Presented by Cary Stamp
The term windfall comes from an 18th-century law that allowed North American settlers to build only with wood blown to the ground by the wind. Wood that was actually cut down became the property of the English monarchy. So when strong winds randomly and unexpectedly felled trees, settlers had the opportunity to gather the wood off the ground and construct stronger homes for the future.
Today, a financial windfall, when handled appropriately, can provide similar opportunities for the future—to grow a financial support structure that can last for years to come. Windfalls can come from a variety of places and quite out of the blue: a marriage or divorce, a sale of a business, an insurance settlement, an inheritance, company stock options, a lottery win, and so forth.
But no matter what the source, newfound wealth brings major changes, often stirring a range of complex emotions. Psychologists even have a name for it: sudden wealth syndrome. If you find yourself the recipient of new wealth, the right guidance can make a world of difference for your emotional and financial success.
Wealthy and wise—three recommendations
Because financial windfalls can come from so many different sources, there’s no one-size-fits-all approach or book that will solve all the issues that new-found wealth delivers. But there are several shared principles to keep in mind:
1. Recognize the emotional impact of the life change.
2. Understand family dynamics.
3. Partner with the right professionals who have a process for working with clients in this situation.
Without a strategic plan or approach in mind, you may find yourself in worse financial shape than before the windfall came your way.
Recognize the emotional impact
Becoming wealthy may well have been your life-long dream; however, there may also be a sense of “be careful what you wish for” that comes with it. Those who become suddenly wealthy often:
- Lack financial savvy. They don’t know what to do with the newfound money, as they weigh the recommendations of others (who may also not be qualified to give such advice) and have to learn a whole new language around finances.
- Feel guilty. Some feel they haven’t “earned” the money and don’t deserve it. Or they feel guilty that their friends and family aren’t as well off so they are uncomfortable enjoying their new financial situation.
- Experience relationship strain. This can tie in with guilt. Friends and family may suddenly expect loans or gifts, which can damage or ruin relationships.
There is no cure-all for your emotions, but recognizing that any major life change—positive or negative—comes with some stress can help keep things in perspective.
Understand family dynamics
For many, family plays an important role in their happiness. The way a family interacts and functions together relative to emotions, communication, and each member’s role are all part of that happiness and bond. Thus, understanding how the infusion of new wealth into this system can impact everyone will go a long way toward easing stress. If your new wealth leads you to shift into the role of supporting your family financially, it can be jarring for all. You need to communicate with your family, listen to their feelings about the change, and work together to address concerns.
Partner with the right professionals
Financial advisors who have successfully guided suddenly wealthy clients not only provide financial education, but they also prepare clients to handle the major transitions a windfall usually entails. Advisors who are experienced in dealing with the emotional side of finances emphasize the importance of easing the often-stressful transition for clients.
The advisor’s role is to create a process for bridging the personal/subjective behavior and the technical/objective financial planning issues. A well-defined process helps keep stress in check so that the individual is focused on the big picture. Bear in mind that “doing nothing” is doing something—that is, doing nothing lets you slow things down a bit in order to get used to your new situation and to focus on long-term goals and planning.
In addition to an experienced financial advisor, you may also want to seek out other professionals, including an attorney to handle estate planning documentation, trust implementation, and other legal matters relative to your wealth (and your impending plans for it), as well as a tax professional. They may work in tandem with your financial advisor, who is often the “quarterback” of your team when it comes to your wealth and planning.
Avoid roadblocks to planning
Once stress is under control, it’s time to talk about finances. You may face some common challenges to dealing with this part of the equation, including:
- Financial familiarity. If you are not a seasoned investor, you may find it hard to understand the choices available or how they can impact you over the long term. This could result in an unwillingness to move ahead with a recommended course of action.
- Risk aversion. You’ll need to come to terms with risk—namely, with how much risk (loss) to existing assets you are willing to assume in exchange for potential future gain. It’s natural to feel risk-averse when it comes to wealth, which can cause you to delay taking action.
The answer to these challenges boils down to one thing: clear communication. Clear communication is essential in any relationship, but it’s especially important when it comes to newfound wealth. You and your family must be on the same page as your financial advisor, feeling free to voice questions and concerns as they occur.
Preserve wealth for the long term
You may wish to pass your wealth on to the next generation—and the one after that. To help ensure that outcome, you should be aware that 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. It’s natural to struggle with how to start the dialogue with the next generation, 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. Experienced professionals can guide you through these challenges, foster family communication, and help you build a lasting legacy.
As you can see, there’s a lot to consider when coming into new wealth. But if you understand the issues, prepare for them, and work with the right professionals, you can ease the strain and focus on the many benefits.
Cary Stamp is a financial advisor located at Cary Stamp & Company, 110 Bridge Road, Tequesta, Florida 33458. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 561-471-7700 or at firstname.lastname@example.org
© 2011 Commonwealth Financial Network®