Tips for managing your parents' money ; For an adult child, being asked by an aging parent to take responsibility for their finances is a potential minefield. Sometimes it is a power of attorney situation, where the parent is no longer able to take care of the finances. In other cases, the parent just feels more confident having the child take charge. If you’ve been asked to take on such a responsibility, tread carefully and keep in mind the following four rules:
1) Understand the full financial picture.
Like any financial planner, you can't do a good job managing someone’s investments unless you understand their situation, including how much risk they need to take, their annual expenses, income, assets and their personal risk tolerance. If you are not able to communicate or have access to the whole financial picture, then you simply can't do a good job of managing their investments. This is a prerequisite to accepting the responsibility.
2) Don't be afraid to use a professional.
Even if you manage your own money, you may want to work with a professional when handling your parents’ money. There are three reasons for this: One, it takes some of the responsibility and burden off of you; two, a good financial planner can often provide greater investment discipline; and three, a planner is emotionally removed from the money. Especially when managing your parents’ money, emotions can wreak havoc on investment decisions.
3) Know how much capital is needed to support your parents.
This is related to the financial plan, but drives the investment decisions in a significant way. If a parent might reasonably live to age 90, plan for age 95. Based on that, determine how much money is required to cover their expenses. This isn't easy. In some cases, their capital won't cover their potential needs. In those cases, unfortunately, you are somewhat restricted in taking any meaningful risk.
Normally I might say that such parents need to take more risks, but because of your fiduciary responsibility and their likely short-term needs, if the risk goes poorly, you may be facing more than just guilt over the poor management.
In another case, someone might require $350,000 for income, but they have $1-million. In such a case, it is a mistake to be too conservative. The $350,000 should be managed very safely, but the other $650,000 is really being managed for the beneficiaries, and should probably more closely match their asset mix and risk tolerance. In these cases, don't make the mistake of an all-GIC portfolio.
4) Communicate with other family members.
In almost every case, there will be some criticism from other family members of how you are managing things. It comes with the territory and is one of the reasons why it is sometimes better to hire a professional to take the heat. In any case, you can minimize criticism by communicating what you are doing, why you are doing it, and to get notional buy-in. You don't need consensus, but if the family is close enough, at least they will be part of the process and less likely to complain, attack or possibly sue you 10 years from now if there is no inheritance.
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