Preparing The Floodgates

December 3, 2008

Preparing The Floodgates - By Gary S. Shunk , Megan Wells - 12/4/2008

What if you had a client who was completely knocked off balance after inheriting $60 million from his estranged father? Or say you had a client who knew he would inherit money when the family business was sold, but didn't expect it would be $10 million. Or say there was a client who received $400 million from the sale of family real estate she vaguely knew existed. It would be a shock to say the least.

People who find themselves overwhelmed by a sudden liquidity event express a similar mix of emotions: disbelief, elation and bewilderment-even grief, depending on their relationship with the person who left them the money. But people do not come out of this experience the same way and the outcome is not always positive. We've seen some clients careen off course before righting themselves and attempting a rational investment of what remains.

A wealth advisor who is savvy about the psychological challenges of these large transfers of wealth can best help clients anticipate and make the best use of these large influxes of money.

A Flood
Castle Peak is a 14,000-foot mountain in Colorado. This snow-capped destination is a favorite of altitude seekers. After a dense winter, the peak is blinding white with snow in the Colorado sun. Spring melts it away and water rushes pitching and plunging down. The water flows into gullies, streams and lakes carved by previous springs. When the melt is extraordinary, the water can loosen boulders and defy riverbeds, overflowing the areas around them.

Such a cataclysm is analogous to the financial and psychological impact a big liquidity event has on your clients. As new wealth floods in, a person's identity and old ideas of self are suddenly tested. They are faced with numerous questions. "Will this new money change who I am?"

"Will it change how I behave?" "Do I trust myself to remain true to my values or will I be tempted to pursue a lifestyle I previously disdained?" "How will my relationships change?"

No matter how stable and composed a client may seem, the new money will have a psychological impact. And the intensity of the emotional response is not entirely determined by the amount of wealth received. Rather, it depends on how well the client responds positively to the change. For some, new money brings exciting possibilities. For others, new money brings a downpour of disruption.

There are key emotional areas to watch and skills you will need to help steady your client during the rush of energy a liquidity event triggers.

Excitement And Anxiety
A liquidity event stirs both excitement and anxiety. On one hand, an heir thinks, "Wow, I can do more! Maybe I can start a contemporary art collection." But on the other side of the same coin, the client thinks, "Sigh! I'll have to do more. I don't know the first thing about art, do I?"

What Can The Advisor Do?
Listen attentively. Reinforce the client's enthusiasm for specific topics. Jot a few notes from each conversation. Are there any consistent topics your client keeps revisiting? Is the financial plan aiming the money toward the client's passionate areas of interest?

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