It is easy to understand that parents who are spending money to pay for their children’s education, health care and appetites, are going to have less money to use for discretionary purposes, including investing.
Investors with dependent children, even those who are well off financially, are more likely to have drains on their funds that investors without dependent children do not. Advisors must understand the pressures that exist for investors with dependent children and treat their portfolio differently than they do with investors without dependent children.
This dichotomy is quantified in Spectrem’s unique look at the cost of parenting, Family Affairs: How Children Change Decision-Making. The research shows just how stark the differences are between parents with and parents without dependent children, and is most visible when examining what those two type of parents owe and what they own.
“The financial aspects of parenting are a two-fold matter,’’ said Spectrem president George H. Walper Jr. “Paying for a child’s education, health care and living necessities like food and clothing cause some investors to go into debt, with hopes that the financial picture will become less cloudy as time goes on. When investors are in debt due to their roles as parents, they have less money available to spend on investments or investment assets such as making contributions into Individual Retirement Accounts.”
There are parents with dependent children who are in a financial position to care for their children and invest for the long-term, but Spectrem research shows repeatedly that investors with dependent children trail those without dependent children in paying for their lifestyle today and preparing financially for their lifestyle tomorrow.
The debt picture is perhaps the most revealing. Among Millionaire investors with a net worth between $1 million and $5 million, 19 percent of those with dependent children claim to be concerned with their debt level, while only 7 percent of those without dependent children feel that way.
For those with lower wealth levels, the percentages are higher but the differences between the two types of investors remain similar. Among Mass Affluent investors with a net worth between $100,000 and $1 million, 31 percent of those with dependent children are concerned about their debt level while only 17 percent of those without dependent children have that concern.
When dealing with investors with dependent children, advisors must balance the need of the investor to handle their debt situation while promoting the idea that they need to consider investing for the future.
Comparing investors with dependent children and those without, the debt differences scan almost all forms of outstanding balances. Looking at Ultra High Net Worth investors with a net worth between $5 million and $25 million, 50 percent of those with dependent children still have a first mortgage while only 29 percent of those without dependent children still have a first mortgage.
In terms of second mortgages and outstanding home equity loans, the percentage difference is more than double: 24 percent of investors with dependent children have those types of loans while only 10 percent of those without dependent children are in debt in that way. The percentages are hugely different in terms of matter-of-fact debt like credit card balances and automobile loans.
This reiterates the need for advisors to understand the debt standing of investors and how it relates to their parental status. Investors are going to put their children first, but they still want to do what they can to procure a solid financial future, and those two pressures require a thoughtful approach to advising.
Looking at the differences between the two types of investors based on what they actually own, investors without dependent children are much more likely to have money in Individual Retirement Accounts and employer-sponsored defined contribution accounts. There are differences as well in managed accounts, and the percentage difference grows as net worth grows.
This type of analysis is influenced by age: investors with dependent children are likely to be younger than those without. However, there are investment options available in which investors of similar ages would likely make similar choices if the children factor was not present.
Among UHNW Investors, 45 percent of investors without dependent children have assets held in a trust, to just 35 percent of UHNW investors with dependent children. The percentage differences are similar as net worth drops, with less participation as net worth decreases.
Top Takeaways For Advisors
Timing is everything, they say, and that is true for investors who are parents. From the moment investors become clients, advisors should have them on a timetable related to when their children are grown and no longer dependent. In fact, financial dependency changes even when the children are school age, and an investor parent’s financial outlook can change as dependent children get older. When those dependent children become independent, advisors must have investors prepared for the chance to take advantage of their newfound status.
Investors with dependent children will also have the pressure of wanting to save for their children’s financial future as well as their own. Education plans like 529s are viable investments when the children are dependent and such funds can be returned to investors if the children get scholarships that reduce the financial burden on parents to provide educational funding. That change in plans can create an opportunity for expanded investment actions.
©2016 Spectrem Group