Talk to children about handling money, and then talk to them some more. That's the message from wealth advisors who say parents must prepare the next generation for making smart choices and avoiding problems down the line.

Talking to children about money is a conversation most parents, perhaps especially those with wealth, would rather not have.

“Families are predisposed not to talk about money,” said Glenn Kurlander, head of Morgan Stanley’s Family Governance & Wealth Education division. “If they do, they think it risks opening up a Pandora’s Box.”

Consequently, money is the last taboo for many families – which is exactly the wrong approach, according to Kurlander. 

“Parents should be looking for opportunities to talk to children about money all the time,” he told a virtual event sponsored by Morgan Stanley’s Family Legacy and Governance Institute. “We try to help clients understand a fundamental reality: the ‘Pandora’s Box’ they’re worried about is already open to some degree. And if not yet, it will be soon.”

Money is like sex as far as children are concerned, according to Kurlander, who is also a Morgan Stanley managing director: “They know more than we think they know – but they’re confused about what they think they know.”

Be realistic
Too many wealthy parents delude themselves into believing that they’ve kept their wealth a secret for their children, Kurlander said. 

“When I was in private practice,” he recalled, “I had a client who was worth in excess of half a billion dollars. One day he said to me, ‘Glenn, my kids have no idea how much I’m worth; I’ve kept them totally in the dark'. I replied, ‘You live in a 25,000 square-foot house and your kids have never been on a commercial plane – they’re always on your private jet. I think they’ve figured it out.’”

Thanks to the internet and social media, children today typically know much more about us than we knew about our parents when we were the same age, Kurlander said. The problem is often that children don’t have sufficient context to make what they know meaningful.

As a result, affluent parents and their advisors need to create a context for their knowledge that’s “helpful and empowering” to children.

The talking cure
How can they do that?

“Talk, talk and talk some more,” Kurlander said. 

The conversation needs to be a dialogue not a lecture and questions should be as much a part of the dialogue as answers, he stressed. And the subject matter shouldn’t be about how much money the family has but about the value and meaning of money. For example:

•    What are the responsibilities, obligations and challenges that come with wealth?

•    Why does the family value it?

•    How was the family’s wealth accumulated? What did the family learn from the effort that took?

•    How would the family be different if the money was lost?

•    What does the family want to accomplish with its wealth?

Rather than simply give children answers to questions, it’s usually more effective to ask questions that force them to supply their own answers. And while parents must answer children’s questions honestly, it’s “ultimately more valuable” to focus on helping children “formulate the truly important questions and arrive at their own answers,” according to Kurlander.

Navigating an allowance
One actionable piece of advice Kurlander has for wealthy clients is to give their children an allowance.

Start out by giving very young kids a fixed amount of money, or “special allowance” to spend at an event like a ball game. A child may receive $30, for example, and be told they can spend it anyway they want – perhaps, for example, for one big souvenir. Instead, they can choose a smaller one, leaving money left over for a drink and a hot dog.

For many children, “this is their first experience of making their own decisions about money,” Kurlander noted. The caveat, of course, is that parents have to be firm that once its spent, no more will be given.

When transitioning to a regular allowance, be clear about why you’re doing it, he cautioned. For some families it may be for doing chores, for example. 

Most importantly, allowances help children learn how to spend and save money, according to Kurlander, and perhaps begin the habit of giving some away to charity.

How much allowance should parents give?

The amount shouldn’t be so large that a child can buy anything she or he wishes – that defeats the need to make choices, Kurlander noted, which is what an allowance is all about. Nor should the amount be so small that it’s meaningless and doesn’t really allow for making choices.

A reasonable amount, he contended, relates the allowance to what it’s expected to cover. “In other words, decide first what expenses you want your children to defray from the allowance, what portion you want them to save and what portion, if any, you want them to set aside for charity.”

A thoughtfully structured allowance can teach a child the need to budget, save and make choices. And making mistakes, Kurlander stressed, is part of the learning process as well as an effective teaching tool.

In the end, families who are able to successfully break the taboo about talking about money are the ones who, Kurlander said, are able to “manage the impact of financial capital on human capital.”