Sudden Wealth Syndrome

A Message from Kimberly Clouse, Financial Expert:

kim_clouse I have worked in the financial services industry for nearly a decade in many capacities, most recently as a financial adviser for individuals. Over the course of my career, I have had the privilege of working with a diverse range of people, from the single mother just starting her own business to the billionaire. Based upon my experiences, I have learned that the same basic principles and lessons apply to a successful and healthy financial life, whether you’re starting out or cashing out. These guiding principles include simplicity, a long-term perspective, and above all, knowing that you have control of your financial destiny, and all the information you need is well within your reach.


Sudden Wealth Syndrome

Reactions of the Newly Rich

The unprecedented wealth creation of recent years has spawned a new segment of the population–the suddenly wealthy. Unlike those with inherited wealth, the newly rich do not have time to prepare psychologically for their new status and the emotions that often accompany the dollars. In my work as a financial adviser, I frequently talked with newly minted millionaires about their reaction to their wealth. Most wondered whether or not their experience was “normal”; I usually assured them that it was. I found that the suddenly wealthy typically experience at least one of five reactions (aside from the predictable shopping spree):

Shock and disbelief: Disbelief is often the response of the entrepreneur who has just seen his or her company go public or be acquired for a hefty premium. Prior to such a liquidity event, the wealth is just on paper, a psychic asset at best. Post liquidity event, however, the money becomes accessible, after the applicable securities law and corporate restrictions lapse. At this point, some entrepreneurs continue to pretend that the money doesn’t exist and try to maintain as much of their pre-wealth lifestyle as possible. Certain of my clients went so far as to pay themselves an allowance similar to their pre-IPO salary, just to preserve a familiar and predictable existence.

Guilt: Feelings of guilt and shame are more often associated with inherited wealth, and “trust-fund babies” frequently suffer from low self-esteem, since their money is not the fruit of their own labor. However, the newly wealthy can have feelings of guilt as well, though it is, in my experience, a more uncommon response. Some believe that they don’t deserve the money they now have; that it’s all a fluke; and that they are imposers who will soon be discovered.

Purposelessness: For the suddenly rich, the key question may be whether or not to work. Without work, however, the question becomes what is the meaning of life? For those who enjoy what they do, they move on to the next venture; after all, in the New Economy–and Silicon Valley in particular–entrepreneurs are only as good as the last cutting-edge technology they’ve helped create. For those who rely on work for their self-definition, the thought of leaving the workforce can be downright terrifying, and they look for the next challenge immediately. Still others choose to invest in new ventures, imparting their wisdom and capital to younger entrepreneurs.

Cost of Success: Many use the freedom that tremendous wealth can bring as an opportunity for self-reflection and consideration of the cost of success. Most entrepreneurs have sacrificed time with family and friends for the good of their company and eventually come to realize that money comes and goes, but time can never be recouped. The child who was an infant when the company was founded is now attending kindergarten. The parent who was an active retiree is now living in a nursing home. Increasingly, entrepreneurs are giving back through venture philanthropy, which involves applying venture capital and for-profit business principles to non-profit organizations. This way, they can tap their business acumen for the betterment of society. In several cases, I helped suddenly wealthy individuals establish foundations to support causes they cared about, such as curing cancer or protecting the environment.

Increased Risk Appetite: The risk-taking characteristics that frequently contribute to entrepreneurs’ business success often surface in their personal lives as well. When wealth explodes, so does the appetite for risk, which is often manifested in increasingly dangerous leisure activities, such as heli-skiing, wind surfing, rock climbing, and hang gliding. Once a feeling of invincibility sets in, the consequences can be disastrous and life threatening. Moreover, the very rich can often find themselves surrounded–and encouraged–by people whose flattery and admiration heighten their sense of daring and insulate them from reality.

My fundamental advice to suddenly wealthy clients as they entered the ranks of the financial elite was to greet the transition as they do other major life changes, such as attending college, getting married, or moving to a new city: Don’t underestimate the magnitude of the opportunities and challenges but realize that acclimatization can take a while. Be patient; be cautious; seek sound advice; resist impulsive action; and create a plan for the long term.

This column is designed to provide accurate and authoritative information on the subject of personal finances. It is provided with the understanding that the Author is not engaged in rendering legal, accounting, or other professional services by publishing this column. As each individual situation is unique, questions relevant to personal finances and specific to the individual should be addressed to an appropriate professional to ensure that the situation has been evaluated carefully and appropriately. The Author specifically disclaims any liability, loss or risk which is incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this work.