Most people fantasize about winning millions in a lottery. Joe Lindo, financial advisor and director at Dundee Private Investors Inc. in Burlington, Ont., fantasized for years about having a client win a big lottery prize. Lindo’s dream came true on Oct. 13, 2000, when one of his clients called to tell him she and her husband held the winning Super 7 ticket. Their take: $10 million.

That gave Lindo a chance to act out the scenario of his dreams. He arranged for a limousine to take the lucky couple to the lottery corporation’s downtown Toronto offices. A week later, on a crisp autumn day, the limo was parked outside Lindo’s office. The only flaw in the plan: the lottery winners were nowhere to be seen.

Lindo, who had been up all night anticipating the event, was in a panic. But not the lucky couple. They arrived half an hour late, and sheepishly apologized for having slept in.

Not everyone makes the transition to sudden money so easily. When people come into sudden wealth, whether from the improbable event of winning a lottery or the more common occurrence of an inheritance, it can present an opportunity for them to realize their dreams, be those to retire early, become debt-free, pay for their children’s education or all of the above. But for those who are unprepared, sudden money also presents the danger of making unwise financial decisions.

Lindo’s lottery winners were fortunate in many ways. Not only did they win the big prize, but they were already financially secure, with a net worth of more than $1 million. Retired and in their 70s, they had plenty of experience in investing money. And they had good advice.

Lindo was the first person they called with the news that they had won the jackpot. While Lindo knew their secret, the couple didn’t come forward to collect their prize right away, giving Lindo a chance to help them plan a way to pick up their money without leaving themselves vulnerable. His clients were concerned that they, as well as their adult children, might be inundated with calls from charities, the media and con artists. They feared their grandchildren might be subject to harassment and extortion attempts.

The couple laid low for a week. Then they rode in Lindo’s limo to the lottery office, collected their prize and took off for a vacation at a resort hotel, where they got together with their children and grandchildren but could not be found by the media.

“In the early stages, it was all this preliminary work of ‘how do we protect you?’” Lindo says. “We had to arrange how to pick up the money and give the impression that it was already dealt with, and at the same time control the media so that the winners weren’t hounded by every local paper and television station. We arranged all that from our office before they claimed their prize. Once they got the cheque, they went out of town.”

The “protection” apparently worked. The couple received only two solicitations: a letter from a charity and a promotional video cassette from another financial advisor.

Claiming the prize is the fun part. But when everything settles down, where do clients park the money?

There are a number of views on the way found money should be invested. Lindo is puzzled by the attitude that a sudden windfall, such as an inheritance or lottery winnings, should be treated differently than retirement savings. “Clients will take risks with their money that is saved in RRSPs, but once they get this jackpot, all of a sudden preservation of capital becomes their No. 1 concern,” he says.

Jack Lumsden, senior financial advisor with Assante Financial Management Ltd. in Burlington, Ont., agrees. “People tend to be more cautious with found money,” he says.

The first reaction of Lindo’s lottery-winning clients — even though they were experienced investors — was to put the money in a “cozy,” low-risk vehicle. But putting a large chunk in a GIC, for example, would generate substantial taxable income.

“One of the things people can do wrong [with lottery winnings] is to stuff it in a savings account,” says Warren Baldwin, regional vice president with T.E. Financial Consultants Ltd. in Toronto. A middle-income earner who comes into a six-figure windfall may think a bank account that generates 1.5% is a good, safe vehicle. But, Baldwin points out, savings accounts are often tiered, so 1.5% may apply only to the excess of the first $100,000. Further, deposit insurance covers only $100,000.

If the client is uncertain of where to put a significant sum of money, Baldwin suggests a money market fund as a first step. A money market fund offered by an established institution is a relatively secure investment that offers liquidity while the client decides on a long-term plan for the money.

And the arrival of new money is a good opportunity to do a full financial plan to outline the options, says Lumsden, who wrote and self-published the book Sudden Wealth: The next generation (1996).“You can show the client what the expected income will be in 15 years if he or she invested in GICs, and compare that with the expected income if the client invested in a balanced portfolio.” The client can then make an informed decision.

Lindo’s $10-million winners invested 10% of their new-found wealth in the stock market through their broker, and turned the rest over to Lindo to manage. Considering their ages and their already high net worth, Lindo arranged a universal life policy that would allow the money to grow through its investment component.

“The death benefit is not taxable, nor is the excess cash in the [universal life] plan,” Lindo says. “So that is an option most people would consider right away for people coming into money, when that money is going to be invested for a reasonable period of time.”

Smaller amounts of sudden money may also mean a need for financial advice. Another of Lindo’s clients won $250,000 in the Encore lottery. The client figured the money would allow him to retire a few years early. But he wanted to keep the bulk of his winnings in a GIC, a decision against which Lindo advised.

