18 minutes | May 15, 2019

My $28 Million Mistake

Great losses are great lessons. As Richard Branson said, “You don't learn to walk by following rules. You learn by doing, and by falling over.” In this episode, you’ll learn three key insights that are critical to doubling the lifetime value of your accounts and dramatically increasing the value of your practice. Paul shares his personal story about how he inherited his father’s $28 million estate, and then proceeded to trust the wrong people and experience the result of not having been prepared as an heir. You’ll learn why most transfers to the next generation are not successful. This is also one of the top reasons for your clients’ heirs leaving you when your client passes away. This is the show devoted to financial advisors, fee-based investment advisors, and wealth managers who want to increase the value of their practice by attracting more premium clients and reducing client attrition. Now if this sounds like you, all you need to do is lean forward and listen carefully. Family Dynasty Planning is central to our discussions, and you and I will also explore other fascinating and important topics such as attracting wealthy clients, dealing with increasing competition, continuity planning and succession planning, growing and building your business, understanding the true worth of your business, and leveraging technology, just to name a few. In this episode, you’ll learn three key insights that I believe are critical to doubling the lifetime value of your accounts and dramatically increasing the value of your practice. You’ll discover the importance of your clients’ future heirs being prepared to inherit your clients’ investments, and having additional safeguards in place such as a trust that prevents outright, lump sum distributions. You’ll also learn the single greatest reason that most transfers to the next generation are not successful. This is also one of the top reasons for your clients’ heirs leaving you when your client passes away. Finally, you’ll learn the one thing to suggest to someone who recently came into a financial windfall. Please read this carefully because this could have a significant impact on your future success. Paul will begin with his own personal story and why it’s motivated him to start this podcast series. Rags to riches to a new mission It’s Tuesday, November 10, 2009. I’m in my father’s house in Vancouver, Washington. I’m looking at his wooden desk with a desktop computer and inkjet printer on it. I notice a 2008 federal tax return on top of the printer. The first page of the return indicates a $1.5 million passive income. Over the coming weeks I realize that I am inheriting over a $28 million estate. Now imagine that five years later, this amount has been depleted down to $500,000. When this all happened, I was an experienced estate and probate attorney. I had graduated from a top-tier law school and mentored with a nationally known estate planning and asset protection attorney. I had even written about the dangers of sudden wealth, and how to prevent it being lost. How embarrassing, right?!? But when it actually happened to me, I was blind-sided. I had no idea how a person’s psychology changes as a result of a financial windfall. Research shows that it takes an average of 5 years to adjust to a “new normal” after suddenly receiving a large amount of money. But it takes a lot less time to lose the windfall. I never met my real dad until he was in a nursing home and I was 42. How that situation was created is a story for another time. For now, let me just tell about when I actually met my father for the first time. It was a rainy Autumn day in Vancouver, Washington. As I walked into his room at the nursing home, he was alone. He was a Vietnam vet. He and I made a plan that day that he would come meet his grandchildren in Scottsdale for the first time when he got better. He never did. Six weeks later he went to hospice. At that point, I knew he hadn’t been to his house for several months, and I wanted to see what condition things were in. As I was going through his house, I stumbled upon his tax return. Apparently, he was a great investor and I had no idea. Then he died. But here’s what happened. Through a lack of planning, No tax planning No estate planning No plan for transferring his knowledge or vision for his family’s future … within five years, what I inherited had dwindled down to $500,000. Now I’m on a mission to make sure what happened to my family doesn’t happen to other families. I’m reaching out to you as a financial advisor because you probably talk to your clients more regularly than I do as an estate attorney. So, you’re more likely to be able to spot an issue and help prevent it. Shirtsleeves to shirtsleeves You see, traditional estate and financial planning doesn’t prepare heirs. There is a saying, "Shirtsleeves to shirtsleeves in 3 generations." This refers to the fact that around 70% of wealth is lost after it’s transferred to the second generation, and 90% or more is lost by the grandchildren. There are two general reasons for this. First is simply the subsequent generation not being prepared. The other reason is lack of trust and communication in your clients’ family. If you’re an investment advisor or wealth manager, this is relevant to you because over 90% of children leave their parents’ advisor after inheriting their parents’ wealth. I’m actually encouraging you to be self-interested, because by solving this problem for yourselves, you are also helping solve the shirtsleeves to shirtsleeves pattern for families. There is no Quick Fix for preparing the heirs. Just like there is no Quick Fix for training to run a marathon or learning a musical instrument. In all of these cases, it takes time and dedication to practicing the right things. If you want to prepare heirs to inherit wealth and not become druggies or deadbeats, you need a certain context. For starters, you need to prevent them from having complete control for a period of time. It normally takes as much as 5 years for someone coming into a financial windfall to acclimate to the situation. During that time, they are (for lack of a better word) “unstable” emotionally and psychologically. We’ll cover how to address this in future podcasts. But one solution is having the assets in a trust that does not provide for an outright distribution. The other reason that wealth transfers don’t work is lack of communication and trust in the family. This is the single greatest reason for transfers to the next generation not being successful. This is also one of the top reasons for your clients’ heirs leaving you when your client passes away. In future podcasts, we’ll discuss how YOU can be a family champion and advocate for better communication and trust within your client families. Ok. I know that doesn’t exactly sound like what you signed up for when you got into investments and giving financial advice. But think of the Department of Homeland Security. Homeland Security’s slogan is “If you see something, say something.” By this, they mean that if you as a civilian see an abandoned backpack or an angry passenger in an airport, you should report it, even though that’s not officially your job. Similarly, if you have a client with adult children, you should ask if they have talked to their kids about what the family’s wealth means to them and their hopes and aspirations for how that wealth gets used in the future. Yes, I know this is a huge taboo. That’s why it’s important. Do you care about your clients? Well, your High Net Worth clients’ wealth WILL get lost if they don’t begin open communication with their kids about how the wealth will be used in the future. And don’t worry. I’ll provide more guidance about how to address this topic in future podcasts. So, you can take a breather for now. Now let me mention so you can implement immediately. If you know of someone who recently came into a large financial windfall, you can do the following: Call and ask how things are going. Just listen. (Research active listening if you aren’t familiar with this.) Mention that a lot of times people who come into sudden financial windfalls lose the money due to making mistakes and trusting the wrong people. Ask if they are open to a suggestion. Then suggest that they take some portion and put it into an irrevocable trust to be safeguarded for 5 years. If you’re affiliated with a trust company, that company can serve as trustee. They shouldn’t have a problem with hedging their bets and putting 10% or 20% in a trust that will be re-distributed to them in 5 years. You can even say you’ll bet them that the investment returns in the trust will beat the returns that they get over those 5 years. (That shouldn’t be hard, since chances are they will blow the money they have control of. Meanwhile, you’ll be getting a conservative return … and you won’t lose the money that you manage.) Say that if you lose, you’ll buy him or her a dinner. No lose situation, right? Ask if they would be willing to agree to not make any major financial decisions until their emotions have stabilized and they have reached a point of feeling normal again. You can explain that people tend to make bad financial decisions when they are overly emotional. Use active listening. We’ll cover this in future podcasts. And if you can’t remember these give steps … just remember to call periodically. People who come into a sudden windfall are usually lonely (even though they probably have no lack of people around them) and they’re looking for someone who just shows genuine care. Don’t sell. Just listen and care. EPISODE REVIEW So, let’s do a quick review of the insights you and I discovered in this episode. We covered the importance of your clients’ future heirs being prepared to inherit your clients’ investments, and having additi
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