Windfall recipients may need special handling, and maybe a kick in the pants.
Some financial advisors fail, not because they are
giving bad advice but because their clients cannot hear them. This
strange phenomenon occurs more frequently when the client suddenly
comes into a large amount of money, either through a lottery win, an
unexpected inheritance, a divorce, a legal settlement, the sale a
business or exercise of stock options.
If a financial advisor has not dealt with a client
who has received a sudden windfall, the situation can be stressful for
both the client and the advisor, according to experts in the field of
sudden wealth and certified financial planners who have helped clients
adjust to these types of new life situations. Without good advice, or
when advice is ignored, many newly wealthy do not stay wealthy long.
Good statistics about the number of people who
unexpectedly come into a large amount of money but are unable to hold
onto it are difficult to find, but almost every financial planner knows
anecdotally that some people seem determined to lose money almost as
fast as they acquired it.
Robert Matheson of Matheson Financial Services in
Naples, Fla., has had two such cases, where he eventually gave up.
"It's sad, but I had two clients like this. In one case, I resigned
after a year-and-a-half. The woman received $2 million, and I managed
to take $100,000 and put it pretty much out of her reach, but she spent
the rest on a young boyfriend, jewelry and other things. In another
case, a woman inherited $1 million and she agreed to put $140,000 out
of easy reach, but most of the rest was soon gone," Matheson says. "It
is a difficult situation, because as an advisor you are limited in what
you can do."
Matheson, whose clients include a lot of single
women, says he tries to empower his clients. "I try to educate them to
look at the long term and coach them so they are making their own
decisions," he says.
But coaching will only work if the people are
willing, and able, to listen. Contrary to what some might think, being
the recipient of a large amount of unexpected money may not
automatically be a good thing. Instead, it ranks very high on the list
of stressful situations a person or family can encounter and, depending
on where the money comes from, there can be a great deal of guilt or
regret attached to it, according to Jon and Eileen Gallo, co-authors of
books on parenting and wealth. He is a tax attorney and she is a
psychologist, and both have spent extensive time studying the effects
of sudden wealth on individuals and families.
"People who obtain a lot of money try to retire,
remodel their house or buy a new one, or make other drastic changes.
These are all things that create stress, and obtaining money in itself
creates stress, so now you are piling stress on top of stress," says
Jon Gallo, who has conducted a study of successful, and not so
successful, adjustments to large windfalls. "I have found [that]
whether a person makes a successful adjustment to sudden money is not
dependent on education level or other factors, it is dependent upon the
quality of the communication, and the nature of the relationship, he or
she has with a financial advisor. The financial advisor has to be able
to educate the person in an understandable way and needs to be able to
say, 'This is a person with whom I would like to develop a
relationship.'"
Done right, that relationship can translate into a
multigenerational client, where the financial advisor goes on to help
the wealthy person's children when they are ready to assume
responsibility for the money, explains Dr. Eileen Gallo.
However, the key is communication, a two-way street
that the suddenly wealthy may not be ready to travel for some time
after acquiring the new money.
"There are no statistics on how many people lose
millions within a year or two years because any survey is a
self-selecting group, depending on who wants to talk about it, but it
is far more than you would expect," says Susan K. Bradley, author of
Sudden Money: Managing a Financial Windfall, and founder of the Sudden
Money Institute in Palm Beach Gardens, Fla. Bradley conducts seminars
for financial advisors and other professionals in how to help clients
who suddenly find themselves wealthy.
"For the person who has come into a lot of money,
everything is exaggerated. There are a lot of emotions involved. I
don't know how many advisors have said to me, 'I tried to tell them not
to do it, but they wouldn't listen.' It is not that they are not
listening. At that point in their lives, they cannot hear you. Nothing
penetrates for a while," she says. "For a financial advisor this is
different territory. We are used to dealing with situations in a linear
fashion. But at this point, these are not linear people. Financial
advisors try to deal with this as a financial event with an emotional
component, but it is the opposite, and a financial advisor can actually
create harm by not dealing with the emotions."
The Financial Planning Association agrees that the
emotional considerations often dominate the financial decisions,
particularly in inheritance situations or others involving grief.
"While the financial side requires patience, attention to detail and
professional consultation, the emotional side of inheriting is often
the more difficult and deeper-rooted challenge" for a financial
advisor, the FPA advises.
