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They thought they were set for life: How a fortune was frittered away

It takes courage for advisors to tell affluent clients they’re living beyond their means

They thought they were set for life.

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In 2010, a tech entrepreneur and his family moved from San Francisco back to Canada. He was in his early thirties, had sold the majority of his shares in his start-up and deposited more money into his bank account than he could have ever imagined. He had worked hard, was dedicated to spending more time with his wife and children and felt terrific about himself and his future.

But by 2017, he was quietly looking for a new job, his wife had gone back to work and they were worried about having to remove their children from a prominent private school.

This is not an uncommon situation and somewhat predictable. Young Canadian millionaires who are new to wealth often fall into similar patterns, and many come from the tech sector. How does it happen? His situation was not the result of one dire decision, but rather a series of simple, and, in isolation, acceptable choices.

Seeking to 'consume' some of the hard-earned wealth is natural, but learning how challenging it may become to stop spending is rarely raised by advisors.

When this couple sat down with their financial advisor in 2010, the advisor was not equipped to give them the honesty they required about their intentions. The advisor had never worked with anyone in their circumstances but was eager to please the tech “big shot.” (His name had been in the media with the transaction numbers clearly outlined.)

The couple were incredibly humble and looked trustingly to the financial advisor for his expertise. Tech entrepreneurship and financial advisory are very different skills, and each party was in glowing admiration of the other.

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There was no way the couple could have identified the professional’s lack of experience related to their specific situation. He was a well-respected, middle-aged investment professional who worked at a major financial institution. All logic suggested they were in great hands.

To the advisor’s credit, he felt honoured to bring his life’s work to this young couple and had their best interests in mind. He didn’t know what he didn’t know.

When the couple shared their idea of taking 10 per cent of the liquid cash and treating themselves and select family members to a better lifestyle, the advisor took notes and built their idea into the plan. The remaining funds were to be used for longer term investments that would provide income and modest growth.

Financial plan agreed upon

At this point, the couple inquired about setting up a family office and directing some of their capital toward new business and tech ventures. Their advisor was adamant that they would be better off in the stability of the public markets for the remainder of their lifetimes. The financial plan was set; 10 per cent of the cash was set aside and the financial advisor invested the remainder into the public markets.

Eighteen months later the couple had become accustomed to what 10 per cent of their liquidity could deliver. Their new home, cars and extended family gifts were a sign of affluence beyond anyone’s expectations. They had created a new norm.

Their “normal,” however, was not only what they expected to be able to spend on themselves, but what others expected them to be able to provide. Their children were enrolled in new schools and suddenly their one-off discretionary 10 per cent was a new unstoppable lifestyle. The spending train had left the station.

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In some family offices the wealth strategy establishes clear spending parameters. (This is different from a “financial plan” with a target retirement date.) Seeking to “consume” some of the hard-earned wealth is natural, but learning how challenging it may become to stop spending is rarely raised by those tasked with being family office professionals, gatekeepers or advisors. It takes incredible courage for an advisor to suggest to affluent clients that they may be living beyond their means regardless of the dollars in the account.

Investments in new ventures

Entrepreneurs will always be entrepreneurs. In this case, and in most cases, the newly found liquidity began to be invested in new ventures. This eroded the capital base the family was to use for income and meant liquidating some of the public holdings.

Furthermore, the public markets went through their normal cycles while the family was spending and withdrawing for other commitments. This led further to the financial unravelling of the reasonable intentions originally set in place.

Why hasn’t this topic come to light in the past? In Canada the creation and transition of wealth is relatively new in comparison to much of the world. Wealthy Canadians are learning as they go, and the domestic advisory professionals are learning alongside. Advisors don’t share clients’ situations with each other, and clients don’t open up about how quickly they may have spent their fortunes. There is no open dialogue from an educated and experienced lens.

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Additionally, some advisors treat entrepreneurs like “lotto winners,” and this couldn’t be further from reality. They are very different.

If you are considering the establishment of a family office or working to update an existing one, consider what consumption rates will do to the overall wealth. Has enough capital been put aside for intergenerational wealth advancement? Will your children and grandchildren expect to have the same lifestyle you exhibit? Has your advisor had the courage to suggest you are overspending?

Family offices often include strategy and parameters, and when structured correctly may be one of the most important tools available to affluent Canadians to find the balance between enjoyment of wealth and stabilization of their financial future.

Carolyn Cole founded Cole & Associates, a family office strategy and design firm, after a 25-year career working with enterprising families. She leads the family office for three prominent Canadian families. Carolyn also acts as Special Advisor to Grayhawk Wealth, Family Office Service, is a member of the Association of Corporate Growth’s Family Office Advisory Committee and recently launched Family Office Administration Services. Carolyn’s writing draws upon her personal experiences both from her capacity as an advisor and as the mother of two adult sons who are fourth generation of an enterprising family.
Carolyn Cole