Can you stop spendthrift clients before they drive themselves to the poorhouse?

    How can advisors help clients who are spending their way into poverty? Advisors who have worked with spendthrifts say it can take a lot of effort-and patience-to help such clients overcome their self-destructive behavior.
    Thomas E. Murphy, a CFP licensee from Dallas, relates the story of a client who won $24 million in the lottery, or about $14 million after taxes. "He was a barber and she was a church secretary and they had four children, with the oldest being 17 at the time they won the lottery. I took them to Austin to pick up the first check because they did not have a car reliable enough to make it there. I had done some research and knew lottery winners often go through their winnings within a few years, so we set aside money for the kids, bought a new house and car," says Murphy of TEMAA Financial. "But after that they were struggling to live on $675,000 a year. He bought cars-30 of them-then he bought a building to store them in.
    "This guy had a fantasy about what life would be like after he won this money. Life was supposed to be perfect, but it wasn't. Some people do not understand that having money only solves those problems created by not having money, and it creates a whole other set of problems in the process," he says.
    In this instance the family was relatively lucky because many of the extravagances the husband indulged in were things that did not lose value. "Whenever you invest in property around Dallas, it is probably going to increase in value, but this client now knows he has to sell the cars," the advisor says. Murphy, who holds designations as an estate planner and a divorce financial analyst, continues to work with the family because they have options open to them.
    Another client of the Dallas firm faced a similar situation, but the problem had a completely different source. A father was with his 12-year-old son at an event at a pistol range when a stray bullet struck and killed the boy. A wrongful death suit resulted in the family receiving several million dollars. The wife was so traumatized that she was absent from the financial planning, but the father collected the money and then began spending indiscriminately.
    "He had grief counseling, but I still worked with him for a long time before we were able to figure out what was behind his spending. Every time he looked at that money, he remembered how he got it and he was just trying to get rid of it," Murphy says. "Once we figured out what was going on, we changed the whole plan."
    Some of the money was used to create a memorial for the son and to accomplish other things of that nature. This family, too, is still a client of Murphy's firm. Many other financial planners say they have faced similar problems, and it often takes a large measure of patience to resolve it.
    "If the advisor can identify the emotion that is behind the spending, it can sometimes be dealt with," Murphy advises. "If you can recognize what is going on, you may want to suggest counseling. You can sometimes call the counselor a career coach or a success coach, which makes it a little more palatable. But even when the client recognizes the problem, that does not necessarily mean he or she has the skill set to deal with it, and it may take a lot of talking to find out the cause behind the spending."
    Many suddenly well-off people are unconsciously struggling to return to the economic level where they felt comfortable. In some instances, the client knows he or she is indulging in self-destructive behavior but is not willing to change. Steven Landis, CFP at Landis Financial and Investment Services in Columbus, Ohio, had a 40-year-old client whose husband died, leaving her with a substantial insurance settlement and three children.
    "The first child went through Notre Dame; the second is in state university and the youngest is in a parochial middle school. She wants the child in parochial school and I have to respect her choices, but she is going to have to tell him she cannot pay for his college. Now she is depleting her assets with credit card debt," Landis says. "Sometimes a single parent does not want to tell a child 'no,' but at some point she has to realize she cannot do everything.
    "She now calls our office at night or on weekends when she knows she won't have to talk to a person. We finally had to put it on our answering machine that no orders to redeem resources or requests for checks could be left on the voice mail," he says.
    The firm continues to work with her to a certain extent, but without charging for its time or expecting much in the way of results. "I cannot make someone do something," Landis says. "I can hope they will see what they are doing and change, but this is a venture fraught with disappointment. We tried for years to get this particular woman into grief counseling, and she would not go, but I won't say I will not talk to her.
    "I think we all need to do some pro bono work, so whether I will tell a client not to come back depends on how the client treats me," he explains.
