Instead, a better course of action may be to temporarily invest proceeds in high-quality, short-term, liquid securities such as Treasury bills, short-term municipal bonds, certificates of deposit, and money market funds. These types of investments typically hold their value relatively well regardless of the prevailing market environment while generating a modest stream of income. Liquidity and safety are paramount during this initial phase.
During this time, an advisor team can help the client decide whether dividing assets into trusts, partnerships, property, and other protective financial vehicles is prudent. For example, a trust can become a powerful stop sign when the newly wealthy individual is faced with requests for financial assistance. Establishing a trust with distribution standards and a trustee to enforce those standards gives the individual a legitimate reason why they can’t immediately write a check. Instead, the trustee is obligated to evaluate the opportunity and advise the individual accordingly.
Develop a Long-Term Wealth Management and Investment Plan
The newly wealthy may need help with day-to-day budgeting and cash flow needs as well as identifying and planning for future financial goals A wealth advisor can model various cash flow scenarios to determine how much the client needs to live comfortably without overspending and depleting their wealth.
Once a financial plan has been established identifying the client’s future financial goals—for example, paying for children’s educational expenses, maintaining a certain lifestyle through retirement, or transferring wealth to the next generation—their wealth can be divided into buckets and invested in a diversified mix of assets aligned with each goal’s target rate of return and time horizon.
Initially, it’s best to start simple by focusing on traditional investments such as stocks and bonds. Once the client becomes more comfortable with investing, hedge funds, private equity, and other alternative investments may be appropriate. Remember—portfolios aren’t built overnight. New investors often need to slow down and view wealth management as a marathon, not a sprint.
While individual situations will certainly vary, the right team of advisors can often save the suddenly wealthy from making detrimental decisions with their money. Wealthy individuals often need sophisticated legal, tax, and financial advisors to build a cocoon or protective shield around their family and assets. Though the process for getting organized may take several months, the outcome will almost certainly be beneficial in the long run.
Barry Berlin, CFA, is a managing director and senior relationship manager for CIBC Private Wealth Management in Atlanta with more than 40 years of experience assisting high net worth families and their related interests.
Cathy Schnaubelt, managing director and senior wealth strategist for CIBC Private Wealth Management in Houston with more than 35 years of industry experience, is responsible for providing integrated wealth management solutions and comprehensive estate and financial planning services to high net worth clients.