According to a recent compilation of survey material made available by the Family Wealth Alliance of Chicago, 2.5 million households in North America boast a net worth of $1 and $10 million—that’s more than one in 100 households. Further, there are more than 70,000 households with net assets ranging between $10 and $100 million. More are being added to those rolls monthly.
Everyone who becomes rich winds up in the happy position of owning considerable new wealth must decide just what to do with it. There are plenty of options and an array of advice givers delighted to offer their suggestions. But, in the end, individuals and families must decide how to handle their money. It is a very personal matter, indeed, much like choosing friends.
Most rich Americans have made their money in businesses or professions that they either created or inherited and significantly enlarged. The process of wealth accumulation is typically gradual and some insight into investment opportunities beyond one’s business or profession usually grows with the passage of time. That process also assists in the development of some “street-savvy”—the knowledge that there is no limit to the pitfalls and scams waiting to trap the unaware. With luck, evolving also is the good sense to spot such hazards.
Unusual Opportunity Anyone?
In contrast to the gradual accumulation of wealth, sometimes wealth is inherited, lucked into through a rapid business growth, or awarded in exchange for talent in professional athletics or the performing arts. Surveys have shown that there is greater risk of loss of these fortunes because of the general lack of experience and vulnerability to fraud. Great actors and athletes are not necessarily endowed with level heads and MBA degrees.
The problem of loss became so great in professional football that the NFL Players Association created a financial boot camp for players a few years ago, geared especially toward rookies coming into wealth for the first time. Being easy prey to the fraud and deception of hucksters and con-artists is an annoyance that had grown into a crisis. In one case, 78 NFL players were bilked out of $42 million through a phony investment company, Global Sports and Entertainment, run by a charismatic Californian named Donald Lukens. Tampa Bay Buccaneer, Simeon Rice was taken for 2.4 million alone as he learned from the scam that his remarkable defensive intellect and skill did not extend to the investment analysis field.
In addition to losses due to dishonesty, there are many investment opportunities that are completely legitimate, sound promising, look as though they will succeed, but do not. Often, such failures arise due to changes in markets and consumer preferences. However, sometimes the ability to implement a great idea simply is beyond the investments’ creators and managers.
Such possibilities explain the results of a recent survey by Chicago based Spectrum Group of a cross section of investors with long-term net worth’s of $5,000,000 and above. Spectrum found that 43 percent of those surveyed preferred to hold the majority of their assets in investments offering guarantees on principal and yield. In fact, Spectrum’s annual survey has shown a tendency toward greater conservatism in recent years. The reason cited generally: “Why take much risk? We have this money now but may not be able to replace it if it is lost.” The balance of these portfolios tends to be diversified into stocks (mostly domestic large company issues), real estate, and other alternative investments involving some greater risk, but risk that is carefully diversified in an attempt to reduce it as well.
To Do List
So, if you come into money suddenly, say from the sale of your business or when a developer buys your farm for the new mall’s site, what should you do?
First, most experts today recognize and actually approve of the great temptation to spend a little of the new money in a sort of “mad money spree.” However, they recommend containing that urge to no more than 5 percent of the windfall’s after-tax total. The balance of the funds should initially be placed in secure, interest bearing accounts for a holding period of at least a few months. This quiet period is perfect for getting used to the new financial situation. During it, careful deliberations on various options for the funds should also ensue.
Sometime, in those first months before investments investment decisions are made, advisors should be selected to help with the management of the funds. Even if one already has a financial advisor when attaining the new wealth, the advisor’s credentials should be reconsidered in light of the new situation. Most advisors like to consider themselves as counsel to the rich, but the reality is that some that are fine with smaller sums do not have the training and skill for the proper management of larger amounts. Also, an attorney will be needed for estate planning and an accountant for tax counsel and forms preparation. Advisors who work regularly with the most affluent people in a particular area will know who the best regional professionals to team up with are.
For big league investing, just as with investing smaller sums, the knowledge of both one’s objectives and one’s tolerance for risk are important components in the equation. Both must be considered by the investor and the advisor because both are key components to the formulation of an appropriate investment policy and portfolio.
Thoughtful Spending
When considering goals, one should think both long and short term. A good financial planner can assist in that process by illuminating the possibilities and stressing the realities. While many newly rich will feel that their $1 million windfall can be spent on various lifestyle improvements and provide a large income for life as well, the advisor knows that such a viewpoint is unrealistic. Experts hold that spending no more than 4 percent annually of one’s nest egg is a necessary limit to ensure its lasting for decades. For $1 million that amounts to $40,000; a nice sum, but a hardly lavish one. On the other hand, surveys show that most people coming into money believe that the amount they can safely take from their invested pool annually is more like 10 percent, the approximate, long-term average yield on large capitalization stocks. Sorry, that math will not work.
As to another significant withdrawal of invested funds issue, some financial planners recommend that their clients establish a side fund to handle the expected requests from family, friends and charities for financial assistance. The fund forces a limit on how much money may be used to accommodate such requests, thereby containing the spending involved. Another method of containment is to compel a seeker of financial assistance to go through the investment advisor first. The advisor can then act as a buffer between the parties. The typical position taken by the wealthy owner in such an arrangement is to send the person seeking financial help directly to the advisor to see if the outlay can be afforded.
Most importantly, one should enjoy the good fortune and avoid becoming overly stressed about it. Large sums of money are sometimes extremely worrisome to those who own them. They may even feel some guilt for having acquired the fortune in the first place. However, the best way to get comfortable with the situation is take some time to identify one’s personal and family goals for the funds and have competent and trustworthy investment counsel to help with goal recognition and attainment. With financial success should come some fun and good works, both of which have been shown to be very satisfying.