An unexpected windfall is welcome, but stressful. Here's a plan for helping clients cope.
Way back when, a windfall was nothing more than a pile of sticks. The word actually comes from an eighteenth-century law that allowed American settlers to collect only the wood blown to the ground by the wind. Anything cut down was the property of the English monarchy. When strong winds felled trees, the settlers had an opportunity to build for the future.
Today, a financial windfall can provide similar opportunities to grow a financial support structure that can last for years to come. Sudden wealth can come from a variety of places: a marriage or divorce, a sale of a business, an insurance settlement, an inheritance, etc.
No matter its source, newfound wealth may bring a major life change for clients, often stirring a range of complex emotions. Psychologists even have a name for it: sudden wealth syndrome.
Because their newly minted money can come from so many different sources, there's no one-size-fits-all approach to working with newly wealthy clients. But there are several shared principles to keep in mind:
* Recognize the emotional impact of the life change.
* Communicate clearly and often.
* Understand family dynamics.
* Show that you have a process for working with clients in this situation.
Taking a closer look at these elements, it's clear why they're essential for attracting and retaining such clients. Without a strategic approach, you may find yourself passed over.
Advisors who successfully advise suddenly wealthy clients don't just provide financial education, they also prepare clients to handle the major transitions a windfall usually entails. "These clients need to be treated much differently from other clients because of the change or transformation that's occurred," says Susan K. Bradley, author of Sudden Money: Managing a Financial Windfall and founder of the Sudden Money Institute in Palm Beach Gardens, Florida.
"It's natural for clients and advisors to gravitate toward the investments because they are concrete and easily definable. But it's the human side that should take priority," she says. These clients are often under a huge amount of stress, which can limit their ability to focus and make decisions. You may offer them great advice, but if they're beset by anxiety, they won't be able to absorb it.
In her coaching sessions and seminars for financial advisors, Bradley emphasizes the importance of easing the often-stressful transition for clients. It's key to understand the issues they face and to tailor your routine to their needs. "The advisor's role is to create a process for bridging the personal/subjective behavior and the technical/objective financial planning issues," she says. A well-defined process helps keep stress in check and clients focused on the big picture.
Once clients' stress is under control, then it's time to talk about their finances. Clear communication is essential in any relationship, but it's especially important with these clients who often face unexpected distractions. If they're not sophisticated investors, they may be reluctant to take your advice until they understand their financial situation more fully.
Advisor Charles P. Brown of Capitol Financial Advisors in Wellesley, Massachusetts, finds that clear communication makes all the difference with such clients, many of whom are entrepreneurs who have just sold their businesses. "Years ago, I realized that many of my business-owner clients perceive investing to be similar to gambling or going to Las Vegas," Brown says. "Before they owned their businesses, all of their money was in the bank, where it was real and tangible to them. When they sell their businesses, we need to train these clients about investing, showing them how their money works for them now - and that it's not as unpredictable as they originally thought."
Often, getting your message across takes time and patience, especially with risk-averse clients. "Our approach is to spend as many meetings as it takes for them to truly understand investment risk, including the different types of risks and how they are measured," Brown says. It may not yield immediate results, but plain and frequent communication builds clients' trust and enables them to move forward.
To preserve sudden wealth for the long term, it's essential to gauge family dynamics and often forge relationships with a client's next of kin. After all, family issues can prevent clients from taking sound advice, particularly in wealth-transfer situations, says Kathleen Burns Kingsbury, founder of KBK Wealth Connection and author of Creating Wealth from the Inside Out Workbook.
Only a small percentage of wealth-transfer plans go awry because of problems with financial planning, taxes or legal issues. The main reason is faulty family communication and preparation. Kingsbury quips, "Clients may see themselves as well-trained quarterbacks throwing the perfect spiral to a wide receiver, only to have the receiver drop the ball in the end zone. In this case, everyone loses."
Anticipating these problems, savvy advisors coach all of the players, not just the quarterback. "Clients struggle with how to start the dialogue, how to handle the real or anticipated discomfort of talking about money, and how to work through conflicts that may arise when family members have different perspectives," Kingsbury says. By guiding them through these challenging conversations and fostering family communication, you can help suddenly wealthy clients build a lasting legacy for future generations.
Show Your Strength
These clients tend to gravitate toward advisors who are set up to work with individuals in their situation. They want to know that you and your team understand how to handle their needs.
"From my experience, it doesn't take an individual or family much time to determine whether you're set up to work with them long term," says advisor Jonathan C. Wolff of Lightship Wealth Strategies in Newton Lower Falls, Massachusetts. "The effort you put into developing your approach can not only make the difference in attracting new sudden wealth clients, but also in maintaining them profitably."
His first step? He takes the money out of the equation. "One important decision we make is to do nothing with the money for about a year. Not only does this take all the stress off the clients, but it also helps them get laser-focused on their goals and long-term planning," he says. "Even if the assets sit in an account earning practically nothing, it allows us time to get the clients' expectations and personal issues on the table."
Next, he gets clients thinking about the future by asking, "What is that one thing you've always wanted to do?" Whether the goal is to buy a beach house, travel around the world or pay for a relative's education, Wolff shows clients he can help them craft a plan to fulfill their dreams.
In the end, though, working with windfall clients comes back to relieving their stress. "We prepare them for what they're going to run into with their newfound wealth and let them know that all of their financial matters will flow through us," Wolff says. "We even coach them on how to handle individuals and family members who ask them for money."
Most people who come into sudden wealth lack the financial planning knowledge to handle their new assets, and many are quick to realize they can't do it alone. Going forward, a $40 trillion wealth transfer is on the horizon, the use of stock options to attract and keep key executives is growing and baby boomers are beginning to retire and sell their businesses. All that means is it's vital to refine your approach for working with newly wealthy clients.
The information provided is for general information purposes only and is not intended to be legal, tax or investment advice. The information contained herein has been provided by sources other than Lord Abbett which are believed to be reliable; however Lord Abbett cannot guarantee the accuracy or completeness of this information.
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Source: SourceMedia and Financial Planning (09/2011).