If ever there were a poster woman for the perils of sudden wealth, it would have to be our latest reality television star, Anna Nicole Smith. In 14 months of marriage to her late billionaire husband, Smith managed to spend $6.7 million on clothes, jewelry and homes while receiving $8 million in gifts — or so the tabloids say. Now, as E! cameras follow her every move, she's readying to receive an $88 million settlement after years of wrangling over the $1.6 billion estate left behind by her former soulmate, J. Howard Marshall, the 90-year-old wheelchair-bound oil magnate.
Smith's lawyer and ever-present sidekick Howard Stern (no, not the smutty one) was unwilling to reveal to Registered Rep. how Smith's newfound windfall will be invested, so we approached Los Angeles advisor Jeff Fishman of JSF Financial/Royal Alliance to discover how a 34-year-old working widow with a teenage son and a Prozac-popping pup might wisely allocate such funds. “You know they're going to want to buy some toys: boats, houses, whatever,” says Fishman, who counsels a number of celebrities. “So you give them 10 percent play money.”
But Fishman says the ultimate goal for clients such as these is wealth preservation. In Smith's case, he recommends greater than usual allocations for fixed income or real estate, and lower than usual allocations for equities. And then, Fishman says, it's your job to make sure they don't self-destruct.
The Sky is Falling
“When money falls out of the sky, there's a real disconnect,” says Richard Hearn, a financial advisor and founder of Starcare Associates (affiliated with Linsco/Private Ledger) in Newport Beach, Calif., a firm that serves athletes and other clients, including those with personal injury, medical malpractice and wrongful death settlements. “People who aren't used to that much money think it's going to last forever.”
Many recipients endure feelings of guilt, fear and isolation that can culminate in a condition known as “sudden wealth syndrome,” or “affluenza.” It's a condition that could soon grow to epidemic proportions. During the next ten years, more than $40 trillion will be recieved by individuals and families unprepared for it, says Susan Bradley, founder of the Sudden Money Institute in Palm Beach, Fla. Most of this activity will be transfers of wealth to baby boomers from their parents.
A windfall could be $300,000 or $10 million. It might come from an inheritance, a divorce, a personal injury settlement, a pro sports contract, a marriage to a millionaire or even from a lottery (though landing a lottery winner as a client is about as likely as winning the lottery itself).
It's every working person's dream — and it also can prove to be a curse. “Marrying into money was not a good thing for me,” Smith has said — though not always convincingly. It's a curse most — like Smith — happily accept.
It can be every advisor's dream, too. But for those unprepared, it can become a nightmare. Lesson No. 1: The nouveau riche aren't like you or me. Emotions can run high as erstwhile family members appear, as well as charities, looking for a chunk of their money; truly, handholding can become a huge part of your job. A CFP accreditation is a plus, along with patience and a commitment to long-term financial planning. No special academic credentials are required — though a background in psychology can be helpful.
Some advisors intuitively know how to work with the suddenly wealthy, says Bradley. Others need tools: questionnaires, advice, workshops or software for scenario planning. Bradley advises advisors as well as the suddenly rich themselves as part of her practice. The Sudden Money Institute, in fact, trains reps to become part of its nationwide network of specialists.
If treading on personal territory seems intrusive, or if you're not skilled at it, you might team up with a therapist or refer certain clients to someone better able to help them.
The emphasis on money and emotion can seem downright touchy-feely to some brokers, but others say that understanding the psychological aspects of investing is beneficial in dealing with all clients. Postulants of the Nazrudin Project, created by CFP George Kinder, for example, explore the spiritual side of learning to live with money. Kinder, author of The Seven Stages of Money Maturity, has practices in Cambridge, Mass., and Maui, Hawaii. He says he finds inspiration in exploring “what all of our humanness has to do with our relationship to money.”
Seem like heady stuff? “This isn't for everybody,” says Bradley.
Though asset allocation recommendations vary drastically from client to client, there are a few general rules on how to proceed. For starters, Bradley recommends creating a decision-free zone, that is, time and space for the client to contemplate his or her life goals. “You're in rough water, and your instinct is to paddle as fast as you can. But underlying turbulence could cause some regrettable decisions,” Bradley says. “I'm not saying don't cash the check.” She notes, however, “The money can be parked in short-term vehicles for the time being.” In counseling her clients, Bradley divides the process into three phases:
Letting the client adjust to his or her new financial position.
Implementing plans, making investments, buying homes, giving gifts, etc.
Monitoring progress, making estate planning decision, and putting philanthropy plans into place.
