What’s the first thing you should do if you receive a sudden windfall, such as an inheritance, legal settlement, or bonus?
Robert Pagliarini, president of Pacifica Wealth Advisors and author of The Sudden Wealth Solution: 12 Principles to Transform Sudden Wealth Into Lasting Wealth, gives advice on how to take control of the situation. How do you get proper financial help and guidance, and how should you deal with people who want a slice of your newfound wealth?
Most of us accrue wealth not through a windfall but through savings and compound growth. One popular investment vehicle to grow wealth is ETFs (Exchange Traded Funds). Listen to learn more about ETFs and if they are suitable for your situation. Also on the show is surprise guest Zack the Puppet, CFPP, who talks about a new financial educational resource.
Follow Robert Pagliarini on http://suddenwealthsolution.com and on Twitter @rPagliarini
Watch The Sudden Wealth Solution on YouTube.Read the Transcript
Interview with Robert Pagliarini
Robert Pagliarini, financial planner and author, discusses what happens when you receive a sudden windfall. How should you deal with it, and what happens to your relationships?
Douglas Goldstein: I’m very happy to have Robert Pagliarini on The Goldstein on Gelt Show. Robert has a very interesting job. In fact, his job is very much like my job.
He’s also a Certified Financial PlannerTM. He interestingly deals with people who are dealing with windfalls, such as inheritances, when they win a lawsuit, they have a business sale, or even win the lottery. One issue that I face all the time is when people come to me who have just received an inheritance and they don’t know what to do. What’s the first thing that you normally suggest somebody should do when he gets a big sum of money like an inheritance?
Robert Pagliarini: That’s a great question, Doug, and I would say the very first thing someone should do is take a long and deep breath. Then, very quickly after that long and deep breath, you really have to change your mindset a bit. What I mean by that is you have to take control, and that does not mean that you have to have all the answers. For sure, you are not going to have all the answers. That’s why you’re going to have a team of people who help you. But there’s this thing that happens when you decide at that moment that this is your money and it’s your responsibility, and that all the decisions are going to be yours. It puts you in a place of empowerment, and it makes sure that you know that you are responsible for this and nobody else is.
Who’s in control?
Douglas Goldstein: That is very scary. Let’s just stop right there, because anyone hearing this who gets a big sum of money, but has never dealt with anything, might just say, “Wait a second. Can’t I just hire someone to take control because i don’t even know what to do?”
Robert Pagliarini: Yes, in fact you can hire someone. But it’s not necessarily to take control. If you give up control, and I have seen this too many times, if you simply relinquish the responsibility to somebody else, what often happens is that you basically get taken advantage of, and that’s what we do not want to happen. When I say take control, it is just a shift in your mind to say, “Okay, this is a new experience for me. I understand that it’s really scary and I understand that I really don’t know what I’m doing. But taking control means that I am going to find people who can help me, but that I am not going to just let other people make all of the decisions on my behalf. It means that I am going to be able to guide my own way through this process, with some help of course.”
Take your time
Douglas Goldstein: What you are describing is not necessarily, like you said, knowing all the answers but hiring people to help you. The problem is that when I work with business owners, they normally tell me that the most difficult thing they have to do is hire staff, and these people are professional managers or business owners. How is someone who’s never really dealt with that all of a sudden going to get good at hiring financial advisors, accountants, insurance people, or lawyers?
Robert Pagliarini: The first thing I would say is definitely take your time. When you have a windfall, whether it’s from an inheritance or lawsuit, or maybe a business sale, the decisions you make before and even right after you get this money could be some of the most important financial decisions you make in your entire life. You want to make sure you have a good team who can guide you through this process, and finding that good team is not always easy. So take your time, interview a lot of people, have discussions, make sure you print out some interview questions. There’s a lot of those kinds of questions you can find online on how to interview financial advisors or how to interview tax people.
You want to be really comfortable with them and their personality. Research their backgrounds, experience, and education. Make sure, and this is such an important one: At least in the United States you can go on Brokercheck, which is a website that basically looks at your advisor that you’re interviewing and says whether they’ve had any regulatory problems. That’s a no-brainer. Go on there and check it out. Make sure your advisor has a clean slate before you start doing business with him or her.
Douglas Goldstein: Interestingly on that topic, there was just an update in the rule that all advisors have to put a direct link to their Brokercheck profile on their own websites. Recently my web designers had to update all of the websites where my name appears and right next to it, it says “check out Douglas Goldstein Goldstein,” since I’m licensed in the U.S. as an advisor. That way they can instantly see my record, which I’m happy to say is clean, but I always encourage people to look there. Robert, you mention and suggest that people should take their time. So often, when people have money they feel as if it’s burning a hole in their pocket; they feel that they don’t have time. What do you say in that case?
