This article originally appeared in Morningstar Direct Cloud and Morningstar Office Cloud.
In the past two columns I’ve told the story of clients who have come into a huge windfall. The first part of the saga was a lesson in how critical it can be to remind your clients about the importance of a fiduciary. The second part of the story was our strategy for helping these clients develop a very different--and complicated--financial plan from the one that they had before.
But there’s much more to it than tax strategies and portfolio decisions aimed at helping your clients preserve and pass on their wealth. There’s another side to the story that involves helping them to live their now very different lives.
Your clients now have a very different set of challenges:
• How to emotionally accept that they are multimillionaires
• How to deal with friends and family who want financial help
• How to responsibly manage their wealth
• How to best make an impact with charitable giving
• How to instill philanthropic values on their children and grandchildren
• How to avoid being taken advantage of
Let’s talk about each item in relation to your client’s needs and how you can help.
Emotional Acceptance Transitions can be stressful--even good ones! Your client was used to whatever lifestyle they had and suddenly everything is different. The mindset of wondering if something is affordable now takes on an entirely different meaning.
Coming into money carries with it a lot of conflicting emotions: happiness, guilt, excitement, sadness. There’s denial when the client thinks, “Just because I have money, nothing will change.” There’s worry about blowing their newfound wealth. There’s acceptance when they decide they want to buy a fancy new car.
As an advisor, it is important to recognize that emotions can run high, especially in the beginning. Your job is to reassure your client that these things take time and no decisions need or should be made immediately.
Dealing With Friends and Family People tend to hang out with others who are similar to themselves. A person of moderate means likely does not have a group of multimillionaire friends. In terms of current relationships, there will be tension—it will be one-sided if the client keeps their newfound wealth private; two-sided if both parties are aware of the changed financial circumstances. It's a complicated situation for your clients to handle.
Depending on the relationship--for example, a parent or lifelong friend versus a tennis buddy or coworker--you can encourage them to keep finances personal. Those in the latter category don’t need to know how much money your client has. In most cases, when the information is out there, relationships will feel uneasy.
Unfortunately, it is sometimes impossible to keep this news private, especially if the lottery winner is announced on TV or friends and family are aware that a wealthy relative has passed away.
For the client dealing with guilt and acceptance, the initial response might be to give money away to friends and family or to say “yes” to requests. This does not set a good precedent, and, in fact, it can be detrimental to relationships either way (whether money is given or denied).
Until well-thought-out plans are made, your client should avoid handing out checks or making big changes. Of course, saying “no” can come with guilt and be difficult at times.
But the advisor can be a big help in this area by reassuring the client and taking on the role of the “bad guy.” You can suggest that your client puts the blame on you, for example, by saying: “My hands are tied right now until all of the financial and legal matters are resolved.”
Unfortunately, some of your client’s relationships will go downhill or end. This is unavoidable in many cases since some people have a hard time accepting a friend or family member’s extreme wealth. Be sure to prepare your client and let them know that this is a typical byproduct of financial windfalls.
Responsible Management With greater wealth comes greater responsibility. At least that's how it should be! Instead of worrying about whether they will have enough money to retire, your client must now determine their goals on an entirely different level. Since there are only four ways the money can go--to themselves, to their family/friends, to charity, or to Uncle Sam--your client has decisions to make on their priorities. I must say, that in my years of experience, I have never had a client who has wanted to help Uncle Sam (unless they actually had an uncle named Sam!).
To assist your clients with responsible management, you will need to facilitate updated goal-setting. Once goals are clear, it will be time to set up tax-planning, update the estate plan, and supplement insurance protection.
Impactful Philanthropy The ability to do good for the world along with tax benefits make for a winning combination. Whether structuring donations as cash contributions, donor-advised funds, charitable remainder trusts, and so on, the advisor can certainly provide valuable input on optimal tax structure. More importantly, though, the advisor's role is to help the client determine what their charitable passions are and how best to make an impact.
At a minimum, it is important to confirm that each charity is qualified by the Internal Revenue Service as a duly registered exempt charitable organization. It is also a good idea to check the ratings as evaluated by organizations such as Charity Navigator. On a more comprehensive level, we work with a local community foundation to gain valuable insights and recommendations on particular charities and approaches.
Passing on Philanthropic Values to Next-Gen I have long heard that the best way to give children money is to give them enough so they can do anything they want, but not so much that they don't have to do anything! Beyond ensuring that next generations continue to have a work ethic, many clients would also like to instill philanthropic values upon their children and grandchildren.
Your role as an advisor is to help your client set a good example (by giving charitably) and by meeting with and working with the next generation on charitable education. For one client, we set up a donor-advised fund with the local community foundation that has “sub-funds” to be used by the children and grandchildren.
Avoiding the Wolves Perhaps one of the biggest issues for newly wealthy clients is being approached by unscrupulous "advisors" seeking to sell them unneeded annuities, risky investments, and other fake opportunities. Some of these "wolves" can be personal acquaintances, golf partners, business contacts, or friends of friends. They can seem very nice, caring, and knowledgeable.
You should be your client’s trusted advisor. Warn them about opportunists and remind them that you have a fiduciary duty to put their interests first. Ask them to refrain from making decisions and especially to avoid signing anything without a conversation with you first!
Conclusion Working with clients who suddenly have become wealthy can be fun and challenging. You will be helping them to live their lives well while making a difference for others. As an advisor, this is the greatest job ever! But with that comes a responsibility to educate your client and to take your planning skills up a notch.
Sheryl Rowling, CPA, is head of rebalancing solutions for Morningstar and principal of Rowling & Associates, an investment advisory firm. She is a part-time columnist and consultant on advisor-focused products for Morningstar, and she continues to actively run her advisory business, from which Morningstar acquired the Total Rebalance Expert software platform in 2015. The views expressed in this article do not necessarily reflect the views of Morningstar.
The opinions expressed here are the author’s. Morningstar values diversity of thought and publishes a broad range of viewpoints.