to communicate the plan to the kids personally. Sometimes, clients find the conversation too uncomfortable so they ask me to explain to the kids what they can and can’t expect financially from their parents.
To serve our clients well, we have to have these conversations, and yes, they can be awkward. When our kids are born, we all think they will go to college on a full scholarship and later win a Nobel prize. Some clients know their kids are unreliable, but are hesitant to talk about it. Those kids are not model citizens.
Money can’t fix a lot of problems. Through good planning, though, some problems can be reduced or eliminated. Having a client’s retirement vision destroyed by kids who won’t get off the payroll is one problem that is largely preventable if you take the time to have the right conversations, even if those conversations are challenging.