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CAPITAL IDEAS: The Bank of Mom and Dad

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By Wednesday, Jun 12, 2019 Trade and Commerce

Swing and a miss

Dalton — Last week the main regulatory body for brokers took another shot at regulating wayward financial advisors and whiffed. I won’t drag you through the details of the new SEC disclosure and compliance requirements (the final document is 524 pages), but it doesn’t do enough to protect investors. You know all those documents you get and never read when you invest in something? Well, apparently the regulators deem it sufficient to bury the fact that the broker doesn’t have to have your best interests in mind in legalese. The new regulations fail to properly inform investors that financial advice given by a broker may be solely incidental, and mostly its intent is to drive revenue to the financial firm and the broker.

The Bank of Mom and Dad would be the seventh largest lender in the U.S.

Legal & General, a U.K.-based financial services firm and global investor with $1.27 trillion in assets, conducted a study that details how widespread family lending is.

The study found that one in five U.S. homeowners received gifts or loans from family to help them buy their homes. The money is typically given as a gift or interest-free loan, with the average sum being $39,000. That amount doesn’t even include other loans or gifts, usually associated with college. The study nailed the effect on the proprietors of the Bank of Mom and Dad, as it said Mom and Dad are “giving until it hurts—putting off retirement or accepting a lower standard of living in their golden years to help the next generation.” Supporting that assessment is the following painful data:

  • 54 percent of U.S. parents and grandparents drained cash savings to help the younger generation to purchase a house;
  • 7 percent of those who lent money had to postpone retirement;
  • 15 percent of the lenders experienced a lower standard of living; and
  • 14 percent felt less financially secure.

Almost half of the mom and pop lenders, 48 percent, failed to obtain professional advice in making these gifts or loans.

Emptying the cash register of adult children

The Bank of Mom and Dad, I bet, is not a new concept to you. But what might be less familiar to you is the Bank of Junior, which has an obligation to pay the cost of elder care for aging parents.

Ever hear of filial responsibility laws? No? Oh, you better pay attention to this one, then. Filial responsibility laws are U.S. laws that impose a duty, typically upon adult children, for the support of their impoverished parents. The key concept here is “impoverished,” as it’s not age-related. Not all states are currently subject to these laws—for example, Massachusetts is but New York isn’t.

This is not the same thing as the provision in federal law that requires a “lookback” of five years of financial records to determine if someone qualifies for Medicaid. This isn’t a law meant for quasi-affluent families who are legally trying to hide assets so as to minimize expenses by qualifying for certain benefits, but you could see how your parents gifting all of their assets away so that they run out of money while still living could later come back to bite you, the Bank of Junior. Filial laws sound a bit bizarre, but they’ve been held up in court. Not only have there been instances when children were held liable for nursing home costs, but there have been instances where children used the laws to force siblings to pay a share of care cost. For example, in Eori v. Eori, one brother was paying for most of the home health care bills and used the filial laws to force his brother to contribute to the cost of care.

It’s important to know that these laws exist, sure, to be prepared. But mostly it’s important to drive home that caring for an elderly parent is going to be a very real financial concern for many people. You, as parents, may be far too aware of the cost of adult children, even beyond college. I don’t have children and even I hear about it all the time from people my age (46) and even people my parent’s age. You hear it all the time, and now you’ve seen the statistics—48 percent of heads of the respective Banks of Mom and Dad fail to obtain professional advice in making the gifts or loans. What you hear less of, but what I personally see a lot of given my profession, is the cost of taking care of their parents. People who are aware of the financial burden often don’t know how they, the “rich” sibling, are going to handle the conversation about sharing expenses or duties with their brothers or sisters. Familial resentment and discord can be a bigger problem than writing a big check when adult children avoid communicating about how they’ll share in taking care of their parents.

