Rod Tyler, founder and financial advisor at The Tyler Group Financial Services in Regina, remembers vividly when he was a graduate student living in the town of Leaf Rapids, Man., in the early 1970s, where three $1-million-winning lottery tickets had been sold at the local convenience store within the span of a year.
The first individual to receive the windfall was contacted over the phone by a stranger from the United States, who promised to double the winner’s money if he sent it to that stranger. The winner never saw his money again.
The second winner was a young man who worked in the nearby copper mine and tore through his winnings in less than a year, buying three luxury vehicles and giving many newfound friends the royal treatment.
The owners of the third winning ticket were a schoolteacher couple, who said very little, left town at the end of the term and were never heard from again.
“I suspect they did okay,” says Mr. Tyler. “But what does that tell you about the other winners? Either they weren’t satisfied with $1-million and were prepared to take the risk of losing it all, or they thought they would never run out. That can happen when you come into sudden wealth. Like the gambler’s fallacy, they think they’ll do it again and again. Money can ruin people in a hurry.”
And as a significant amount of personal wealth has begun its transfer over to the next generation, many Canadians will experience a sudden shift in their financial status – acquiring roughly $1-trillion by 2026. According to a recent report from BMO Wealth Management entitled, “A Sudden Windfall: A Blessing, Not a Burden,” most of that wealth will appear in amounts these people have never before managed on a daily basis.
Whether acquired through an inheritance, lottery winnings or a legal settlement, sudden wealth can lead to stress, guilt and can overwhelm the recipient. In these situations, advisors can play a crucial role in preventing clients from making poor decisions by not only providing prudent investment advice, but also by acting as a sounding board as they adjust to a new reality.
“Most of the time, I have to pull [these clients] back into reality and emphasize the prudence of long-term planning,” says Steven Miao, senior vice-president, managing director and portfolio manager at BMO Nesbitt Burns Inc. in Toronto.
For clients prone to overspending, Mr. Miao will establish more frequent contact and suggest they check in before making major purchases to ensure they have enough cash flow to sustain them.
“In the beginning, they become more confident and feel like they can make a lot of decisions on their own. They might go on a spending spree, which is never the right thing to do,” he says. “After three to six months, they’ll say, ‘Why did I do that? That’s not fun anymore.’ ”
The first thing Mr. Miao advises his clients to do after a windfall is absolutely nothing. “Have a cool-down period and don’t rush into anything,” he says. “Then, we set up a meeting during which we assess key factors such as: What do you really want? What have you always wanted to do? What’s your main objective and who will it impact?”
Although some clients might say they always wanted a Lamborghini, after careful consideration, they usually reveal they want to share their windfall with their families, says Mr. Miao.
That desire to leave a legacy – whether to family, friends or charity – was the most frequently cited goal of Canadians surveyed for BMO Wealth Management’s report, along with paying off debt (both at 64 per cent). And as the inter-generational transfer of wealth begins to take hold, the mean age of high-income investors also is dropping rapidly. In fact, a new study from the Spectrem Group in the United States found that the mean age of investors with more than US$25-million dropped to 47 years of age in 2018 from 58 years old in 2014.
These trends mean that candid conversations between generations are more important than ever before, says Mr. Miao.
“Not having those conversations, especially about sensitive topics such as drafting a will and the transfer of the estate, appears to be a major reason for poor retirement and estate planning,” he says. “I encourage the seniors of the family to talk openly with younger members and to hold a meeting with them and myself so I can coach them on how to leave a lasting legacy.”
After all, if the windfall is substantial enough, it affects family members too, says Brad Sarna, an advisor at Scott Wolfe Management, a division of Manulife Securities Investment Services Inc., in Headingly, Man.
“These events give clients and advisors a great opportunity to take a big step back and reassess the big picture,” he says. “In planning, we can sometimes get caught up in the fine details, but it’s always important to review your ultimate goals periodically and to ‘find your why.’ ”
Most of his clients’ financial windfalls come from the sale of their business or property. Well before the pen hits the paper on the sale, Mr. Sarna estimates the net results to the client and begins a discussion.
“We address how much capital they will be receiving, the tax implications and what their next day, week, month and year will look like,” he says.
Mr. Sarna also advises clients to establish a documented financial plan, review priorities regularly and check off goals as they are achieved.
“We drill down a lot and it’s amazing what comes out at the end of the conversation. We often find out things we didn’t originally know about: legacy wishes for grandchildren, charitable intent, desires to volunteer, and many other great ideas,” he says.
“That is the fun part – really digging into a person’s value system and finding out what is truly important to them,” Mr. Sarna adds. “Being able to help guide them on their way to achieving things that were once beyond their wildest dreams is quite a journey.”