Michael Boone, a CFP and CFA with MWBoone Associates in Bellevue, Wash., recommends clearing money out of a client's swollen checking account (minus some spending money for a splurge, echoing Fishman's approach) as soon as possible and parking it in other liquid investments while assessing the client's long-term goals and risk tolerance.
Sometimes settlements are held in trust for a client. If a client has an injury or disability, a special needs trust may be in place. This sort of trust permits the individual to receive some government benefits without being reduced to poverty. Advisors may be in the position of recommending a trustee who handles the disbursement of funds.
Advisors who work in this area normally charge a flat fee or a retainer and don't depend on commissions. What's more, they may not have a large number of clients — “Just a few good ones,” as one advisor put it. When client money is substantial, most or all of it may be managed by the family firm or family office, leaving the financial planner to focus on life planning rather than investment issues.
Cicily Maton, CFP at Aequus Wealth Management Resources in Chicago, a Sudden Money Institute network member and one of the original members of the Nazrudin Project, has her clients draw up a written investment policy statement addressing how they want to use their money. “Decisions aren't so difficult when framed in their stated value system,” she says, and clients are more likely to be satisfied with their choices down the road.
Bradley, meanwhile, uses a questionnaire that asks clients to fill in the blanks. For example:
My money message from my parents was … (client fills in the blank)
My money message to my children is … (client fills in the blank)
Before taking on suddenly wealthy clients, says Hearn, consider this: “The consequences of not doing your job right are more dire because there's no way to replicate the circumstances of the windfall.”
One of Hearn's clients, a widow with a small wrongful death settlement, made a series of bad choices upon receipt of her sudden wealth. She bought a used vehicle that broke down, fixed up a mobile home she didn't own that sat on land that couldn't be sold, and got involved in a restaurant venture that quickly failed because her partner had liabilities she knew nothing of.
“Sometimes the best you can do is prevent things from getting worse,” says Hearn.
To Heir Is Human
Myra Salzer helps people who come into money early in life overcome the obstacles to living happily ever after.
Myra Salzer, a financial planner for The Wealth Conservancy, works with the young and often restless: the heirs to large fortunes. “They haven't had the opportunity to take risks or to grow into their money,” she says. “Their net worth and self worth are not aligned.”
Salzer isn't a trust-fund baby though some of her schoolmates were. What she wanted for herself was to be financially self-sufficient with only a bachelor's degree. A chemical engineering major at Case Western Reserve University, she took an engineering job and, later, studied for her CFP in her spare time.
After her second daughter was born, Salzer opened a financial planning office in Boulder, Colo. Her husband, a dentist, helped support the family until the business grew. Her specialty evolved in the late 1980s, as she realized that clients endowed with inherited wealth face a unique set of challenges.
The technical background of Salzer has helped her simplify complex issues in her new profession, she says: “I can encapsulate a whole family's estate plan or a client's multi-account portfolio in a one-page diagram that puts it all into perspective.”
Salzer takes a “big picture approach” when developing a financial plan and selecting money managers. “We are an overseer of managers,” she says, noting that clients often remain with the same investment management firms and trust companies they were with before seeking her counsel. She charges a percent of assets (usually between 0.25 and 0.50 annually) or a fixed fee, depending on a client's financial complexity and services rendered. (For more on inherited wealth and values-based trusts, see page 129.)
Since the late 1980s, Salzer has been holding four-day workshops entitled Inherited Wealth and You in which she teams up with two other professionals — Thayer Willis, a Portland, Ore., psychotherapist whose clients are primarily people with inherited wealth and who happens to be heir to the Georgia-Pacific fortune, and Walter Kingsbery, tax attorney and partner in Kingsbery, Johnson, Phillips, Foster & Love, a Boulder law firm specializing in inherited wealth — to cover such topics as purpose in life, relationships, family business issues, philanthropy and instilling values in youngsters. Attendees — never more than 25 — may sign up for private sessions with any of the professionals. The fee to attend the program is $1,950.
The only non-inheritors encouraged to attend are spouses, who typically have signed prenups and are thusly referred to as “the outlaws” by original wealth holders and their attorneys. Salzer acknowledges that such individuals have their own challenges, such as how to show your dad your new Jaguar when he's struggling to pay the mortgage.
Want to learn more? Following are three books on sudden wealth:
- Why Smart People Make Big Money Mistakes and How to Correct Them: Lessons from the New Science of Behavioral Economics by Gary Belsky and Thomas Gilovich, Fireside, 2000.
- Sudden Money: Managing a Financial Windfall by Susan Bradley, CFP, John Wiley & Sons, 2000.
- Seven Stages of Money Maturity by George Kinder, Dell, 1999.