It stands for “sudden wealth syndrome” and it’s an affliction far too common. Vancouver advisor Thane Stenner provides some solutions.
We’ve all heard it: Lottery winners going broke after just five years of winning a huge lump sum upwards of $10-million or more.
For wealth advisors who deal with moderately educated individuals and investors, it doesn’t get worse than this and Stenner, director of wealth management and a portfolio manager at Richardson GMP Limited, has seen it firsthand.
“(Approximately) 90 per cent of lottery winners go broke in the first five years,” Stenner said in an interview with WP.
“Somebody wins the lottery,their name and face is on the front page of the paper and they have 100 new friends. It becomes a very public event and basically you become a target.”
Tales of frivolous expenditures were detailed in an article on MoneySense.ca recently, which cited people who’d lost all their money spending on family, friends, bad investments and exotic trips around the world.
Nine years after winning $10.6 million, a woman from Hamilton reportedly lost all her money doing the exact same things while a man from Markham had to quit his job because his co-workers wouldn’t stop hounding him for his $21 million prize.
A couple from Truro, N.S., were targeted by scammers for their $11.25 million and were suckered into giving it away to “charity”. Safe to say the charity was the scammer.
All of these situations are scenarios that are similar to ones that Stenner has heard and correlate to the one time where he had a client like this – a professional athlete.
As an athlete, Stenner said, you work your way up the ladder until you are drafted and then begin to make globs of money but he added most are not prepared to deal with the financial realities that await.
Some go to school for four years – some not even that – and then are plunged into the real world with real money they’re not prepared or educated to handle.
But what’s more troublesome for advisors are the lottery winners and athletes who just don’t listen, who won’t listen – who can’t listen – to the advice that’ll keep them going long-term.
“We call that the Sudden Wealth Syndrome,” said Stenner. “From the recipient’s point of view, they’re not equipped to get a lump sum and haven’t studied investments. They get overwhelmed by their friends and it’s a tough spot to be in. We saw it with Jack Johnson, the NHL player who made almost $20 million in his career, and had to file for bankruptcy now because of family and friends.”
The challenge is for advisors to give the person the tools to handle those investments and that means education, education and more education – books, articles, anything!
“There’s a lot of complexity that hits that person. If they haven’t created wealth, this is virgin territory for them. It’s a risky time. Upbringing also comes into play.”
“We would set up a lawyer to set up a trust and also update their wills immediately. We have to protect the money. The trust beats back all the people at the door. We’d coach them to say I can’t invest because it’s been set aside a trust. It gives excuse to not invest and creates a moat around you.”
Stenner once had an athlete who he’d repeatedly advised to temper his spending or he'd end up broke. After a tough time convincing him over months, Stenner suggested the client move on and a while later, found out the athlete was insolvent.
It’s a tough game for advisors but one that happens all the time, said Stenner.