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Counseling Clients with Sudden Wealth

Sudden wealth has many sources: lottery winnings, pro sports, an inheritance, a legal judgment or a business liquidity event. Investment professionals can play an important role in helping individuals survive emotions and mistakes often associated with a sudden financial windfall.

 

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Counseling Clients with Sudden Wealth

Counseling Clients with Sudden Wealth

Most investment professionals’ clients got rich the old-fashioned way: they worked hard, saved regularly and invested wisely over many years.  But, for a small minority of people, wealth comes suddenly, and perhaps too easily. Sudden wealth has many sources: lottery winnings, pro sports, an inheritance, a legal judgment or a business liquidity event. For such suddenly-wealthy individuals, the emotional and psychological burdens may prove to be an obstacle to personal happiness and sound financial decisions. However, lottery winners and celebrities’ sudden wealth can become a problem that financial advisors can solve.

Investment professionals can play an important role in helping individuals survive the minefield of emotions and potential mistakes too often associated with a sudden financial windfall.

How an Investment Professional Can Help

The challenge with sudden wealth is not how to develop an appropriate investment strategy; that’s the easy part.

The real challenge is identifying and working through the emotional stew that individuals may experience with sudden wealth. The feelings may range from guilt to a sense of unworthiness, and from insecurity to distrust. Sudden wealth can be a source of joy as well as grief. It can also exacerbate underlying issues, particularly family relationships.

For instance, an inheritance may spark confusion, even a disorientation, as the beneficiary tries to adjust to a new reality for which they weren’t remotely prepared.

The first step for the investment professional is to take the time to learn what this suddenly rich person is thinking and feeling. That’s essential for informing the investment professional how to best move forward and help a client avoid potential missteps.

The most common mistakes made by suddenly wealthy people include making quick decisions unnecessarily, making big purchases, engaging in unsustainable spending behavior, making financial commitments to individuals and sharing the news too publicly.

Avoiding Expensive Mistakes

Investment professionals should counsel against making any big decisions in the near-term. In fact, it may be useful to suggest a decision-free period (e.g., 12 months) to guard against impulse decisions that may later be regretted.

Not everything can be put off, so determine what really needs to be addressed now, and what can wait.

Spend time educating the individual about investments, taxes, retirement planning and other relevant issues so that the client can appreciate the financial challenges and opportunities that lie ahead.

The pressure to spend will be great. Counseling patience may not always be practical. It may make sense to recognize the natural impulse to make a big purchase, and “allow” just one to relieve some of that pressure.

Ultimately, an investment professional should engage the individual in an in-depth conversation about his or her desired lifestyle, dreams, family needs and legacy goals, which can be the basis of building a long-term plan to achieve emotional balance, desired financial objectives and long-term financial security.

See referenced disclosure (2) at http://blog.americanportfolios.com/disclosures/ 

About The Author

Kimberly A. Branch, CFP®

 

Vice President of Marketing Strategy 
631.439.4600, ext. 217 

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