Big transitions. They are at the heart of most of the major work we do with clients— inheritance, selling a business, retirement, divorce and even death. But most of these transitions require more than our planning skills. We are called on to become counselors and confidants beyond the financial as we help them navigate sudden change and uncertainty.
In most cases, we advise our clients to step back and make no decisions until time, and emotions, have passed and they feel ready to move forward. It’s critical for them to recognize they are not in a normal state of mind. That they should wait until they can deal with the transition—in many cases a trauma—in a thoughtful way and avoid costly mistakes. No one needs to decide anything today, or even this week. It’s really best to withdraw from further action until they are able to sort things out.
Because we have seen so many clients go through these situations, we try to prepare them for transitions we can anticipate such as retirement or selling a business. But we also try to help them understand that there likely will be unexpected events, and let them know we can help them to deal with those as well.
In her book, Sudden Money, Managing a Financial Windfall, author and financial advisor Susan Bradley examines the issues surrounding people who experience financial windfalls in varying degrees, and she identifies eight common events, all of which affect people emotionally as well as financially:
· Winning the lottery
· Taking a lump sum retirement payout
· Insurance settlements
· Divorce settlements
· Intergenerational inheritance
· Spousal inheritance
· Sudden celebrity in entertainment or athletics
· Stock options
Bradley found that many people were so affected emotionally by the sudden or unexpected money they received that they ended up losing some portion of it within just a few years. In addition to the emotional impact, many people who receive money unexpectedly are unprepared to deal with a sudden windfall. “There is no dress rehearsal for Sudden Money,” Bradley writes, “You don’t know how you will react until it actually happens to you. But you can prepare yourself for certain decisions and problems that seem to be universal for windfall recipients.”
We often see the consequences of lack of preparation among business owners. Most discuss and intensively plan for the sale of their business, but once it is sold, they are rarely prepared emotionally. Many go off the radar screen afterward, detaching even from family and friends. They often do not know how to occupy themselves day to day. If you ask whether they are glad they sold the business, the response usually is yes. But most will also say they believe they retired too early.
An advisor can help avoid this situation by asking critical questions as the client prepares for the sale of the business. Ask what he or she would like to do after the sale. Tell them stories to illustrate how people have handled things well and how others have handled things poorly. Business owners are smart, confident people—lecturing isn’t the best choice to help them come up with a plan, but hearing real life stories from an advisor who has seen it before can be very effective.
Retirement, even a planned one, can be nightmarish if a client hasn’t considered his or her life after work ends. It’s not unheard of for people to start spending money on travel or large purchases just because they haven’t thought about daily life in their next chapter.
The death of a spouse is among the most difficult transitions, especially unexpected deaths. It can take years for a surviving spouse to recover, and certainly months before they feel able to make good decisions.
To help clients prepare for financial transitions of all types, we use a questionnaire that covers non-financial matters as well. We ask them about their interests and what they like to do when they’re not working. Part of this approach is to uncover interests that could have a financial impact, such as extensive travel or expensive hobbies. But a lot of planning is psychological and emotional—taking care of family, donations to charities, passing on a legacy—and talking about it in advance allows them to prioritize without pressure.
Many transitions are one-time events, which is why it’s so important to be prepared for the unexpected. A person might sell more than one business or experience more than one divorce, but most transitions happen only once. When the unexpected occurs, advisors can be of critical help in getting clients to slow down and recognize the heightened stress. They can point out to the client that they may feel almost like a different person and are vulnerable to making strange or inappropriate decisions about big and small things including their portfolios or the sale of a home. The goal is to help them slow down and realize that they have planned well, that they know how much they need to live on, and that they can go on with their lives and be OK.
Bradley refers to this slow down as getting into the Decision Free Zone (DFZ), during which the person gives himself or herself the time and space to be free from making unnecessary financial decisions, something she recommends regardless of the nature of the transition or the amount of money involved. Among her advice for time spent in the DFZ is that it’s important for clients to retain control and seek help from a financial advisor to plan for the new circumstance, gather information to understand the financial implications of the transition and make a list of necessary decisions.
Like Bradley, we believe having a framework to help clients through the initial shock of their financial transitions—good or bad—can help insulate them from the emotion and external forces that could cause them to make ill-advised decisions. Once they are ready, we help them move forward to assess their situation and make sound financial decisions for the next chapter of their lives.
Michael J. Cleary is chairman and CEO of Cleary Gull www.clearygull.com.