Adult children are increasingly looking for advice on how to help elderly parents manage their finances and investments. A common question we’re receiving at Stockspot is: “How can I help my parents manage money?”
Investing for parents is a common concern, as many older adults can face health, mobility or other types of issues that make it difficult to manage their money effectively.
It’s important for families to work together to ensure their loved ones are able to live comfortably and securely in their later years.
If you’re in this position, rest assured that there are a variety of strategies and resources available to help you navigate the complex world of investing and financial planning for older adults.
As an older child of ageing parents myself, there are several ways you can help them invest and manage their money effectively.
Here are a few tips to get you started.
1. Check their investment strategy (asset allocation)
As you transition to later stages of life, it’s important to ensure you have the right asset allocation. Being well diversified is essential. That means not having all of your eggs in one basket. You should be investing in a number of different things to reduce risk and reduce volatility (that is, when the market goes up and down). This becomes even more important in the latter stages of your investment journey.
Typically, increasing the allocation to defensive assets, such as high-grade government bonds and gold, and reducing the allocation to growth assets (which can be more volatile) like Australian and global shares, is the best way to reduce risk. Ensuring the portfolio is in assets that can be easily converted to cash (known as liquidity) is also critical. Broad index ETFs that can be bought and sold on the ASX, for example, provide a high level of diversification and liquidity.
2. Check the fees they’re paying
Advice fees: If your parents are seeing an adviser or financial planner, check on any ongoing advice fees they might be paying. Do the fees represent value for money for the financial outcomes they’re getting and ongoing management of your parent’s financial affairs?
Tread carefully though. Your parents may have a trusted relationship with their adviser, so you don’t want to be too gung-ho, without inquiring into that relationship first.
It can be helpful to start by asking questions like how often they catch up with their adviser, does the adviser help with their day-to-day affairs, such as lodgement of assets and income with Centrelink, what strategies has the adviser put in place to help them grow and preserve their wealth. Getting a picture of this first will help you get a sense of how the adviser is helping your parents.
You may also want to attend a meeting with your parents and their adviser to ensure the adviser is attentive to your parent’s level of financial literacy. Then go from there.
Investment fees: All investment products charge fees – some a lot more than others. Many actively managed funds charge more than 1 per cent per annum in fees, which are deducted regardless of how the fund performs.
Over time, these fees stack up and can be a huge drag on performance. Broad index ETFs charge a fraction of the cost. An Australian share index ETF, such as VAS for example, charges just 0.1 per cent. If your parents are okay with it, ask to review any performance reports and fee statements so you can look into these fees. Advisers will typically recommend products that are on their ‘approved product list’, but there can be much better and cheaper alternatives out there.
Your parents may also be paying other layers of fees that can be challenging to find. If they are on a wrap platform for example, they will also be paying fees to be on that platform, and each time the adviser transacts for them, there will be transaction costs to consider too.
3. Check portfolio performance over time
Portfolio performance will vary each year and is dependent on the asset allocation (i.e. proportion of growth and defensive assets). Looking at returns over a longer period, such as five years, will help you understand what returns their portfolio is generating on average, year on year.
If your parents are in say a balanced portfolio (60/40 growth/defensive mix) and their five-year returns average 2-3 per cent, you should be concerned. If it’s closer to 6-8 per cent, that would be more in line with expectations, depending, of course, on the current market conditions.
A lot of products fail to outperform a basic index ETF each year. These products can also charge higher fees, which, we know, eat away at returns.
4. Reviewing advice documents with your parents
Financial advice documents can be challenging for even the most astute investor to understand. Statements of Advice (SOAs) issued by a financial planner can be 30 to 50 pages long. Reviewing these documents with your parents can be helpful, to ensure the strategies and recommendations put in place are in your parents’ best interest and meet their needs.
Investing and managing finances for parents can be complex and overwhelming, especially for older adults who may be dealing with parents’ health or mobility issues.
As an older child, you can play a critical role in helping your parents navigate these challenges and ensure that their financial future is secure. By working together and leveraging your collective knowledge and expertise, you can help your parents achieve their financial goals and enjoy peace of mind in their golden years.
Are you helping older parents or being helped by an older child? Do you have any other insights? Why not share your suggestions in the comments section below?
Also read: Ask these questions about your expenses, says money expert
Sarah King is head of client care and advice at investment specialist Stockspot.
