Financial Planning

Financial Advice to a Lottery Winner



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Congratulations!

You are the proud winner of a substantial sum from a national state lottery. A little euphoria is in order for the achievement is remarkable.

In a typical lottery, the odds of matching six numbers in a row is approximately 14 million to one. The probability of winning the jackpot in a popular US lottery is even more severe. The odds are 178 million to 1 in the Megamillions draw and 195 million to 1 in the Powerball Lottery.

Sometimes the news comes discretely. In the United Kingdom, the identity of  a Premium Bond prize winner is held in strict confidence. and the  jackpot prize winners are notified in person.  In other lotteries, the news arrives with razzmatazz.  Accepting the publicity can lead to another round of euphoria, with TV shows and feature articles in newspapers, but may lead to drawbacks.

In many lotteries the holder of a jackpot ticket may be offered professional advice.

Perhaps first is the need for counseling. The combination of a large lump sum and a sense of luck is a heady combination.  At first, all things will seem possible.  There is a great danger that the victor will fall Into the pitfalls of success.  Many are the cases of gambling, drinking and frittering away a fortune.  Early counseling can help the winner understand the new lifestyle that money can bring.  The victor should not do anything hasty. There should be no need to move house, nor quit the day job, until the winner has worked out a sustainable substitute use for his/her time. At this stage it is useful to draw up a preliminary budget to identify what is possible with the new money. This will prevent against overstretch. Even large financial sums are finite!

At this early stage the winner should clarify the role of private bank accounts. These offer a higher level of customer service and have stronger confidentiality and disclosure rules when compared to the retail banks.

A financial adviser will be required to help the client through the maze of investment decisions, tax issues and long term financial planning that will arise from a lottery win.  This adviser should be professionally qualified, reaching a standard approved by the CFA in the US, or the FSA in the United Kingdom, or equivalent national bodies. The lucky winner should interview at least three financial planners, ask many questions and follow up testimonials. The victor should establish how the adviser is remunerated.  Is he paid a commission when he sells a product or is he paid by the client?  

The relationship with the financial advisor shoud be carefully nurtured. A good financial planner will provide an engagement letter which clarifies what is expected of him/her.  A planner who is unable to do this should be avoided, not least because he could be found guilty of mis-selling financial products. As a further safeguard, the lottery winner should not tiotally rely upon an adviser. The winner should take a reasonable interest in financial matters and prepare budgets and paperwork in advance of meetings with the adviser. An interest in financial matters might be a new experience to the lottery winner.  Nethertheless it is important to maximise the value of meetings with the advisor and safeguard against mis-handling of the account.

The use of a professional adviser from the outset is important, particularly if the win attracts high publicity.  A high profile win will probably attract begging letters from friends, relatives, scams and charitable causes.  These have the intent of luring the faint hearted from their fortune. It might seem like overkill but the involvement of a solicitor can offset any sense of bad feeling or overcommitment that could arise at a later stage. The solicitor will have experience in these matters and will not be emotionally nvolved. The sense of euphoria and good luck for a novice with money is a heady cocktail. A good solicitor would advise that recipients of gifts arising from the win sign confidentiality agreements that extend for at least five years. 

A solicitor should also be consulted if there are plans to divide the winnings among a syndicate, or among friends or relatives.  This is particulasrly important because surpising jealousies break out when big money is involved.

The lottery winner should liase  with a financial adviser before making any investment decisions.  Nothing should be assumed or undertaken without careful checks.  Even the terms of the lottery win may require professional interpretation and clarification. Some lotteries do not pay a lump sum and prefer to pay an annuity. This is an annual allowance taken from a lump sum investment to which the lottery fund winnery does not have access.  The adviser will be able to clarify immediate tax liabilities. These need to be established before the true size of the lottery win can be established. Some journalists say that the first brush calcuations of lifestyle after a lottery win should assume that the tax liabilty reaches a punative 50% of the total win.

During a meeting between the financial adviser and lottery winner the financial advisor will try to determiine the winner'sappetite for risk. The financial advisor will try to determine whether his potential client  would consider losing it in a potentially lucrative high risk portfolio, or whether he would prefer to invest in a more cautious, lower achieving but steady set of investments.  The adviser will want to know whether the investor wishes to be an active, hands on investor or passive, at arms length, investor. inancial planners tend to specialise in different levels of riks and it is important that the financial advisor and client have similar appetites for risk.

After a modest initial spending spree, the lottery winner should pay off all outstanding short term loans as quickly as possible.  The winner should then work with the adviser to establish a long term financial plan.  A typical objective is to maximise monthly income.  Another is be achieve capital growth. These, or other, financial objectives can be achieved by diversifying the lump sum across a range of investments such as property, equities, bonds and commodities.

Some prize winners have modest expactations and may wish simply to maintain their current lifestyle with the reassurance that they are financially comfortable.  Their objectives might extend to providing financial security for friends and relatives and perhaps include donations to their favourite good causes.  Their needs could be addressed by a financial planner who specialised in risk averse investment advice, inheritance planning and tax advice.

Other prize winners expect a more racy lifestyle. Their business acumen might involve themin property management, commercial acquisitions and business development. These prizewinners need to be mindful that although rich in capital, they may be commercially inexperienced. It is important that they seek professional and financial advice when engaging in  foreign home, yacht and luxury car purchases. It is also important not to over extend these interests. A business minded prizewinner must keep proper track of all liabilities, expenses and management time that is associated with the investments.

These points are a guideline. Follow them carefully and allow the lottery win to be a source of lifelong happiness

More about this author: Nick Ford

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