Sudden wealth: life after a windfall

As Millennials prepare to take over the position of ‘largest generation’ from Baby Boomers,^disclaimerit’s time for future heirs to consider if they’re truly prepared to manage and grow their wealth.

People can come into wealth in several ways – and it’s not all lotto wins. Inheritance is common, as is the sale of a significant asset or business. Or, a person may have been wealthy previously, but simply hasn’t had to manage that wealth by themselves before, such as after a divorce.

Wealth presents undeniable opportunities – and its abrupt acquisition can affect more than bank account balances. Sudden wealth can impact how a person feels about themselves and how their friends and family feel about them, changing behaviour and relationship dynamics. There is even a colloquial condition – Sudden Wealth Syndrome, or SWS – which recognises the distress some individuals suffer as a result of the guilt, confusion, isolation or fear that can arrive on the heels of their newfound wealth.

Take your time to decide your purpose and plan of action

Justin Phillips, a senior investment advisor with ANZ Private, says that it’s important for someone who has come into wealth to take the time to privately process their emotions before acting, and perhaps speak to a professional about how they’re feeling and where they want their life to go in the future.

“There’s no harm in reaching out to professionals to discuss those thoughts or emotions, and to help develop those goals,” he says.

A clear head helps in setting goals and understanding needs which, Phillips notes, is where the planning starts and where anyone who has acquired wealth needs to begin – rather than leaping into making significant lifestyle purchases.

Ask the right people the right questions

Phillips suggests asking questions – firstly, of yourself.

“What kind of lifestyle do you want to enjoy? Where are you now? What will things look like in the future? And – you might think this is a silly question, but it’s not – how long does the money need to last?”

Although the answer to those questions depends partly on the quantum of wealth, Phillips says they need answering before anything is done with the capital.

“Is it [the windfall] just to fund your current lifestyle, for your lifetime? Or are you going to give it as a gift? Or is it going to form part of your estate and will it ultimately go to your children? What you do with it can take many forms. It’s not just about how you want to spend the money; it’s thinking about how you want to develop your financial goals.”

Phillips suggests being patient and doing research before getting started, which includes finding good advisors – and not just financial advisors, a good solicitor and tax accountant to receive tax, structuring and asset protection advice is also critical.

“The reality is that there can be issues that require a specialist, like an estate planner, to really delve in and get to the nuts and bolts of what you need. And it does come down to taking your time and being patient as you go through and manage that process,” he says.

“A lot of things will come out that you haven’t had a chance to think about before – it’s that old adage, ‘you don’t know what you don’t know.’ And that’s where having goals and understanding your needs is important, because it sets you on a course and helps you ask further questions.”

Asking questions is also essential to getting the wealth management solution you need.

“Ask a lot of questions,” Phillips reiterates. “On the surface, something might seem simple, but in reality, it often isn’t. Even ask your advisor questions that include ‘am I missing anything, what other questions should I be asking’. This helps develop your own understanding, but it also aids in getting to know your advisors, developing deeper relationships and as you grow your knowledge, helps understand their answers.”

Recognise and avoid common pitfalls

Phillips says the most common mistake of people who acquire sudden wealth is thinking of the capital as something to be spent, not as a tool to earn future income.

“In the early days, they overspend on luxuries and lifestyle, and don’t really think about how that’s actually an income or return source that is required to fund their lifestyle,” he observes.

People generally underestimate the amount of capital required to generate a return to fund their lifestyle, simultaneously underestimating the cost of their new, upgraded lifestyle which often increases considerably. This is especially the case when new ‘lifestyle’ assets such as holiday houses, boats or other toys may be acquired.

“There is a cost to holding lifestyle assets. While you can often get a return on these assets when sold, or sometimes a small ongoing income return, in general there’s a drag on the immediate growth and income production from your overall portfolio.”

This feeds into the second mistake Phillips sees: the illiquidity trap. New investors typically fall back to what they know and understand, usually property. And while property in all forms can turn out to be great investments, costs to hold these investments can be very high with a significant rise in recent times, and investors typically forget about the liquidity risks.  

“When managing your overall wealth, you need to think about liquidity buckets. Some assets can be liquid, assets like shares and listed bonds which are easily tradable. And then there are things like commercial property, which are definitely an income-producing investment asset but without the same liquidity,” he says.

“That can be a problem when something happens to make people rethink how their portfolio needs to be positioned or simply to raise cash for an unexpected emergency. Liquid assets can be easily sold or repositioned to take advantage of economic cycles; but this is not the case if you’ve overallocated to more illiquid assets.” Sadly, this issue may not pop up until there is a family or economic crisis when it is often too late.

And the third mistake: either focussing too much on a small portion of their portfolio, or taking a ‘scattergun’ approach rather than focussing on the overall asset allocation.

“Often, a person will pick a handful of stocks or a small portfolio of equities and think they’re going great guns, but they’ve left the bulk of the assets in a more conservative framework. Or they’ll just take up investment offers when they come through rather than checking how or if the investment fits within their overall plan,” Phillips says.

“You need to think about your overall asset allocation. What does your current asset allocation look like – and what does it need to look like in future to get you to your end goal?”

It’s never too early to make a start

While there is rarely an immediate obligation to do something with sudden wealth, if an individual knows they will be coming into a large sum – such as in the case of inheritance – it is never too early to learn how to manage money.

“From an education perspective, it’s never too early to think about your financial goals and understand the options you have in terms of wealth management and asset allocation,” Phillips says.

“We always recommend people start their wealth creation journey very, very early. When it comes to investing, time is your biggest friend. So even though you mightn’t have the means right now, starting early with your education, your savings and your investment goals is critical to getting ahead in this world.”

What to do if you’ve suddenly come into wealth

1. Be patient. Take your time to process how you feel and what you want the rest of your life to look like.
2. Do your own research and ask questions until you understand what you need, what you want, and what you are being told.
3. Find skilled professionals you can trust. Visit several before you settle on the right advisors for your needs – you should understand how the relationship is supposed to work before entering it.
4. Understand your current needs, what your future goals are, and what you need to achieve them.
5. Ensure your actions are based on wealth as a tool to provide you with an income and a return, which can grow with the right care – rather than a pool of capital to be drained.
6. Diversify your portfolio as you build it and be prepared to nurture and change it over time.

How ANZ Private can help

ANZ is a bank with a long history of managing wealth, with strong governance and highly accredited and well-trained advisors. We can offer not only financial advice but also connect you with a network of estate planners, so you can be sure we’ll be there with the advice and service for your goals and needs.

• Talk to your ANZ Private Banker directly
• Contact us by requesting a callback
• Learn more about ANZ Private