Life & Legacy

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Hannamari: Hello everyone, welcome to this new episode of the Life & Legacy Podcast Series. My name if Hannamari Koivikko, and I today am here with my colleague Alfonso Baigorri. We are wealth advisors with the International Private Bank.

Alfonso: Hi Hannamari! Happy to be here today! 

Hannamari: In todays’ episode Alfonso and I will be discussing the impact sudden wealth may have on you and your family, in particular from the point of view of emotional intelligence. In our practice we have learned that unexpected wealth, initially likely a positive surprise, comes with a wide array of challenges of its own. As wealth advisors, we study these cases and believe that with timely and proper planning you can avoid most of the potential pitfalls that may arise from the rapid acquisition of a large amount of wealth. 

I work with entrepreneurs deeply passionate on their business, and the wealth comes almost as an unexpected positive surprise. Wealth is merely a side product of concentrated hard work. It was not necessarily ever the goal to gather wealth, and therefore there may not have been that much time or interest in planning the effect sudden wealth can have. Often, the family may only learn about the deal five minutes before the deadline. 

Alfonso: Individuals may suddenly come into large sums of money in many ways. In my practice, the most common is an unexpected inheritance, where the heir was not aware of the size of it, the magnitude of the wealth, or a few times even ignored that it was coming, maybe because money talks are such a cultural taboo; there is also the entrepreneur type, that is so talked about now in the media, and although there are a number of growth paths, with regards to time it takes to create, and size of the wealth, there are those who are hugely successful in creating a significant amount of wealth typically by taking their company public; of course we remember the dot.com generation and most recently we now have the crypto billionaires, who really have amassed huge amounts of wealth in a very short time span. There is also the professional athlete, the lottery winner, the performer, and other types, which I don’t see much in my practice, but each of them with their own profile and challenges.

Hannamari: Indeed, and we have helped to map the liquidity needs, security issues, educationaleducational plans, organizing charitable giving and so forth matching those profiles and challenges. That said, if the family is not included in the conversation and the emotional impact is not managed, all plans are only one third ready. Informing the family of the wealth is just the first but very important step. Wanted or not, the wealth does have an impact on the whole family, not just the principle recipient. In Scandinavian countries for example, managing the publicity is tricky. Newspapers publish the taxable income of the wealthy families. Once, a child was not aware that the father had sold multimillion business before his face was on the front page of the local financial news. Think about what kind of a discussion that generated in the school yard! 

Alfonso what are some of the effects that you have seen in families who unexpectedly come across significant wealth?

Alfonso: Regardless of how the wealth was acquired or created, there is a “burden” to that type of wealth. Wealth cannot be hidden, psychologically speaking. It’s important to know and recognize this as advisors. The feeling of burden emerge to even those who have been raised and educated to understand their position of privilege. A person may feel separate and different from other people. Your relations with everyone, including your family, changes-wealth is a great disruptor in that sense. If you have young children, you can’t hide the wealth from them-they will find out though social media or friends. Depending on how the wealth was acquired it may also come with a feeling of guilt. This is not uncommon. It is important to remember always that we are dealing with people, not the wealth or an enterprise. Those are just the objects around which a whole bunch of complex and human emotions revolve.

Hannamari: Famously, money cannot buy happiness, but I believe we both have seen the unwanted impact on the second generation. Burden that you mentioned may arise also from the need to preserve the family estate or to manage the assets. A family I have worked with created immediately after a sudden sale of their company a full next generation program. They saw how perplexed the children were, when the parents suddenly were more at home. Was the life now going to be all about fast cars and fancy restaurants? The parents in particular wished to avoid the golden cage syndrome, Living in luxury with no possibility to impact or mold your own destiny. Getting use to the new lifestyle can also take some time, and for example for this family, it took about three years to find the balance. The children were in their teens, which is of course always more delicate. 

