Most people fantasize about winning the lottery or a Publisher's Clearinghouse sweepstakes. But most are more likely to be struck by lightning than to win a large sum of money.
Depressing as it may be, odds are better that people will come into wealth from a sad event rather than a happy one. Reps say they handle money from inheritances, divorce, personal injury or insurance settlements more frequently than lottery or gambling winnings.
Either way, dealing with windfall clients requires the highest professionalism from financial advisers. Instantly wealthy individuals need help establishing new ground rules to ensure they'll be set for life, says Kirk McKenzie, a former insurance adjuster who is now a rep with Primerica Financial Services in Brea, Calif. "Most people without a game plan will spend it all."
People who have never had much money don't realize how quickly their new "fortune" can evaporate. State and federal taxes alone often claim 40 percent to 45 percent of lottery winnings, says Susan Bradley, a Raymond James rep in West Palm Beach, Fla., who deals frequently with windfall clients. She has written a book titled "Sudden Money" (published by John Wiley & Son) that is due out next spring.
"If they've won 2 million dollars, and they buy cars for everyone in the family and buy a new house, they've spent more than 10 percent of their money and that's before taxes," she says.
Slowing Down the Emotions The risk of blowing a windfall is especially great if it's placed in easily accessible bank accounts. "It can be gone in three to four years," McKenzie says. He tries to help clients create a blueprint for how to spend and grow the money over the course of a lifetime. Last year, he helped a client who had won more than 400,000 dollars in insurance settlements from her daughter's death in an unfortunate boating accident.
Because the woman had lost her husband to cancer only eight months earlier and still had a mortgage, it was vital to preserve the 400,000 dollars for the rest of her lifetime, McKenzie says.
The first step was convincing the client to think of the lump sum as her new job for life, even though she continued to work part time. McKenzie talked her out of buying a new 35,000 dollars Mustang convertible, and paying for her other daughter's college tuition in a lump sum, decisions that would have depleted the settlement instantly by nearly one fourth.
"People start spending and think there isn't any problem," McKenzie says. "The first thing I did was talk to her about everything she wanted and said, 'You can still have these things, but you can't have them all at once.'"
Bradley says advisers should be unemotional about spending issues and help regulate the client's emotions. "They've spent so many years living on a budget, now they're going to go for it," she says. "You've got to slow them down. ... They need a reality check."
McKenzie counseled his client to place 10,000 dollars of the settlement money into an emergency money market fund for unexpected short-term expenses such as car repairs or quick trips. He then put 10,000 dollars in an intermediate account to pay for her daughter's college tuition, raising that to 50,000 dollars when a second insurance settlement came in. The first year's tuition and college expenses cost 26,000 dollars, but the remaining 24,000 dollars in the account grew to 32,000 dollars.
The remaining 380,000 dollars of the settlement went into a growth account that generates 2,500 dollars a month for the woman to withdraw. "When [the account] grows a little more to 475,000 dollars, we'll put 100,000 dollars into a variable annuity to keep her tax burden down," McKenzie says. He would have liked to put more of the money into a long-term tax-advantaged account right away, but the woman wanted access to her money. That's one area in which advisers frequently battle clients.
"She would rather have that money accessible even if it means higher taxes," he says. "This is all very new to her-it's like a security blanket. ... She wants to on a whim be able to take trips."
Serving Windfall Clients You don't have to hang out with personal injury attorneys or at casino cashier windows to find windfall clients. Odds are one of your existing clients or prospects will inherit money or sell a business, says Dan Horgan of Sutro & Co. in Newport Beach, Calif. "We try to open up a lot of accounts with all kinds of people," he says. "Then occasionally someone who's a client will come into wealth."
Horgan says one woman client with a 100,000 dollars account sold her business and received 3 million dollars. His team of professionals provided her with a financial profile and plan as she anticipated the sale of her business. Since the sale, they have slowly eased her into investments as the money came to her in blocks.
When dealing with people who come into money suddenly, patience is key. "It takes time to build up client trust and confidence," Horgan says. "You have to have the patience to answer all their questions, and review everything. They want to learn where the money's going. It's a large sum for them. They don't want to lose it."
Horgan offers by way of example a 35-year-old construction worker who received an accident settlement of 200,000 dollars. The man had dumped his first adviser after receiving poor service. While working with the client, who had been making 25,000 dollars a year, Horgan says he and his team had to do a lot of education. "He never really had much money before," Horgan says. "We had to keep him in line about spending, and educate him about investing."
Bradley says she often advises windfall clients to place their money in tax-free municipal bonds for the first six months to a year, to give them more time to adjust to having the money and to build up trust with their adviser.
Andy Roth, an adviser with Linsco/ Private Ledger in Glendale, Calif., frequently attracts divorcees at his Women and Investing seminars. One client he worked with received 950,000 dollars from her portion of her ex-husband's IRA rollover. Roth is currently helping another divorced client with a multiple six-figure settlement.
"I'm really careful about the language I use," Roth says. "I don't use technical terms. I challenge seminar audiences to raise their hands if they hear something they don't understand," he says.
The key for windfall clients, Roth says, is building trust. Many divorcees have "never had anything to do with managing their own money. ... They're faced with making their own decisions, so they're eager to learn. Most of these people are totally putting their trust in us."
Lottery winners in the United States total 20,000 to 25,000 and lottery winnings represent as much as 18 billion dollars a year, according to some studies.
"Many of these winners are groups, so a lottery group would be considered one winner, but could be 20 to 50 people," says Martin Granoff of Granoff Enterprises in Davie, Fla., who buys payment streams from winners in exchange for lump sums.
"A lot are reckless and will take the money and go around the world twice," Granoff says. "Others will be very prudent and invest it wisely. We don't ask them what they're going to do with the money. We want an arms-length transaction."
The tradition of paying out lottery winnings over time-and avoiding the worst type of spendthrift behavior-is changing. More states give winners the lump-sum option.