How much money do you actually have?
Robert Pagliarini: I see that a lot with clients. Even before they get the money, sometimes they start spending it in their heads. Some start actually spending it. They take on debt even before they have the actual windfall, and that’s a common response. One of the first things we start thinking about is what to do with this money. What can I buy with this money? It’s really looking at it incorrectly. What I’d like to suggest to people who are coming into sudden wealth is to make sure they know how much money they actually have. What I mean by that is if you get an inheritance or a lawsuit settlement, you may owe some tax.
In the United States, there is no tax when you receive an inheritance. But depending on the type of sudden wealth event, like a business sale or a lottery, you may owe a significant amount of money to taxes, so the last thing you want to do is start spending and thinking that you have a lot more money than you actually do. That’s why I say take a step back, get your team together, have them analyze the numbers, - what I call the “end of the day” number. What is the amount of money you have after paying your debts, after paying all of the taxes associated with it? That’s truly how much you have, and that figure could be very different than the headline figure that you think you have.
You had on your show one of my favorite authors and thinkers Daniel Kahneman. His focus is on behavioral finance, and he talks about anchoring. Anchoring is such an important thing when it comes to sudden wealth. I had a client who received $83 million in a lawsuit settlement, and for the longest time she thought she had $83 million. It took a lot of work to convince her that she actually didn’t have $83 million. She really 'only' had about $39 million because of all the taxes she had to pay. It’s most important to know how much you have because you are going to spend and think about the money much differently if you think you have $3 million than if you really only had $1.5 million.
What happens to your relationships?
Douglas Goldstein: That is definitely a big difference. We are talking with Robert Pagliarini, who is an expert in dealing with lump sum distributions that people get from many sources. He wrote a book called The Sudden Wealth Solution. Let’s dig into one of the emotional issues that people have when they get a lot of money. All of a sudden, everyone becomes their best friend, or their relatives come in and say, “Now that you've got only $33 million, could you help me out a little bit?” What do you advise people to do in that case?
Robert Pagliarini: You’d be surprised at how often that becomes a big issue. When you talk about sudden wealth, or the lottery, or some of these other forms of windfalls, you’ll often hear horror stories from people who don’t consider it so much of a blessing as more of a curse. The reason for that is not because of this newfound money that they have. It’s not because they can afford things that they couldn’t before, or that they can go on trips, or that they can quit their jobs. Those are all positive things to the most part. The reason people feel so negative sometimes about sudden wealth is what it does to their relationships.
I have seen this time and time again almost on a daily basis with my own clients. They get phone calls. They have friends and neighbors, or distant relatives, knocking on their doors or texting them in the middle of the night, begging and pleading for money for help, and it can be really difficult to say no. It’s one of the hardest words in the English language to say. You have to approach things very differently, because you often want to help your friends. You want to help your family, but if you say yes too often, you're going to run out of money or set a bad precedent where you are telling your friends and family that no matter what happens you have money; you can help out.
That’s the wrong approach to take. You want to make sure that you don’t overpromise anything and that when someone does come asking for help you have a system in place, that your immediate reaction is not yes. It should be, “I don’t know. Let me check with my team.” That’s why a good financial advisor like you can come in, Doug, where you can be the bad guy. I’m often the bad guy.
Douglas Goldstein: Been there, done that.
Robert Pagliarini: Yes, it happens all the time. My client will be asked, “Hey, could you loan me some money?” and they’ll say, “You’ll have to talk to my financial guy.” Then I get the phone call, and I have to say, “Well, that doesn’t seem like something we are going to be able to do.” It puts people on notice that you are not just someone who’s going to be writing some blank checks all the time. There’s a system in place. So it’s really important to do that.
Douglas Goldstein: That is really important. Listen, Robert, I know there are a lot of very important steps. Unfortunately, in our extremely short amount of time, we are not going to be able to find out about them. Tell me in the last few seconds, how can people learn more about your ideas, keep track of what you are doing, and follow you?
Robert Pagliarini: I would say that the best place to go is suddenwealthsolution.com, where you can look at the book. You can buy it on iPad or Kindle version of it there. There are lots of tools, free videos, and resources there.
Douglas Goldstein: We will put a link to that at the show notes of today’s show at goldsteinongelt.com. Robert Pagliarini, thanks so much for your time.
Robert Pagliarini: Thank you.