Inheritance.
On TV, you never see it coming. Someone buys a lottery ticket and the next day he's a multi-millionaire. A person's digging in the backyard and suddenly there's a gusher of oil. A family is cleaning out their attic and they find a lost Picasso.
Real life, of course, is a lot different from these clichés. Most of the time, you can see a liquidity event coming—sometimes, years in advance. The business owner knows she wants to sell. The inheritor knows his wealthy parents are in failing health. The executive knows she's sitting on a substantial options package. All these individuals know that one day they will be very "liquid wealthy".
So why are so many people unprepared for liquidity events?
I'm not sure I can answer that. But make no mistake; it's something I see a lot. People come into my office who have just gone through a liquidity event—smart, savvy people at the top of their game intellectually, financially, socially— but they haven't asked themselves even the most basic financial questions about an event they know is coming. I find this is often true even of those who have put in a lot of effort to become wealthy (business owners for example). In many cases, they've spent so much mental energy getting where they want to be that they haven't thought that much about what happens next.
No matter what kind of liquidity event you go through — business sale, inheritance, divorce, cashing in options, etc. — you need to focus on four critical questions before you go through a liquidity event. While you may not come up with all the answers, at least by asking the questions, you can start the mental process of developing tangible goals and plans.
What will this mean for my life?
Liquid wealth has the potential to change your life — this is obvious. You're going to have a lot more freedom than before and many of your existing financial worries are going to be eliminated (only to be replaced with new complexities). Your relationships with friends and family may change as well, and not always for the better.
Some individuals will resist such change. I've worked with several old school business owners who hang on to their lifestyle even more fiercely after a liquidity event, almost to prove they haven't changed. I've also met some individuals who have been completely turned upside down by liquid wealth. Wealth seems to amplify their emotions (both good and bad) and their tendency to make impulsive decisions. For them, liquid wealth is an incredibly disruptive force.
It's difficult to know exactly how you'll react to newly liquid wealth. But at the very least, by thinking about the event before it happens, you can adjust mentally, and take appropriate steps to minimize the disruptive effect of change.
How much 'cushion' will this liquidity allow me?
Do I have to work again? Do I want to work again? What's on "the bucket list" — and why? What legacy do I want to leave behind: for my family, and my community?
A liquidity event gives you unprecedented freedom to answer these questions in whatever way you want to. But it also presents an unprecedented temptation to be distracted from important goals — by spending on the wrong things, paying attention to the wrong priorities, etc. This is something I've seen quite a bit during my career.
Take the time now to identify important goals. A little advance thinking will allow you the opportunity to stay focused and make the most of the opportunities that are about to open up for you.
What might this mean for retirement?
What does retirement look like? Now that you have the freedom to do what you want, what do you really want to do next? Many people assume these questions are easy to answer, but in my experience, many people who go through a liquidity event have a hard time answering them. Again, in my experience, this is particularly true of business owners — sitting back and taking it easy usually isn't part of their makeup.
For some, "retirement" is more about a change than a permanent break with the working world. These people are looking forward to their next business, or to launch a business idea they've had for some time. And of course, some take the opportunity to launch themselves fully into charitable, corporate board, or community work. Any or all of these choices can work for you, but thinking a lot about them before the event is a very good idea.
What does this mean for the children?
This is a question I see again and again, in research and surveys, but also in my own conversations with high-net worth individuals. Now that we're wealthy, what will happen to the kids? How will wealth affect their development? How can we ensure they are driven, ambitious hard workers rather than lazy spendthrifts?
There are no silver bullet answers to these questions. Only by understanding family lessons and financial principles before and during the liquidity event can you better ensure the kids have a healthy relationship to wealth, rather than being defined by it. After all, between the media, insider reporting, and people talking, the kids will likely hear about it anyways.
Thane Stenner is founder of Stenner Investment Partners within Richardson GMP Ltd., as well as Portfolio Manager and Director, Wealth Management. Thane is also Managing Director for TIGER 21 Canada (www.tiger21.com/canada). He is the bestselling author of ´True Wealth: an expert guide for high-net-worth individuals (and their advisors)'. (www.stennerinvestmentpartners.com) (Thane.Stenner@RichardsonGMP.com). The opinions expressed in this article are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Ltd. or its affiliates. Richardson GMP Limited, Member Canadian Investor Protection Fund.