Massey University research has found that wealthy people often fail to impart financial literacy skills to the next generation.
This is despite the fact that many have concerns about the ability of their intended heirs to manage their inheritance well.
I have found the results of interviews with high net-worth individuals quite surprising.
We know from previous research, including the Financial Education Research (Fin-Ed) Centre’s longitudinal study that people pick up their financial literacy skills from observing their parents, rather than formal instruction.
But with this particular group there was an expectation that they would want to actively pass their financial knowledge onto their children. Unfortunately, that is not necessarily the case.
We conducted face-to-face interviews with people (whose net worth was valued at $1 million or higher) to understand how they taught their children to manage money.
Shift in opulence
The coming years will see a massive shift in wealth as baby-boomers start to transfer their assets to their children. It is therefore important that there is also an effective transfer of financial literacy.
Without that happening, the next generation will repeat the same expensive, yet avoidable, mistakes that come with the traditional trial-and-error approach to gaining financial wisdom. This group faces the risk of losing significant wealth, destroying, rather than creating value.
About a third of people interviewed had concerns about their heirs’ ability to handle their inheritance; yet 70% of people with concerns stated that they had not provided their heirs with any assistance.
It is interesting that 94% said that it was either ‘important’ or ‘very important’ to provide their children with strategies for financial success, but very few actually discussed financial matters with their family.
This highlights a huge gap between thought and action, which is cause for concern.
There seemed to be an almost Victorian attitude towards talking about money – as one participant said, “I am sure that financial matters are more sensitive than sex.”
It is important for all parents to discuss financial literacy with their children.
The Fin-Ed Centre’s longitudinal study found that 72% of young people looked to their parents as positive financial role models.
I therefore think that parents should consider this aspect, discuss the ‘birds and the bees’ and ‘big money talk’.
If parents do not have a high level of financial literacy, they must learn those skills to be able to teach them to their children.
Dr Claire Matthews is a Senior Lecturer at Massey University. The Fin-Ed Centre is a joint initiative between the University and Westpac to help New Zealanders become more financially savvy.