Coming into wealth. Part 2.

Managing the basics

April 27, 2017

The second of a four-part blog about the implications of overnight wealth.

In my first blog post investigating the consequences of Coming into wealth, I focused on the psychology rather than the practicality of the issue. This time I want to be more down to earth. My convictions about this matter can be summed up in three words: Get a plan.

Failure to plan means planning to fail

The impact of sudden wealth highlights one of the oldest adages in wealth management: failure to plan means planning to fail.

This means that if you don’t have a wealth advisor, get one. Or, if you have a trusted advisor, go see him/her pronto. Lay out the facts. Discuss the scope of the challenge. Roll-up your sleeves. Get to work. Most important of all: resist the urge to spend. You have plenty of time for that.

Build a wealth management strategy

A wealth management strategy has many components: financial planning, tax minimization, investment management, insurance, education financing (if you have kids), philanthropic and charitable giving, estate and trust issues, and legacy creation.

Developing a wealth strategy takes time and effort, but the consequences it will have for your composure and overall state of mind are incalculable.

For those without prior investment expertise, coming into money can be an intimidating experience. No one is born with an ability to astutely manage assets. This is a talent that requires knowledge and practice.

Perhaps the safest procedure is to refrain from any investment decisions for a full year, while any windfall is parked in non-risk vehicles such as certificates of deposit, government insured savings accounts, and treasury notes.

Thieves and charlatans, and let’s not exclude charities

If you attempt to become involved in making investment decisions before you acquire an appreciation of the risks and rewards involved, you are fair game for the thieves and charlatans who regularly prey upon moneyed novices.

And remember, charity is often uncharitable. Rarely a day goes by that the media fails to interview someone who has come – often blundered – into money. Invariably the declaration is blurted out: “I’m gonna’ give $70,000 dollars to the Zilch Foundation because I care about feedin’ the leprechauns.”

Unfortunately, there is not enough money in the world to satisfy the myriad of organizations with outstretched hands. Charitable institutions that are carefully selected and effectively monitored can be an excellent way to share your good fortune in a meaningful way, but simply pouring out dollars on impulse is no way to accomplish any lasting good – and will likely harm you.

Voices from the past

It’s amazing how many people you knew that you no longer see – that is until your name appears in the newspaper as the sole beneficiary in rich old Aunt Emma’s will. Within a few days long lost cousin Calvin will phone to remind you how much he always admired you, and how his current misfortune can be resolved if you can just see your way clear to assisting him.

And don’t forget your former classmate Ernie, with whom you stopped exchanging Christmas cards a decade ago. His email extols the close camaraderie you two always shared, adding that the technology IPO his brokerage firm is underwriting is certain to be right up your alley, just like the good old days. If you fail to fend off these moochers and hangers-on, you’ll find yourself in deep trouble.

A defensive shield

More than providing you with an organizational basis for administering your newfound riches, a wealth management strategy provides you with a defensive shield against those who would take advantage of you.

Ultimately it enables you to say: While I take your request seriously, I get quite a few of them as you might imagine. So I must run it by my advisor. Together, we will assess the merits of the issue, make an informed decision, and get back to you.

Without a wealth management strategy, supported by a reliable advisor, life for the recently rich can become quite unpleasant.

Geoff Funke, Senior Wealth Advisor, Scotia Wealth Management, 604.535.4721.