The perils that come with sudden wealth are well documented. There are countless stories of pro athletes recklessly spending their fortunes on frivolous purchases and lottery winners filing for bankruptcy.
It’s easy to become just another cautionary tale. It’s even harder still for people to stick to a strict budget when suddenly, previously unforeseen lofty goals — taking a year off to travel or investing in real estate — are now temptingly within reach.
If your client comes into sudden wealth, it’s partly up to you, as the trusted advisor, to help that person avoid mismanaging his or her nest egg.
“If [the client] is jeopardizing his future, you have to lay it out there,” says Al Nagy, regional director with Winnipeg-based Investors Group Inc. in Edmonton. “It’s our duty to say, ‘This is hurting you’ [to the client].”
Here are some tips on how to help clients who have come into sudden wealth make disciplined financial decisions:
1. Listen first
Instead of bombarding these clients with all the things they need to consider, says Nagy, invite them to draw up a list of questions for the initial meeting. This is a more subtle way of positioning yourself as an authority on the subject, and it leads to a more fruitful discussion about what they need.
Resist the impulse to take a cookie-cutter approach, he says: “Too often, you end up with advisors going out and telling people what they should have [in place].”
2. Offer detailed projections
Once you have a strong sense of the client’s financial goals, you can start creating an analysis of cash-flow needs, says Prashant Patel, vice president, high net-worth planning services with Royal Bank of Canada’s wealth-management division in Toronto.
As difficult as it may be for some clients to be prudent after an unexpected windfall, they tend to be more receptive to staying on budget if you remind them of the ramifications.
For example, you can offer them projections adjusted after a significant, unnecessary expense was made.
“Always bring them back to the impact a redemption or expenditure will have on their long-term plan,” says Nagy. “Bring them back to the original conversation.”
3. Establish a wish list
A crucial piece of the financial plan involves hashing out how clients want to share their newfound wealth, says Patel. Your role is to help these clients exercise spending restraint — and part of that is acknowledging that they will want to splurge or spread the fortune.
Whether there’s a desire to allocate a portion to charity or spend a considerable sum on gifts, high-priced expenses can be factored into your client’s customized plan, says Patel.
This makes the process of putting together a financial plan a more positive experience, he adds.
If those expenses are built in, you minimize the risk of clients feeling blindsided by the impact huge expenditures can have in the long run. Just make it a point to monitor how closely they follow the plan, says Patel.
Photo copyright: payphoto/123RF