Search the phrase “sudden wealth syndrome” in Google and you'll find thousands of Web pages replete with tales of lottery winners, women who married wealthy men, and successful entrepreneurs who all have one thing in common: They can't handle their new riches.
It's almost become a truism that those who find themselves with a sudden windfall will blow it. In fact, the chance that a wealthy family will still be wealthy three generations down the line is less than one in 10.
Experts who deal with such families say it's true that the chips are stacked against them.
“Yesterday's wealth is no guarantee of tomorrow's success,” said Sarah Bull, a principal and member of the KJH Private Services team at KJ Harrison & Partners Inc. in Toronto. “When people receive wealth for the first time they don't really know how to handle it. There are often emotional issues around handling it, and they don't know how to spend responsibly, and they don't understand the math.”
A growing body of evidence points to disturbingly low levels of financial literacy among Canadians, and one of the symptoms is the spending habits of the nouveau riche.
A study released this month by research firm TNS found that only 13 per cent of Canadians could answer three basic risk-literacy questions correctly, and suggested that most consumers have very little grasp of the basic principles of financial risk.
It asked participants to assess the relative payout of two lotteries; the relative risk and returns from two investment funds; and the relative risk of investing in a single stock versus a basket of stocks. Sixteen per cent of Canadian men and 9 per cent of women answered all of the questions correctly. Those who had attended university fared better than those who hadn't, but both groups had dismal results.
Despite that, the study also found that few individuals are working to improve their financial knowledge, even after the market crisis should have hammered home the need to do so. Only 10 per cent of Canadians said they have increased their efforts to educate themselves on financial matters since the global economic crisis began.
“This has been a time for people to pause and realize wealth can erode quickly,” said Mary Holenski, the head of private banking at RBC Wealth Management.
All the more so for those who find themselves with more money than they're used to.
Experts agree that, whether it's entrepreneurs who have sold the business they built or someone who has just come into a large inheritance, the keys to dealing with sudden wealth are education and planning.
When KJ Harrison begins working with entrepreneurs they ask them to think about their “end game” or ultimate goals early, and impress upon them the need to build a “blueprint” to get there, said Philip Lieberman, another principal of the KJH Private Services team.
“For business owners, there's a difference between how you create wealth and how you maintain wealth,” he said. The former takes risk and the latter takes discipline.
The ideal solution to “sudden wealth syndrome” would be preventative: ensuring that everyone gets a solid financial education.
RBC worked with a family where one sibling, the CFO of the family business, had been paying all of the bills, doing all of the tax planning, booking all of the travel, and looking after the investments.
“The patriarch died, and the CFO was going to retire,” Ms. Holenski said. “The money started to be distributed and these people were coming into millions of dollars and they didn't know what to do. So, they're buying luxury yachts, they're buying boats. You go from $65-million to $5-million in five or six months and all of a sudden there's a wake-up call.”
Ms. Bull and the team at KJ Harrison also teach the parents in wealthy families how to educate their children about money. There are four competencies of wealth, Ms. Bull said – saving, spending responsibly, investing and donating.
“Children can't be responsible until they're given responsibilities in all four of these quadrants. Our advice to parents is really to ramp up exposure to these at an early age.”
She suggests creating a mission statement that describes how the family wants to relate to money, such as: “Wealth helps our family grow and develop and gives us an opportunity to help others. Education, hard work and optimism have played a large part in where we are today.”
Lessons for children can begin as early as age five, when they could be given three containers for their weekly allowance – one to save, one to spend and one to donate. Around that age children should also be taught the word “equity,” such as, “I will be your equity partner in the new toy,” KJ Harrison counsels. By age 15 they should know how to read a corporate annual report as well as a credit-card statement.
RBC Wealth Management launched a financial literacy program in December that “is really about going beyond just preparing the wealth for the heirs, to preparing the heirs for the wealth,” Ms. Holenski said.
“We saw that as wealthy people were getting into their 60s and 70s they were looking at their children in their 40s and 50s who were out driving Mercedes and spending and they were saying, ‘They're going to inherit a lot of money and they don't have a clue. I'm afraid I've worked hard all my life, and they're going to spend the money in two or three years.'”
Teaching Money Sense
Parents in wealthy families are urged to teach children about saving, spending responsibly, investing and donating. Here are tips from KJ Harrison & Partners Inc.
5-8 years old
Give your child a calculator when you are grocery shopping.
Establish three containers for weekly allowance: spend, save, donate.
9-12 years old
Introduce the concept of collecting. Take your kids to an art show and give them money to buy a piece of art.
Have your kids create a budget. Give them a certain amount of money for a weekend dinner or school supplies.
Help your child set up a savings account. Try to attach it to an event or goal that is at least a year away.
Have a family meeting on a charitable initiative or gift that matters to the whole family.
Encourage your child to earn money so that it is not just an abstract concept that parents are solely responsible for.
13-15 years old
Order annual reports from your kids' favourite companies and ask them questions: who is the president, how much money did the company spend.
Teach your kids about credit cards and debt – show them a credit card bill and ask them how much you are spending on interest.
Introduce the concept of compound interest.
16-18 years old
Have your 18-year-old open a TFSA and/or an RRSP.
Ask your teen to look at billing options for cellphone companies and present the best one.
Connect saving with future goals – introduce the concept of future value.
Ask your teen to identify which of their favourite brands practise socially responsible business.
Start discussing your teen's future ambitions. Openly communicate about different opportunities and career paths.
(c) 2010 Globe and Mail - Article By Tara Perkins