I’ve said time and again that you don’t need me or any other financial advisor if you’re only interested in investment returns. You can do that on your own. However, if you intend to give or loan your children money, ask your advisor to conduct a financial plan. (Seriously, ask your advisor and not me. Not to be rude about it, but if you’re not already a client of mine, I’m probably going to charge you close to what you plan on giving.) Planning for your parents is more complicated and could require a lawyer who specializes in the process and/or a family meeting expert. (If your advisor doesn’t have a referral for you for those hard-to-find professionals, I can refer you to people, but just be aware that you’d be looking to spend anywhere from $5,000 to $15,000 per professional for the specialized work they do.) A more popular method of funding elder costs is long-term care insurance. I don’t sell insurance, but I’ve endorsed the use of that product where appropriate.

I wish I could tell you that the solutions were easy and inexpensive, but they’re not: They are complicated and require some heavy lifting. But now, at least, you’re more aware and you can bring the conversation to your advisor and work on a plan. Just make sure they don’t try to sell you an annuity as a solution to these problems. Someday I’ll write about the evils of those particular scams. If I were to put all of my clients into some of the awful annuity products I’ve seen, I’d have a $38 million upfront payday and then my annual revenue would spike because of the kickbacks. So you think maybe there’s a moral dilemma I have in pitching annuities? Yeah, maybe.

Do longer expansions lead to more severe recessions?

The good news for the dwindling assets of the Bank of Mom and Dad is that a seemingly never-ending bull market for stock and the economy has lifted portfolio values and incomes. But some fear that the long duration of the bull market will necessarily lead to an outsized contraction, damaging portfolios and dashing dreams.

As you are reading this, the current U.S. economic expansion has just tied the 120-month record set by the expansion from March 1991 to March 2001. Despite a decade of prosperity, I’m often hearing concerns that, because we have had such a long recovery, another mega-recession like the Great Recession of 2008–09 is due us. And I can understand the concern, as it’s grounded in sound rationale and supported by prominent economists. However, historically speaking, that’s unlikely. And fundamentally (at least currently) I outright disagree. First, a reminder: I believe a recession is coming. And I’m not alone. According to the latest Duke CFO Global Business Outlook Survey, 84 percent of CFOs think the U.S. will be in a recession by the end of 2020. I am not a Pollyanna. I’m not one of those who think the best investment strategy is to buy, hold and forget. Recessions happen and fortunes are lost. Still, even acknowledging that, if a recession were to start in the next 18 months, I wouldn’t expect a massive one.

The historical average length of contractions has shrunk as the length of expansions has increased. Since 1945, the average contraction has lasted 11.1 months and the average expansion was 58.4 months (compared to 18.2 months of contraction and 35 months of expansion from 1919 to 1945). The length of this expansion probably says more about the last recession than the next one.

Admittedly, duration is one thing; magnitude is another. The bigger the imbalances, the larger the contraction—or said in a more familiar way: The bigger they are, the harder they fall. And this expansion has not been big. Since 1945 until the end of the previous expansion ending in 2007, the annual employment growth had been 2.99 percent. But it’s been less than half of that at 1.4 percent this expansion. And the annual GDP growth of those previous expansions had been 4.31 percent, but this time around, it’s been only 2.3 percent. I have no doubt that a recession is coming at some point, but currently there are no imbalances so large to suggest that it will be larger than the garden-variety recession. Still, while garden-variety recessions may not cut your portfolio in half, they do still reduce your equity value anywhere from one-fourth to one-third. Given that so much can happen as the Earth fully orbits the sun, it’s merely speculation, but I’d guess that, at this time next year, the smart money will be selling equity. For now, I hope you took my advice and either rode out that correction that’ll probably soon be all but forgotten or, if you had available cash, took advantage of it and put it to work.

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Allen Harris, the author of ‘Build It, Sell It, Profit: Taking Care of Business Today to Get Top Dollar When You Retire,’ is a Certified Value Growth Advisor and Certified Exit Planning Advisor for business owners. He is the owner of Berkshire Money Management in Dalton, managing investments of more than $400 million. His forecasts and opinions are purely his own. None of the information presented here should be construed as individualized investment advice, an endorsement of Berkshire Money Management or a solicitation to become a client of Berkshire Money Management. Direct inquiries to aharris@berkshiremm.com.


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