UNFORTUNATELY, this does not yet apply to me or a friend.*
Every single place that gives advice to lottery winners harps on the idea that you MUST get a financial advisor.
Now I would definitely get a lawyer so I can hide my identity as much as possible. I will also get a fancy tax accountant to get me the best deal tax-wise. Why do I need a financial advisor?
I think of my self as financially savvy. I have 6+ months of savings. No debt (besides mortgage). I invest in the S&P 500 index fund. I track my finances and other aspects of my life through spreadsheets.
I am perfectly capable of investing the vast majority of my winnings into a healthy mix of stocks/bonds/treasuries and living off the interest. Why should I pay a decent percentage of my wealth to some shlub to do the same thing?
Will they just push their own managed funds? Plenty of research indicates that managed funds do not beat the market once fees are factored in.
I have a few guesses why a financial advisor is recommended:
The assumption is that people are not good with money (Why else would they be playing the lottery to begin with, right?). They will blow through it all in 5 years and be penniless at the end. A financial advisor will help prevent this. I am pretty sure I will not have this problem. My kids will probably inherit most of it and then they can waste it.
The financial advisor can get me into investment opportunities that a normal person could not (like venture capital).
Some people just want to give the job of managing the money to someone else. However, I would be nervous enough that the advisor is screwing me that I would end up researching everything they do. I think I would end up spending more time/energy doing that than just doing my own investing.
#2 is the only one that seems useful to me.
So, am I totally off base? Do I need a financial advisor?
*I buy about 6 lottery tickets a year so I can have fun fantasizing. We don’t need the “Lotteries are for people who can’t do math” discussion. I already get my return on investment in entertainment.
I agree with you. I don’t think it’s necessary, I just think it’s “safe” advice for most people, so that’s what they say it. As long as you have basic financial sense, you can manage it yourself, like you said. My wife and I certainly would.
And apparently several people who do win enough to be financially independent don’t really have them either. They just retire and live within their means.
But “people win lottery, retire, and live quietly within their means” is along the lines of “dog bites man” in terms of the news.
Many people ARE poor with money, and are at best amateurs when it comes to investments.
With new found wealth the likes of which you haven’t seen, there will be new avenues open to you with regards to investing, and you won’t have the knowledge to explore these.
I would certainly consult a financial advisor, even if I could manage the finances myself. My assumption is that I could do ok, but could do much better with professional advice.
I’m not sure why you would worry about the advisor screwing you - they do well when you do well. Provided you go with a reputable firm, I don’t see the issue.
Oh, yes! Before I even declared the winning ticket, I would have a top law firm and a reputable financial advisor in place! The average person really doesn’t understand all the pitfalls that come with being wealthy; i.e., scammers, the IRS, etc.
I’m 66. If I won a huge megamillions jackpot I would not hire anyone to manage my loot. I’d work hard to spend as much as possible in the time I have left, after giving some to my kids and gf.
You may be right. But most people don’t have that sort of control, and act extremely irrationally with their finances. An advisor likely earns their fee back more in advising you in what not to do than what you should do. When I was advising, you would be stunned how many people just throw away the “buy low sell high” mantra the moment the market sees a couple days in the red. Being a firewall and a voice of reason on those days saved clients 10%+ in downside (probably closer to 25%+ in March 2020).
That’s what a fee-based financial plan is for. You know everything they’re going to do before they do it (and years in advance in most cases). If you hire an advisor that you give unilateral permission to make trades to, you’ve hired the wrong advisor.
Yes, exactly. Also, with a fee-based financial advisor, you can get into mutual funds at a much lower MER, which if you have a large sum to invest can actually save you money in the long run.
Eg. A balanced fund purchased through a bank; MER 2.13 %. This is what you pay each year out of the gross increase in fund value. SAME FUND when you have a fee-based financial advisor; MER = 0.68% You end up paying less if you have a bunch of money to invest. (In fact, most fee-based advisors won’t look at you unless you have around $500,000. Any less than that and you’re better off just buying through the dude at the bank)
I’m good at managing the money I have but I’d TOTALLY get a financial advisor. I know zip zero zilch about investments. My knowledge lies in how best to manage myself paycheck-to-paycheck. I wouldn’t even know where to begin with the best ways to “make my [extra] money work for me”.
