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Written by: Tucker K. Bixby | Arete Wealth Management
Most financial planners are accustomed to dealing with two basic profiles – to simplify, we can call them “No Windfall” and “Late Windfall” clients.
No Windfall
This is an employee situation – someone who will work for a 3 rd party for the majority, if not the entirety, of their career. Often, this client does not have a significant windfall to look forward to. Thus, successful financial planning involves disciplined financial practices throughout life which enables saving and investment. Discipline requires these families to live within their means, save as much as they can, invest wisely, reduce fees, and reduce risk. Assuming steady employment and relative job or career stability, the path to success is fairly linear. Clients spend decades slowly and methodically building up a nest egg, and then that egg is managed for the next 30 or so years during retirement.
Late Windfall
The other typical profile is that of the entrepreneur or business owner. In the case of these clients, the discipline needed is often not about saving and investment, but about dedication to the success of the business . Instead of slowly building wealth through saving a portion of earning, most entrepreneurs put their time and money back into their business. If successful, this sweat equity turns into real equity, thereby creating increased income and an eventual windfall. Instead of linear, the path to success is often unpredictable and dependent on the successful execution of an entire business, rather than merely saving a portion of a steady income.
Related: What If Investments Don't Matter Much, but Savings and Behavior Do?
Early Windfall
There is, however, a third profile - clients who receive the windfall at the beginning of their financial path. These are professional athletes, children of high net worth families, or increasingly, young entrepreneurs. In many ways, these early windfall clients are the inverse of the two clients above – instead of building to eventual financial success, they begin there.
The primary stumbling block we often see for these early windfall clients manifests itself as a lack of discipline. It is perhaps more accurate, however, to see it as a lack of vision.
It is often difficult for younger, wealthy clients to have a clear vision of their next 50+ years. This is, of course, understandable – the clients described in the examples above build towards eventual financial success and independence. The scope of potential directions their lives can go is significantly narrower by the time they reach 60-65 years of age. By the time No Windfall and Late Windfall clients need to manage their assets for a lifetime of income, they are very familiar with their needs, wants and priorities.
Our work with Early Windfall clients has shown that, while it is often difficult to know exactly what they will want and need down the road, their best chance of financial success is to develop a clear vision for their lifetime income needs. This means detailed and in-depth discussions to identify and prioritize their objectives, establish goals, and determine what is reasonable and, most importantly, sustainable. There are so many opportunities available to these clients - without a long-term vision of what they want to accomplish and how to get there, it is virtually impossible to make short-term, informed decisions with regard to investment, risk, income, tax management, estate planning, philanthropy, protection and dozens of other lifetime concerns.
Of course, that vision will change over time. But when early windfall clients begin with a reasonable, achievable and clear vision for what they want, we believe that they are more likely to make sound financial decisions throughout their lives. They are also more likely to stick to those decisions and maintain the discipline required to ensure they not only maintain their nest egg, but grow it.