Depending on where the money comes from, the
emotions can be a jumble of guilt, grief, remorse or any number of
other things, in addition to the expected euphoria. Scott M. Kahan,
CFP, and a principal at Financial Assets Management Corp. in Manhattan,
has dealt with several people who came into money from varying sources,
including two who are survivors of victims of the terrorist attacks on
September 11.
"One of the 9/11 survivors has been a client for a
number of years, and the other is not a client but I have met with her
several times. They are only now able to deal with the money. One lost
a daughter and one is a widow with two children. There was the original
money from insurance and such, and then there was the victims'
compensation fund on top of it. For these people, they don't want to
deal with the money at all. The 9/11 victims have had the hardest
time spending the money. It takes time before they are comfortable."
Problems can arise even if money is not acquired
from a traumatic event. The sudden responsibility for handling wealth
can produce problems when "children inherit a portfolio from a parent
and they do not want to change the portfolio, even if it is not right
for them. Some people may need outside counseling to eventually be able
to deal with it," Kahan says.
"In many instances, you tell them to just let the
money sit for a while. You are not there to push them," Kahan notes.
"You can tell them not to be driven by market decisions. If they think
they are missing out on a big deal by not buying something now, tell
them there will be other opportunities. Whether it is $50,000 or $5
million, there is nothing wrong with letting it sit for a while."
Susan Bradley has a name for the first phase of
dealing with sudden wealth: the decision-free zone. Part of her
workshop focuses on the financial advisor and the client drawing up a
formal agreement, in which they list what actions must be taken
immediately, such as paying taxes and maybe making estate decisions,
and putting off everything else.
"There is nothing wrong with that money earning low
interest while the person decides what is important. Otherwise they are
likely to come back and wish they had put one less zero on that charity
donation," Bradley warns. "You need a process or they will wig out, but
they need permission to not make decisions for a while."
Bradley's process is proactive and includes
outlining and discussing, at length, what is important, what the person
wants to accomplish with his or her life and what he or she wants as a
legacy, among other things. It also involves going through a number of
scenarios to see what would happen given different variables. All of
this requires the financial advisor to take more time with the suddenly
wealthy client than with someone who has always had money, take copious
notes and explain things more than once even for the sophisticated
client.
Helping clients successfully handle a sudden
infusion of money can set the tone for the entire experience, says
Barbara L. Steinmetz, CFP, of Steinmetz Financial Planning in
Burlingame, Calif. "An advisor needs to know how the person got
the money because that can determine how they deal with it. You get rid
of the government obligations first, and then see what they want to do.
Not every dream is a money dream," Steinmetz says. "Sometimes people
will give to their family before they plan for themselves, or they want
to do something that is not wise. Any financial advisor who is worth
his salt can act as a buffer between the client and the world.
"The value of a planner is to be in tune enough with
the client to act as an intermediary," she advises. "I do not have any
client to whom I cannot say, 'That is a mistake.' You have to be their
counselor, friend and advisor, and it depends on the client which of
these roles is dominant. Sometimes you have to be the bad guy, so that
the client can tell someone, 'My financial advisor said this is not a
good idea.'"
A person who comes into sudden wealth often goes
through two or three financial advisors before finding a relationship
that works, Bradley says. The financial advisor who is rejected should
not take it personally, because the client probably does not know what
he wants in a financial advisor at that point.
"For advisors, clients with sudden money require not
just good financial planning but financial transitions planning. It is
another level of training that is required. While understanding a
client's behavior and communication style are always important, with
sudden money clients it is critical, " she notes.
Attaining this understanding is going to become more important in the
future, as baby boomers begin to inherit their parents' money.
Estimates are that up to $40 trillion dollars will be inherited by baby
boomers in the coming years, depending upon how much their parents have
to spend to support themselves in their senior years, according to the
FPA.
"Money is going to be in motion more in the future
than it ever has in history," Bradley says. Integrating the emotional
considerations into the financial decisions-the tax consequences,
insurance and estate planning considerations, and putting together the
proper team of a financial advisor, attorneys and even therapists-can
mean all the difference. "When correctly handled, an unexpected
windfall can provide expected benefits that will continue far beyond
the lifetime of the initial recipient and turn sudden money into
lasting wealth," she concludes.