    Phillip Cook, CFP, of Cook and Associates of Torrance, Calif., says he tries to get spendthrift clients to commit to a set of goals, and each time they want to spend money they have to weigh whether it is worth sacrificing the long-term goal. "If you take away their goal in exchange for an immediate purchase, sometimes it rattles them and forces them to look realistically at their goals. You can talk 'till you are blue in the face and achieve nothing, but sometimes if you run the numbers it will be effective," Cook says.
    But no technique is foolproof. Another couple Cook worked with briefly could not be helped. "She was the breadwinner and he was a househusband and they had psychoanalyzed money issues to death, but they each wanted something different out of life. I told them they had to pick one set of goals, but I don't expect to see them again. It is amazing how emotional money can get, and emotional decisions are not good ones."
    "It all boils down to attitude," explains Gary Silverman of Personal Money Planning in Wichita Falls, Texas. "It does not matter what a person makes. You can save a lot while making a little, or save nothing while making a lot. I can't help everybody. The Silverman rule of client acquisition is, the client has to be pleasant, has to need our help, has to be willing to pay us and has to take our advice at least sometimes. If they ignore us, it is a waste of their money to pay us and it is frustrating for me."
    Katherine Simmonds, director of investment planning at Brouwer & Janachowski Inc. in Tiburon, Calif., tries to involve another professional, such as a counselor, attorney or accountant, when she encounters a problem client.
    "The team effort works tremendously well. If they hear the same thing over and over from more than one person, it will sometimes get them to acknowledge what they need to do. When they get religion about saving, they really get it and it becomes very rewarding for those who can get closer to their goals, but we cannot work with people who refuse to make changes," Simmonds warns.
    Lili A. Vasileff, CFP, president and owner of Money Matters!, a private financial planning firm with offices in Greenwich and New Haven, Conn., sees what is often the end result of spending conflicts. One couple drowning in $75,000 of credit card debt sought her help and, despite her best efforts, she says, the couple is in financial limbo and teetering on the edge of divorce. Another client couple ended in divorce because she thought money was free for the spending and the husband thought it was for saving.
    "There are individuals who have no concept of overspending. You have to show them the ripple effect of their expenditures or the problems that can be caused by a blip in their credit rating," Vasileff says. "But you have to pick and choose these clients, because it takes a tremendous amount of your time. If you can get them to buy into the idea that overspending is THEIR problem, not some amorphous idea out there, then they can reach a turning point."
    Vasileff specializes in divorce planning, so she sees many couples who have not been able to resolve that conflict. "Some of my clients, if they catch the problem early, can avoid divorce, but being their financial advisor is a matter of relationship building, so you have to hope this is going to develop into a long-term relationship," she advises.
    Much of the question boils down to the amount of time a financial advisor is willing to invest. "We are people first and financial planners second," says Steven J. Williams, CFP of Santa Monica, Calif., whose firm is self-named Steven J. Williams CFP. "We are dealing with the human element, and mine is not an all-or-nothing type of practice. If a client does most of what I say I will stick with them, as long as they are honest with me and not doing anything unethical or illegal. If it is a couple and one is spending too much, I try to influence the spender through the spouse, but I want to make sure the spender does not hurt the saver.
    "One woman was literally on the way to our office to roll over her 401(k) and stopped at a Jaguar dealer on the way. She spent more on a car then she made in a year. I have not heard from her since," he recounts.
    Educating the client to the potential for disaster is often the key to success, notes Marc Cortazzo, senior partner at Macro Consulting Group in Parsippany, N.J., and a broker-dealer with SII Investments, a part of the National Planning Holdings network. "We educate the clients to the chance of failure. In the '90s, no one cared about the downside of investing because the returns were so great. Then by 2002 people did not care about their return, they just wanted their money to be safe. There is a happy medium between those two," Cortazzo says. "Another problem is that people today underestimate their longevity. The quality of life for an 80- or 85-year-old today is dramatically different than it was in the past.
    "Our goal is to minimize the client's risk of failure and there is always some give and take in doing that," Cortazzo continues, "but I have turned away prospective clients because their expectations were unreasonable."