The circumstances surrounding a large inheritance usually involve a combination of emotions — sorrow over the loss of a loved one and appreciation for the financial gain. Conflicted feelings on top of indecision about what to do with an inheritance may have clients in this situation seeking your guidance to help avoid any pitfalls.
To help clients wisely guard and grow their new-found wealth by keeping things in perspective, consider using these three steps:
1. Manage Emotions
More money can lead to more stress. For clients who aren’t used to having a substantial amount of readily available cash or a large portfolio, the sudden influx of funds may lead to irrational purchases (e.g., a new car, bigger home, dream vacation, etc.). While a modest amount of splurging is to be expected, most don’t realize how quickly their fortune can disappear. This is evidenced by the nearly one-third of U.S. lottery winners who end up declaring bankruptcy.1
The Global Organization of Stress reports that 75% of Americans carry chronic stress, and that may lead to questionable financial choices.2 Add the stresses of personal loss and a sudden inheritance into the mix, and clients may make a series of poor and impulsive financial decisions. Conversely, optimism bias — the tendency for humans to overestimate the possibility of positive outcomes3 — may lull clients into paying more attention to the upsides of a decision they’re considering rather than the downsides.
As an advisor, it’s important to raise awareness of the potential risks, bring things back into perspective, and work with clients to manage their emotions as well as their investments.
2. Advise the Inexperienced
Heirs who’ve never had to make major investment decisions may not have a clue about where to start; perhaps that financial naivete is what brought them into your office seeking advice. Sometimes, they are paralyzed by an irrational fear of being taken advantage of or losing their new-found wealth. Many advisors suggest that, for the first few months, the newly rich place their inheritance in a safe account that can be easily transferred to other investments down the road without a penalty.
Should your clients choose to heed this advice in an inheritance situation, the “delay” is a good time for you to build trust and strengthen the relationship, determine appropriate risk tolerance, and discuss various portfolio options. For someone who has little experience in the market, financial jargon and the array of opportunities can be extremely confusing. Be patient, and seek out products that maximize your clients’ investments and cater to their unique levels of financial understanding. With time, clients managing an inheritance will likely be able to approach investing with a clear head and confidence in the future.
3. Determine the “What Next”
Some clients plan their investment strategies for an inheritance but do little to plan what they’ll do with the money once they start withdrawing funds. It’s important to ask, “What’s on your wish list?” Is it a vacation home or travel? Supporting a charity or helping family members? Help your clients assess priorities and rank them in order of greatest importance. Then, help them determine when and how to use the money to reach those financial goals.
Conversations about estate planning should also come into play. Encourage your clients to seek legal assistance in drafting a comprehensive estate plan so that funds are distributed in accordance with their wishes.
One of your key strategies during a transfer of wealth should be to engage the next generation and show your value as a trusted advisor. Our Building Relationships With the Next Generation infographic provides quick and easy tips to build trust with the children and family members of your clients. Simply click on the button below to access this valuable reference tool.
1Benzinga, Out Of Luck: Lottery Winners Who Have Gone Bankrupt, October 28, 2018
2CNBC, ‘Stress Brain’ Can Lead to Bad Financial Decisions, November 20, 2018
3USA Today, The Downside of Being Up. Or When is too Much Optimism too Much?, January 26, 2018