Clients who have waited a long time to become what they consider to be rich, either through a settlement, real estate sale, inheritance or — prevalent in Southern California — a hit movie or screenplay, often want to make up for lost time and go on a big-ticket buying spree.

Buttressed by the idea that the good times will never end, some tend to put real estate at the top of their shopping list. Other targets of the newly wealthy often include boats, jewelry, horses and new “investments,” usually in industries where they have little or no experience or expertise, such as restaurants, complicated real estate deals or something completely different like vitamin supplements or a fleet of food trucks. When dollar signs continue to flash in their eyes, how does an advisor rein in the extravagant client?

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A good way is to be direct and honest and to be prepared to provide data and specific examples. “If the pilot’s not renewed or the next screenplay flops, the money train can quite suddenly hit a wall,” says Los Angeles-based advisor Jeff Fishman of JSF Financial, which serves “new and old money” clients, many in the entertainment and real estate industries. “We need to position so-called suddenly wealthy clients so their money can last beyond the usual temptations. No one likes to lower the boom but we’re prepared to have that talk.”

Not all of those who like to make so-called extravagant purchases are reacting to some sort of sudden wealth effect. Many diligent, otherwise stable clients may decide it’s their time to enjoy life. But do they need an entourage when a nanny will do? Do they really have room for several European sports cars in their driveway or a thousand-bottle, temperature-controlled wine cellar in the basement? Should they buy a minor league sports team? A racehorse? Or a personal submarine to keep them amused for the summer?

While these are issues advisors to the ultra-wealthy occasionally must deal with, whether the extravagant client in question is an entitled child of old money, i.e., a trust baby, or an up-and-coming day trader who promised her boyfriend she’d start her own record label to promote his rap group (and produce the video), when it comes to managing extravagance, a battle between the concepts of “need vs. want” frequently comes into play.

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The outcome is usually a tradeoff between wealth and personal issues such as age, health, marital status, dependents and the importance of establishing legacy goals combined with other commonsense considerations like: Is this truly the best allocation of your resources? Unlike a relatively sane process such as asset allocation or measuring risk tolerance, a client who feels they never have enough may be due for a reality check.

“Lots of people know they need to diet and exercise but how many really do it for the long term? When the economy’s behaving like it won’t quit and symbols of extravagance are all around, it can be tough to convince a client that they should put some substantial money away,” says Rye, New York-based financial advisor Beth Blecker, RFC, who largely works with a high-net-worth clientele, including many female executives. “I’ve told clients they need to go on a money diet. Some have the discipline, others don’t. There can be many conflicting emotions.”

A client’s perceptions about wealth may change over time as various factors come into play. Sometimes it can be due to receiving a sudden flood of money from an inheritance. Other times it’s a feeling that they’ve sacrificed long enough and want to enjoy life, or it can be ego-driven. Realizing the extent of one’s wealth, whether it’s new or old money, involves learning how to respond to the demands of solicitors, including philanthropic-, lifestyle- and business-based. It requires coming to terms with greater personal security and privacy concerns — real or imagined. It is dealing with the fact that if people view you as wealthy, they may treat you differently.

If a client tends to be a “financial loner” and avoids seeking or accepting help from others, there is an excellent likelihood role models (e.g., parents) gave messages of not trusting or relying on others. But there can be greater forces at play.

Behavioral Therapy? “A trip to Europe or the purchase of a Rolex is probably not the kind of event that would torpedo a client’s long-term finances,” says wealth advisor Robert Karn, CFP, of Farmington Connecticut. “Buying that third summer home or a house for the kids in an expensive area like New York City, however, might do it. At times like these, it’s imperative we prevent them from making a big money mistake that could negatively impact their financial future.”

Such observations are underscored by the findings of Victor Riccardi, a finance professor at Goucher College in Baltimore and co-editor of “Investor Behavior: The Psychology of Financial Planning and Investing.” With a focus on emerging research in behavioral finance, Riccardi emphasizes that a great deal of individual behavior often parallels one’s financial-literacy rate, including their likelihood to utilize the services of a financial professional.

“Those who’ve had experience with relatively large sums of money, and especially those who’ve worked with a financial advisor, are more likely to value a financial plan and stick to it,” he says. “Others may need financial therapy,” he says, noting that the success rate may not be as high when trying to convey this value message to a less financially savvy client.

“Someone who comes from a poor background, typical among professional athletes, [and] not used to handling large amounts of capital can easily develop poor financial habits,” says Riccardi. Some become compulsive buyers, others become hoarders. “Some feel compelled to help family and friends while others are overwhelmed by irresponsible handlers and managers.”

The so-called “wealth effect” is a reality as each segment of the global luxury market grew by 5% to nearly $1.2 trillion in 2017, according to the Bain Luxury Study (www.bain.com/publications). But this market’s demographics have shifted, with Generations Y and Z accounting for 85% of 2017 luxury growth, according to Bain, which forecasts that such growth will continue at a 4%–5% compounded annual rate for three more years.

