The recent acquisition of WhatsApp by Facebook, at an astonishingly high valuation, brings to mind some thoughts about the challenges faced by those 53 WhatsApp employees who find themselves suddenly wealthy beyond their wildest dreams.
It’s tempting to laugh and say “I wish someone would hand me that problem!” The surprising reality is that sudden wealth does present some serious problems and emotional challenges. It’s been the subject of extensive research. The result: “Sudden Wealth Syndrome“, a well-documented problem. From the initial euphoria some descend into depression from the guilt associated with good fortune they never imagined they would experience.
If you come from a family with no wealth tradition and are unsure how to proceed here’s some practical advice to consider:
First – Keep the news of your good fortune within your immediate family.
You need time to process the changes your new life circumstances will bring including the emotions it engenders. The onslaught of people coming at you seeking to help you or to receive help from you will be heavy and you need time and a means to deal with it.
Second – Hire a professional with financial skills.
You’ll want a financial planner, a CPA who does such work, a wealth manager and an attorney who works with high net worth individuals and their needs. In the case of tremendous wealth you will need a team composed of all these pros, who provide a counterbalance of advice so that you are not relying on one perspective alone. Some larger registered investment advisory firms can provide the full range of these services. Most importantly, you need a plan to manage your wealth. A plan provides a framework to help you make informed decisions about your wealth and gives you a sense of assurance that your decisions are made within a context that is prudent.
Consider a Family Office.
Financial plans are driven by the range and complexity of family needs. A family office can respond to extensive needs and if your new wealth is in the over $20 million range you may need that service level. Retirement funding, children’s education funding, a charitable giving plan – if you are so inclined – and an estate plan to preserve your wealth and to pass it tax efficiently to subsequent generations are other things to consider. Based on how you want to use your money a wealth manager can help select a portfolio of investment tools to enable you preserve and growth your wealth. A portfolio manager can also help with a spending plan for how money is to be disbursed to meet your goals and objectives. Don’t allow taxes to dominate your thinking. Taxes are a reality of life and have to be dealt with as a consequence of wealth. The worst financial mistakes I’ve ever seen made have come as a result of an excessive focus on trying to minimize income taxes.
Third – Educate yourself about wealth.
You have a team to help you but you are the decision maker. In order to be a good one you’ve got to be informed. There are a myriad of resources available to learn about the fundamentals of managing wealth. Become a student for a time and learn them.
As Richard Stone, founder and chairman of Private Ocean Wealth Management, San Rafael, CA says,
“The single most common mistake new investors make is in underestimating risk and its two components; financial and emotional risk. Many can intellectually understand financial risk. In a downturn though emotions tend to take over and even the most sophisticated are inclined to panic when they see their portfolio down dramatically. Panic selling can lead to serious mistakes. A proper understanding of risk and how to manage it in their portfolio will enable an investor’s financial assets to provide them the lifestyle they wish over their entire lifetime!”
Fourth – Reward yourself.
If you’ve long coveted a large house, a fancy car, a cabin on a lake or a ski condo at a prestigious location work that into your plan as a reward for the good fortune you’ve achieved. The reward has to fit within the context of your plan. Obviously, if your new wealth is $10 million after tax spending over half of it on a mansion is going too far.
Fifth – Avoid the worst outcome that wealth can bring you.
I define that as allowing worry over how to manage your money to become an all-consuming obsession. I’ve seen it up close and it is not pretty. Use the money to enable you to live the life you want for yourself and your family while maintaining the core values of who you are as a family or a person. There are plenty of professional resources available to help you manage any problem that wealth presents, including the emotional challenges. Don’t be afraid to seek help!
Don’t underestimate the practical and emotional adjustments that sudden wealth can bring. If you feel yourself suffering seek professional help to enable you to adjust. Wealth can enrich your life if you handle all the aspects of it well but it will challenge even the strongest to do so.