When investors have dependent children to worry about, they have different priorities related to how they spend their money. Dependent children cost money to raise, and they can occasionally cause sudden expenditures, requiring parents to be judicious about having easily accessible funds that cannot, by definition, be invested for the long-term.
This extreme care in funding also requires parents of dependent children to occasionally look for assistance in financial decisions in the form of loans. Parents of dependent children are less likely than investors without dependent children to pay cash for everything they purchase.
Advisors working with investors who have dependent children must be conscious of the financial pressures that come from having those children on the family ledger. But advisors can alleviate some of those pressures by providing guidance in the area of financial liabilities.
Spectrem’s study on the effects of children on investors – Family Affairs: How Children Change Decision-Making – details the financial pulls which are more likely for investors with dependent children.
“Loans in the form of mortgages or credit card balances allow investors to maintain some cash in hand while enjoying ownership of big-ticket items,’’ said Spectrem president George H. Walper Jr. “Advisors can present a different outlook toward these forms of liabilities and possibly provide a changed perspective toward holding such liabilities over the long-term.”
In the Spectrem study, the proof is everywhere that investors with dependent children take advantage of loans to get by. For example, among Mass Affluent investors with dependent children and a net worth under $1 million, 69 percent have first mortgages, while only 48 percent of investors in the same wealth range without dependent children are paying off first mortgages.
Should you think that is only the case among investors with a net worth under $1 million, the study shows that there is a 50-29 percent difference among investors with and without dependent children in the Ultra High Net Worth category, with a net worth between $5 million and $25 million. It’s very revealing that half of those wealthy investors with dependent children maintain a first mortgage when they probably have the ability to pay off that loan.
Automobile loans prove to be similar. Again, among the UHNW investors, 30 percent of investors with dependent children have at least one automobile loan while only 16 percent of investors without dependent children do so.
Even more demonstrative is the research on credit card balances. Among UHNW investors, 38 percent of those with dependent children maintain balances while only 15 percent of those without dependent children do.
These investors may have accountants advising them on the wisdom of maintaining loans of this nature, but they may not. Any money investors are spending on interest on these loans could be used for other purposes, including investments.
Top Takeaways for Advisors
An initial conversation regarding liabilities can settle questions as to whether the money spent on interest payments is being spent wisely. The answer might possibly be “yes’’, in which case advisors can back off. However, advisors can alert investors that when those loans are paid off, investors are in position to use the money they were spending on the loans to increase portfolios.
©2017 Spectrem Group