How to Rein In a Client Who Strikes It Rich

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?

(Related: If Wynonna Judd Needed Financial Therapy, Maybe Your Clients Do Too)

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.

(Related: Planning for the Suddenly Wealthy: Call In the SWATT Team)

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.