While the high-net-worth client often has other concerns, such as privacy, personal security and protecting their fortune from any shocks to the financial system, they can be known to reward themselves. This is not necessarily a bad thing.

“When a successful client wants to buy what may at first appear to be an extravagant purchase, like a shore house, fine art or high-end pleasure boat, they’re apt to first discuss it with an advisor,” says portfolio manager Philip Kiernan, of Highlander Capital Management, LLC, Short Hills, New Jersey. “When someone who is not used to serious money suddenly has a big cash influx, say from an insurance settlement, they can often benefit from professional guidance to help make it last by tempering any sudden spending impulses they may regret in the future.” It’s not always clear if the wealthy are compulsive or smart when it comes to extravagance.

According to the Barclays Bank white paper: “Profit or Pleasure? Exploring the Motivations Behind Treasure Trends,” only 18% of respondents stated they own art purely as an investment, and only 21% believe it will provide financial security if conventional investments fail. The main reason for acquiring art is for the aesthetic pleasure it provides, according to the report. The wealthy also like to buy antique furniture, classic cars and investment-grade wine for the same reason.

Nearly 60% of respondents say they own precious metals for pure investment motivations, while 10% of them said they hold fine art for financial appreciation, according to the Barclays report. Such behavior, however, can have its rewards. In 2011, a Roy Lichtenstein painting sold for nearly $40 million. Thirteen years earlier its owner purchased it for $2 million.

Can We Talk? According to the Northern Trust report, “Wealth and Wisdom Across Generations,” psychologist and author Brené Brown says human beings are “wired for story.” As much as you may want to demonstrate your mastery of economics, advisors may find that when it comes to managing client behavior, providing anecdotes can be more effective than discussing abstract theory.

“Most advisors will agree that this business is more about understanding people than numbers,” says financial advisor Mark Snyder of Medford, New York. ”When I suspect a client may be considering some financially irresponsible behavior, I’ll take them beyond the numbers. I’ll often ask if they think whatever they have in mind is truly worth it. As the conversation progresses it’s important to make clients think past themselves and consider other wealth-management objectives. Is buying that boat, which likely will decrease in value and be expensive to operate, truly a good idea or would you rather leave a legacy? Some see the wisdom, others don’t.”

Providing so-called real-life, hypothetical examples can be especially helpful when trying to explain financial challenges to clients who may be entering a personal-finance red zone. As easily as people relate to other people it can be tough battling the live-for-today attitude. “We’re bombarded by images of extravagance on a daily basis. Temptation is everywhere,” acknowledges Fishman. “Often what we do is communicate that we’ve helped a lot of clients in very similar situations and these are the steps that have made them happy in the long run.”

Fishman, who manages several professional athletes in addition to those in the entertainment industry, likes to emphasize the importance of establishing an “emergency fund.” This typically is designed to cover about six months of living expenses and is invested in highly liquid securities such as municipal bond and money market funds. This is usually followed by a retirement plan that is described as “off limits,” to clients who may be susceptible to financial temptation. Another reality check for this group is often debt reduction.

No matter how much they may feel that they deserve a Rodeo Drive shopping spree, a middle-aged, working-class client with an upcoming balloon payment on a mortgage or children who are planning to attend college may be well served to deploy any “sudden money” towards reducing debt or launching a new savings-and-investment plan.

Will You Love It Tomorrow? Caution usually is warranted when a client’s desire for extravagance dominates the discussion. A client who has gone on a real estate buying binge may feel he made good investments, but an advisor may want to point out that the client’s feelings may change if he needs to raise cash and has trouble getting the needed price if he has to sell the property.

Similarly, the client in love with fine art may become frustrated if he insists on a high return before removing that Picasso from his wall. Like real estate but unlike stocks and bonds, illiquid assets can take time to sell. Fine art owners tend to require a 62% price increase in the first year after purchasing them before they are willing to consider a sale, according to the Barclays report. Individuals often demand a price that is much higher when selling an item than they themselves would be willing to pay for it.

“We tend to aim for steady but unspectacular growth in low- to medium-risk securities in these cases,” says Fishman. In such conversations he frequently emphasizes that there is already enough risk in their financial lives.

“Clients can sometimes be motivated to invest when they see the potential behind tax-advantaged plans combined with the feel-good aspect of helping a child or grandchild,” says Snyder with a nod towards 529 college-savings plans. Such state-sponsored plans typically offer tax-free investment growth when used to pay for qualified, higher-education expenses.

“We keep the conversation realistic,” says Karn. “We tell them things may be different 10 years from now. As things can change, clients need to see why they may or may not be comfortable with such a decision in the future. We’re okay with being accused of being overly cautious. When it comes to safeguarding a client’s assets, I’d rather err on the side of caution.”

Joseph Finora is a consultant to wealth advisors. He can be reached at jfinora@optonline.net.