Alfonso: Wealth amplifies all things, good and bad. Think of a person, a family, that has become wealthy and now have to learn how to save, how to spend, how to make sensible investment decisions when they have never had to do it before, at least not in the scale they will have to now. One practical way to effectively deal with this new reality is through a goals-based approach. A goals-based approach is a way to organize your money with intent. Try to assign your money to different “mental accounts”; for example, think of how you typically spend a bonus payment and a salary; do you have “play” money and “safe” money?; what are your outstanding commitments (mortgages, college, etc.); when you consider the sources of your money, your commitments and how that may cause you to use the accounts differently you can establish a physical framework, or “buckets” for your money that will be productive. The idea is to regularly review the framework to see if your money behaviors truly align with what you are trying to accomplish. From a practical perspective, a good framework is to organize your money in four buckets: liquidity (cash), lifestyle (money to spend), legacy (what your heirs or foundation will receive-but keeping some degree of flexibility here in case your lifetime buckets are drained) and perpetual growth (while the other three buckets are meant to be consumed, this one is to be invested long-term and for the benefit of generations to come who will become stewards of this bucket). 

Hannamari: What you mentioned about learning to live with the wealth reminds me of one situation where the money really intimidated and almost emotionally cripled the family. Family had lived fairly modestly and in particular the father had experience some financial hardship when he was a child. When he through a series of consciences became wealthy his biggest fear all of a sudden was to lose it all. Instead enjoying the situation or sharing it with his family, he went on haggling the prices, overdoing budgets and worrying over his investments to a point where his advisors became overwhelmed. For him, the right way out was seeking specialist counselling and involve his family to that conversation. 

Alfonso [ON HOW COMMUNICATION CAN BE HELPFUL]: A big issue is how to start a conversation about the newly acquired liquid wealth. You cannot just ignore it. Here are some tips on how to start such a conversation: First, one of the most helpful things to institute a process of family communication is to have regular family meetings. Start somewhere-it doesn’t have to be perfect. It is likely that everyone will be reluctant to talk about the money. But go for it. Second, provide a space where your family can feel safe to share how you feel, listen to each other share how everyone feels. It is natural to feel unsecure about now having money and how to go about it. Bring an external advisor to start teaching basic financial literacy. Third, keep the family meetings as regular, maybe 2-3 a year, as possible, especially during the first few years. Make them fun too-choose a location or an activity that could also be enjoyed by everyone. The business was likely the center of the family’s life, something they knew and control. The center of gravity needs to shift now to the money. Fourth, include storytelling, like how the business started and how it all came to be, as part of the meetings. Root the money to the history of the family. That will help everyone to gain perspective. 

Hannamari: One important aspect we both have mentioned is indeed time. If the wealth is sudden, the adaption to it is typically all but that. Of course it can happen that all happily and seamlessly flow into the world of new possibilities. However, like with many things, it takes at least one year adjust, two to make it a common and three to a routine. Money can change the life also in the way that it can buy time; family can afford to employ more services and even personnel. However, like one client said to me, ; “Instead of taking care of my garden I now need to take care of the gardener. I just realized I like mowing my own lawn, but can’t really find a way to say that to him.” Adapting to money is also about building new boundaries. The same client also got a family officer and an assistant. After a year, when he was complaining that all his decisions were taken for him, he took a step back and re-evaluated the situation. The gardened is still there, but no longer allowed to take care of the holiday home and the family officer and assistant got morphed into a one person who was more suitable to the family’s needs. 

Alfonso: As advisors, our job is to help the family assemble a professional team that can address all challenges in a coordinated fashion and help the family members develop a process that can enable them to solve problems independently. A few best practices here are: first, creating the right expectations from the beginning, defining clear potential outcomes, milestones, and timelines for the work ahead. It is important to pause for a moment and reflect on what has just happened. Second, and the most important expectation to create, is that to increase the chances of surviving this first part of the curve, where the wealth has suddenly been created or simply has arrived, not only financially but also as an individual, a human being, a family, as a couple, as parents, as members of society, is that this is a lifelong learning and adapting commitment. I typically tell a family at the beginning that these processes have an end but not an ending. And finally, but just as important, you may also wish to consider creating trusts or other legal vehicles that could provide maybe some tax and succession planning, but also order and accountability to spending, saving and investing processes-connect it to the goals-based process I mentioned before; and working from where your family is today to start building a healthy relationship with their newly acquired wealth and set them in the direction they want to take. 

Hannamari: Well said. Though every situation is individual, we as a team can help you and your family by sharing examples and solutions we have seen others to employ. 

Hannamari: And with that we reached the end of this episode! Thank you to our audience for joining us in this episode. Your J.P. Morgan Wealth Advisors are here to engage with you and your family on topics of Life and Legacy. We look forward to hearing from you.