More money, more problems: What to do if your client wins Powerball
Four years ago, a financial adviser got a call from a prospect who did not want to disclose any information over the phone. At the in-person meeting, the woman and her husband told the adviser that she had won a $1.2 million jackpot.
A few very lucky lottery players could find themselves with newfound fortunes this week, with Powerball and Mega Millions jackpots each at more than $400 million.
And a few financial advisers might also find themselves with valuable new clients.
Regardless of whether there is a single winner in each lottery or if the jackpots are split among multiple people, the prizes are large — as are the risks of not having a solid financial plan.
Some big lottery winners reportedly end up going bankrupt, and there are many instances of other misfortunes that have followed such windfalls.
A GOOD PLAN
Four years ago, financial adviser Diane Pearson got a call from a prospect who did not want to disclose any information over the phone. At the following in-person meeting, the woman and her husband told Pearson that she won a $1.2 million lump sum in a Pennsylvania state lottery. Pearson, the new client said, was the third person to find out.
“They had not told anyone — no one in their family. This was really well thought out,” said Pearson, whose firm is Pearson Financial Planning. “That’s exactly what I would do — sit down with an adviser and put a game plan together.” That plan included an updated estate plan and ensuring they had proper insurance coverage.
At the time, the couple had a combined income of about $80,000 — she as a drugstore co-manager and he as a grocery store co-manager, Pearson said.
“This was changing their lives forever, and they kind of knew that,” she said. “They wanted to be prepared and make the right decisions up front, instead of blowing it.”
That couple, now in their mid-50s, has upgraded houses and paid off a child’s student loans. The woman quit her job, and the man will be able to retire a little early, at 62, Pearson said.
Adviser John Bovard, who recently founded Incline Wealth Advisors, compares lottery winners to professional athletes — people experiencing sudden wealth that, if it’s not carefully planned for, can vanish quickly. Bovard has an NFL client who is currently in his third contract.
Such clients should look at this overall wealth in three buckets — one for preservation, one with a balanced portfolio and a third for riskier investments, he said. Until NFL players are in their third contract, they should plan on saving at least 50% of their income, he said.
OUT OF THE WOODWORK
A common scenario for the newly wealthy is that old acquaintances or extended family members come knocking, advisers said. Financial professionals can serve as intermediaries who help protect accounts from being drained by an abundance of well-intentioned lending and gift-giving.
Bovard, for example, said clients should have a form they give to anyone asking for money, which the adviser can review.
“That can oftentimes be used as a good deterrent for the majority of people asking for money,” he said.
Pearson said she advised her clients to run all of that by her first. “We had them let us be the bad guy,” she said.
REMAINING ANONYMOUS
“If you live in one of the handful of states that allow lottery winners to remain anonymous, do so,” financial planner Danielle Harrison wrote in an email. “And for those who don’t, put the ticket in a safe place and make sure you have your team assembled before notifying anyone of your fortune.”
Brent Bell, owner of Bell Financial Planning, recommends putting a winning ticket in a safe place, even before signing it.
In some states, “hiring an estate attorney to set up a trust and allowing your trustee to sign the ticket allows for you to potentially set up a barrier between you and anyone else that may want your money,” Bell wrote in an email. “If your state doesn’t allow for this type of anonymity, then I would recommend signing the ticket right away, locking up the ticket again and then deciding on whether to hire someone to address the media for you.”
ASSEMBLING A TEAM
Lottery winners need a good estate planning lawyer, an accountant and a fee-only fiduciary adviser, said Harrison, whose firm is Harrison Financial Planning.
“And finally, who I would deem the most important person on the entire team — a therapist well versed in helping clients understand their relationship with money,” she wrote.
More money can indeed cause more problems, including feelings of guilt, anxiety, isolation and strains on relationships, she said.
Lottery winners who later suffer financial ruin “almost never had an adviser,” said John Power, principal at Power Plans. “I’d want to know about their family, help them reshape goals, think about charitable uses to avoid some taxation.”
BIG BUMP IN BUSINESS
Firms that take on such clients can see their assets under management more than double in an instant. In 2013, for example, Jacksonville, Fla.-based Madden Advisory Services was hired by Gloria Mackenzie, then 84, who received a lump-sum payment of $371 million from Powerball, or $270 million after taxes. At the time, the four-person firm managed about $203 million. The bump in assets would allow the firm to expand in order to help the client, the firm indicated.
Having a big new client can also help a firm hire up and boost its breadth of in-house expertise, Bell said.
“Having a client of this magnitude would also mean that my firm could provide more pro bono financial planning for families and spend more time to educate children and young adults to be more financially successful,” he wrote.
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