Matt Featured In Advisor Perspectives: What Not To Do When A Financial Windfall Happens

Imagine this: You suddenly learn your Uncle Jack has died and left you a sizable sum. Sounds like a dream come true, right? Movies often portray it that way; a sudden bonanza pops up out of the blue and saves the financial day.

But reality can be quite different. It doesn’t take much for that beautiful dream to eventually lead to a living nightmare, a squandered opportunity that may never come again.

We all hope to receive a dazzling, eye-popping bonus at work one day. Or have a piece of real estate skyrocket in value. Or, yes, have a relative pass along a sizable inheritance. That kind of unexpected stroke of good financial luck is called a windfall. And as a wealth manager, it is your responsibility to help your clients handle this unanticipated bankroll. 

I write a lot about helping people be smart with their money. This is a prime example of how you can provide an invaluable service. When your bank account swells, that new BMW is within reach. A big boat looks tempting. It’s possible to book that long-dreamed-about getaway to Tahiti.

I totally get that. After all, we’re only human. The desire to want to have nice things, go to exciting places, and do fun things is implanted deep in our nature.

So, what do you tell a client who suddenly finds themselves in that situation?

My advice is this: “Don’t do anything right now.” Remember that old saying, Act in haste, repent at leisure? It’s especially true in situations where newly acquired wealth is part of the picture.

So, the very first thing your client needs to do is take a deep breath. Tell them to give themselves time to adjust to their new circumstances and to mentally process what has just happened. Because, as so often happens where money is concerned, emotion rears its ugly head. And as we have discussed many times before, emotion tends to shove reason into the back seat.

Glitzy, extravagant purchases are often based on impulse, a primal urge that screams in the brain, “I want it! I must have it! Right now!”

There’s even the temptation to impulsively do things that, on the surface, appear positive. Like showering friends and family with cash or making hefty donations to charities or other worthwhile causes. That’s certainly commendable, but is it smart?

Additionally, some people feel guilty about suddenly benefiting from a windfall. They might think they don’t deserve all that money or that it should have gone to someone else. 

Whatever the situation, I always tell clients who receive a windfall to do nothing for an entire week. Absolutely nothing. They must give themselves time for the reality of their new circumstances to settle in. 

That’s because windfalls are usually the result of something that has happened. And that, in turn, can trigger our emotions.

Say the client has received a significant inheritance. While that is good news financially, the wealth transfer comes as the direct result of a life that has just ended. And if that person was important enough to pass on a significant amount of money to the client, they probably occupied an important place in the client’s heart. It takes time to work through sorrow and grief. That should take precedence over deciding what to do with the bequest.

On the opposite emotional extreme, some windfalls happen due to selling a business. Maybe it was a startup that is now changing hands and moving on to the big leagues. There are many emotions associated with positive life events, too. Selling the business you built from the ground up can feel like watching the child you raised going off to college. Saying goodbye to trusted colleagues you have worked closely with over the years can be challenging as well.

Again, it takes time to process good feelings, just as it does to deal with the bad ones.  

So be sure to tell your clients in any windfall situation to look after themselves first. The money can wait. It’s safely tucked away in an account and isn’t going anywhere. 

Time, the great healer, not only soothes pain; it brings clarity to one’s thinking. Clear and calm decisions result from having a clear and peaceful mind. And that only comes on the heels of a major life event when the client has given themselves ample time.

When the right moment arrives, when clarity has returned, and reason has been restored, the focus should now be directed to devising a plan for managing the money. After a week or so, buying that luxury cabin cruiser may not seem quite as appealing. And perhaps writing some big checks to mom and dad or the kids to assist them might not be in their best interest.

At that point, your client will want options for handling the money, and they will turn to you to provide them.

As with most aspects of successfully managing wealth, it all comes down to having a plan. And that plan should be tailored toward helping the client achieve their unique goals and dreams.

This is where having a solid relationship with the client proves essential. By now, you will have long understood what they are striving to achieve with their wealth and the reasons that motivate them to do so. You will be familiar with whether their objective is early retirement, funding their children’s college education, buying a beach home, or providing a financial cushion for additional peace of mind.

This is your opportunity to show them how their newfound wealth can help them make significant progress toward their target.    

But above all, make sure they understand they need a specific plan. Make certain that plan is in place before spending the first penny. Preparing a blueprint for handling the money is essential.  

Remember, too, to remind the client of financial fundamentals they may have forgotten. For instance, just because they can now afford to write one check and pay off their house all at once, it might not be in their best interest to do. Remind them of the steps they have already agreed upon and how they stand to benefit from continuing on that path. Then, consider how much improved their situation could be by expanding on the original strategy.

But that can only happen following a time out once the wealth has been transferred and the new realities of their suddenly improved situation have had the chance to soak in. Being smart about investing the windfall could be the key to reaching early retirement sooner than initially planned, enjoying a less stressful monthly budget, or just savoring the reassurance that comes from having additional resources at their disposal.

Above all, they can have the satisfaction of knowing the money wasn’t wasted. The new car smell eventually fades, luxurious getaways to exotic destinations eventually end, and today’s “gotta have it” pleasure boat can be passe tomorrow. A soundly based financial strategy lasts.

Make sure your client understands one last thing: Windfalls are like being struck by lightning. Just because it happens once, there’s no guarantee it will ever happen again. So be sure to make the most of it when it does happen. 

Read the Advisor Perspectives article here.