Manna from heaven is every advisor’s dream. Sudden wealth created in an instant, be it from inheritance, divorce, the sale of a family business that went far better than anyone expected, or even a lucky Powerball or Mega-Million-Dollar lottery.
While the odds may be against your teams’ clients winning a jackpot, there’s a good chance that some will find sudden wealth at some point in their lives. It’s the kind of event that can benefit the entire branch office, by bringing in more assets, more revenue and perhaps even a referral or two.
However, advisors need to know that sudden wealth recipients immediate concerns that have little to do with financial planning or investment strategies. Even clients who know they’ll be getting money at some point—such as an inheritance—may significantly underestimate the amount. Failing to address the psychological ramifications of a client’s sudden wealth first can quite simply lead to his or her financial ruin.
“Newfound wealth is a highly emotional thing,” says Robert Pagliarini, CFP-- president of Pacifica Wealth Advisors in Mission Viejo, Calif., who specializes in working with sudden wealth clients, including lottery winners. “People usually make terrible decisions when they’re highly emotional.” Some of the most common and potentially devastating include quitting their jobs, spending sprees and giving money away, he says.
“Before you run numbers with them and make pie charts, it’s critical that sudden wealth recipients get their heads straight. Yes, there are taxes and legal issues that must quickly be addressed. But then, the client really needs to step back and decide what he wants his new life to look like before making any major financial or life-altering decisions.”
Susan Bradley, a former advisor who founded the Palm Beach Gardens, FL-based Sudden Money Institute,coaches people who suddenly come into large sums and offers training for advisors, attorneys and other professionals who work with them. “Sudden money is overwhelming,” she says. “It almost always creates confusion and stress. When people feel stressed, they often try to alleviate it by ‘doing something’. So often they tell me, ‘I can’t sleep. I can’t eat. What am I supposed to do with this money?’”
A Wells Fargo branch office manager in the south, who requested anonymity, says, “Advisors absolutely need help navigating windfall situations, because they are fraught with the potential for disaster. Our firm has in-house psychologists—I’d imagine all the big firms do—who can train FAs either when an event like this happens, or—ideally—before. Many Private psychologists and coaching firms do this as well.”
Pagliarini and Bradley identified some of earliest dangers windfall recipients often face which, if left unchecked, can lead to their financial and emotional demise:
- Many think they have more money than they do. “Until they have a check in their hands, I ask them to pretend they’re not getting anything.”
- They view a windfall very differently than money they have worked for and as a result often spend it irrationally, he says
- They immediately quit their jobs. “I tell sudden wealth clients to go on vacation for a couple of weeks before doing anything.” Jobs give people a purpose, Pagliarini says. “Their current job may very well not be right for them long-term. But, when they don't have to get up and do something, it can create a void. There’s a honeymoon period where they go on spending sprees and it’s very exciting. But, eventually, they’re likely to experience an emptiness again until they can create a new identity and mission for their lives.”
- They become suspicious. “Recipients can withdraw and become suspicious of everyone's intentions. When reps try and get them to focus on the financials first, they appear like everyone else—most interested in the money. And, you can easily lose your client’s trust,” Pagliarini says.
- They are barraged with business propositions, requests for loans and the like. “The rep can help the client craft a statement,” says Bradley. “It could be something like, ‘This money has turned out to be a much more complex issue than I anticipated. I’m trying to figure it all out with my advisor. In the meantime, I won’t be making any new investments.’” Pagliarini suggests his clients instruct anyone who asks them for money to “call me so that I can be the bad guy.”
“We are training clients to make the transition into a new financial world—and setting up ground rules for acting during this time,” he continues. “We want them to determine their primary life goals. Do they want to feel more secure, spend more time enjoying family, etc? Then we can help these clients understand how the money can enable them to do this.”