Two lottery wins in two consecutive years and the combined total of $5.4 million gone in just over two decades. Evelyn Adams, who achieved the Great American Dream twice when she won the New Jersey lottery in 1985 and 1986, is now destitute and living in a trailer.
The tragedy is that hers is not an isolated case.
Sudden wealth has the propensity to undermine and destabilise even the most rational, level headed individual and according to financial planner and wealth advisor, Peter Connolly of Centric Wealth insufficient and/or poorly guided professional advice is frequently to blame.
But often the biggest culprit says Connolly, in the riches to rags slide that hangs like an innate curse over every sudden wealth scenario, is the void in the financial advice sector of any real understanding of the emotional roller coaster that is an intrinsic component of landing a windfall.
Adams points her finger at friends and family members who held out their hands for their share of the winnings and her powerlessness to refuse their requests. She also concedes that gambling took its toll.
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But Connolly believes that a lack of empathetic financial advice was the essential issue in Adams’ failure to survive her lucky event. “A sudden wealth recipient often feels like they have only a limited amount of time to figure out what’s going on,” he says remarking that he always counsels his clients to “take your time to figure out your future financial life”.
“Suddenly more people want to advise them, go into business with them and borrow money. It can be very confusing as they realise that this money may change their lives forever,” Connolly writes in a white paper entitled “Sudden Wealth & Financial Decisions – What you need to know at a time you least want to know it”.
Explaining that there are distinct phases such as excitement, joy, guilt and confusion that people experience when they gain sudden wealth Connolly says it’s imperative that a wealth advisor is aware of these natural emotional states and deals with clients in a holistic manner.
The key to Connolly’s method is to break everything down into simple terms regarding the implication of decisions. Translating a client’s windfall into a regular income stream can be a challenge Connolly confesses pointing out that the sense of unreality that often accompanies the euphoria of instant wealth usually precludes heeding “sensible” guidance.
“A lot of people who suddenly come into money are unfamiliar with handling finances so our role is to help them make smart decisions,” he says. “We advise investing in good opportunities that will tend to generate income of around 5% after tax and fees. If you win one million dollars that essentially means that you can afford to spend an extra $50,000 a year. “If however you go and buy two Porches that will take $300,000 out of the pot, which means you’re only working on $35,000 a year extra. “An instant decision to buy a depreciating asset can cost you $15,000 for the rest of your life.”
When sudden wealth occurs financial advisors currently go through a fairly regimented process that includes fact-finding, financial planing preparation and implementation and an annual review of plans, writes Connolly in his research paper.
In the case of an inheritance the traps of such generic financial planning include the client being coerced into a financial decision for which they are ill-prepared, serious taxation liabilities due to a failure to consult with other specialists and professionals, the executor being placed at risk due to a failure to delve into the family structure prior to the sudden death and investment decisions overlooking the need for cash flow and leading to future asset sales which is inconsistent with prudent investment strategies.
“The more sudden the wealth the less the opportunity for mental preparation regarding key issues which is why giving a client time to assimilate their new position will often prevent the downside,” says Connolly.
“The way inheritances are normally dealt with is just a cursory, have you got a will, when was it updated, thanks, bye. Besides the multitude of tax and legal implications that can face beneficiaries of estates there are also the dozens of other questions that they’re grappling with.”
Connolly maintains that the same basic questions arise with any sudden wealth. “Will I buy a new car and a new house, will I take a holiday and what will I give my family? The key issue is for the client to understand priorities and ultimately it all hinges on the ears that hear the advice.”