The tax accountant is a financial advisor. You’d probably want another one for investing and they’d work together. Assuming you’re talking about hundreds of millions of dollars and not just a million or two, it’s an entirely different ballpark. I did my own taxes and investing for my entire life and retired at 56 and I’d definitely get help in that situation.
Er, if you were financially savvy you would already know the difference between investment advisors/planners and Certified Financial Planners, who are held to a fiduciary standard.
This. People who aren’t rich in the first place, and suddenly receive a massive amount of money, are often ill-prepared to deal with it. They have no sense of e.g. tax consequences, just how much they can spend per year from now on, how to invest, or anything that someone who grew up in a wealthy setting would be familiar with.
There are any number of stories of people (not just lottery winners) who suddenly became wealthy, and then just as suddenly had to declare bankruptcy. MC Hammer may be one of the most famous:
The NFL offers its rookie players free financial counseling because they are often in a similar situation. On average, they last 3.3 years and might earn a couple million dollars, with limited opportunities to earn that kind of money again once they leave the NFL. A lot of these players don’t come from wealthy backgrounds, and when socializing with high-earning players, feel some pressure to keep up with that kind of spending. Counseling helps them plan for the future and exercise some self-restraint; the same sort of counseling could also help the average lottery winner avoid disastrous financial mismanagement.
For myself, if I won a couple million dollars, I don’t think I’d bother with a financial advisor. If I won something on the order of $50M or more, I probably would, just to get some ideas on how a nest egg that big might best be managed differently than what I currently have.
At a minimum I’d want someone to help me intake the initial lump sum into a safe place while I make decisions on how best to invest it all. I don’t know if you even could drop hundreds of millions of dollars into your local bank’s checking account without causing all sorts of problems, but the critical issue is that only a tiny fraction would actually be insured. FDIC only covers something like $250K, which is nothing compared to a big lottery jackpot. Do you just put it all into a Vanguard money market account and then doll it out to various investments over time? I agree with the other posters who say that your typical small-time investment strategies would probably break under the weight of so much money.
If you don’t care about paying more taxes than required, don’t care how much your millions earn through interest or investments, don’t care what kind of estate you leave, just want to give away money to family and friends without caution, then you don’t need a financial advisor.
A financial advisor doesn’t just pick the best investments for you to make the most money with a balanced portfolio. They also look at optimizing tax liability, income vs growth, risk mitigation (all the various life insurance options), providing for dependents, etc.
Washington state requires any winners of $200,000 or more to retain an attorney or financial advisor prior to paying out the jackpot. This is for 2 reasons, to insure all taxes are properly handled and to protect the state from any issues that arise from winning the jackpot. When I won $50,000 a few years ago, I asked the gal behind the counter about this. She said that they had some folks win a bunch of money, blow through it then try to blame the state for not giving them advice on what to do with the money. Plus and attorney or advisor can explain the tax ramifications of winning big jackpots.
First thing I’d do if I won big, before going to collect the money, is go to my accountant and ask her to recommend a tax attorney and certified financial planner.
I’m in my 70s and childless, so the ways to handle my money would doubtless be different than the plan for a younger person with a family. I have some general ideas about how to apply the moolah, for myself and for good causes, but understand that there are good and less-good ways to do those things.
I was going to say look at the average person who regularly plays the lottery - the general advice regarding obtaining a financial advisor is sensible.
Most big, life-altering lottery winnings are closer to the latter than the former. For many (not all) people who have good jobs or are already accustomed to having a comfortable amount of money (professionals or born to middle- to upper-class), a few million would not be something too far out of their experience. Some would still blow it all, but having an advisor wouldn’t help them anyway.
Suddenly getting a million dollars would be totally alien to the majority of people, many or most of whom would probably benefit from some financial advice. But it seems like most lottery winners getting 1 or 2 million are middle class and generally don’t do dumb things - again, we only ever hear about the ‘interesting’ cases where they blow it all, not the boring cases where they don’t.
The Dope skews older and towards higher incomes than society as a whole, so our hidden assumptions tend to bias a bit towards that as well.