Lindo had to explain to the client that all the planning they had done over the past number of years was based on taking some market risk. The client’s ability to retire early depended on getting the same kind of return from his winnings as he had been getting from his RRSP.

“He saw the $250,000 as [adding] about five years of additional work and saving,” Lindo says. “If that money was safe, the client thought, he should be able to retire five years sooner. Unfortunately, it wasn’t enough, because his [retirement savings would have had] to last five years longer.”

For years, that client had been exposing his RRSP money — hard-earned funds he contributed every month — to market risk. Yet he was reluctant to subject his winnings — “free” money — to that same risk to help it grow.

Also, a six-figure windfall is not necessarily a ticket to “take this job and shove it,” as some clients may think. “We have tough things we have to deal with in this business, and this is one of them,” Baldwin says. “Sometimes we have to be the brake on the wheel and say, ‘There’s no point in going nuts about this’.”

A middle-income earner who wins $350,000 may think he’s set for life, but that money may just be enough to close the gap in his retirement plan. The advisor’s job, according to Baldwin, may be to tell the client: “You have a comfortable lifestyle; you’re not spending wads of money. Why not put this money away and relax, knowing you can retire comfortably at age 60?”

Winning a lottery, as unlikely as it is to happen to any given person, is an unforeseen windfall. Substantial inheritances and life insurance benefits, on the other hand, are usually expected and should be planned for well in advance. Unlike a lottery win, which is a joyful experience, an inheritance usually arrives after the death of a parent or another loved one, and often comes with emotional strings attached.

“If you have somebody inheriting money whose relationship was incomplete with the parent, he or she tends to need more help making financial choices because the person is often very busy making emotional choices,” says Catherine Hurlburt, an advisor with Integrated Planning Group Inc. , part of Assante Financial Management, in Vancouver.

Hurlburt tells of a client who inherited a significant estate from her mother. “The client tried to treat her mother’s investment portfolio the way I treat my mother’s antique couch — as a family heirloom that shouldn’t be touched,” she says.

The estate included an investment portfolio, which, unfortunately, included a significant investment in Nortel Networks Corp. Although Hurlburt is not licensed to sell stocks, she told the client that if she sold the Nortel stock, which at the time was worth more than $120 a share, she could pay off her $140,000 mortgage. Instead, the woman rode her mother’s precious investment in the telecommunications industry from $122 a share down to 87¢.

Hurlburt, however, was able to persuade the client to sell other holdings and to do some astute planning. She eliminated a lot of debt, bought a car and contributed the maximum amount to her RRSP. The woman is now able to stay home with her children, but is still paying off her mortgage.

Life insurance benefits come with their own set of obligations, according to Baldwin, and usually should not be regarded as found money. “If a client is receiving a chunk of life insurance money, it means he or she has lost somebody that was near and dear, and the money is there as a form of income replacement,” he says. “If you knew [a client] was getting $1 million worth of life insurance, remember that the policy was bought for a reason. And typically that reason was to help [the beneficiary] with his or her living expenses, mortgage, child care and, perhaps, even with retirement.”

In many cases, people who inherit substantial amounts of money don’t get advice soon enough. Fourteen years ago, a woman who had recently inherited $1 million walked into Hurlburt’s office. The prospective client had spent more than $700,000 building a luxury home on a scenic waterfront property south of Vancouver.

By the time she sought advice from Hurlburt, she was down to $150,000 — and the house was not yet completed. She wanted Hurlburt to generate income of $50,000 a year from that $150,000.

Hurlburt told the prospective client that she would have to get a job.

“But I’m rich,” the woman protested.

“No, you’re not,” Hurlburt replied.

And the would-be client departed.

The woman had grown up in a financially astute household, the classic millionaire-next-door situation. One of six children, she was unaware of her parents’ wealth until her share of their $12-million estate landed in her lap. Before that, she had been doing an admirable job of raising a daughter as a single mother with a steady civil service job and a modest home in the suburbs. She had learned to live on a tight budget and had no significant credit card debt. To this woman, $1 million meant unlimited wealth.

With the right advice, Hurlburt says, the woman might have kept her job, paid off her mortgage, invested the rest of the money and “lived better than she ever dreamed.” That’s one reason why Hurlburt prefers to talk to people who are going to inherit money three to six months before the cheque arrives.

“When people get any amount of money suddenly, they start thinking of ways in which to spend it,” Hurlburt says. “Investing is never the top thing on their list.”

She gets her clients to talk about all the things they’d like to do with the money — pay off the mortgage, buy a new car, eliminate credit card debt, educate the kids. “One reason I like to get them in early is so they can have their fun thinking it through without being able to take any action that could be harmful,” she says.

“By the time the money shows up, the fantasizing part is over and they can make better, more responsible choices — for the same reason you don’t go grocery shopping when you’re hungry,” she adds.

Some advisors see clients come into life-altering sums of money through the sale of real estate. Michael Mulcahy, an advisor with Dundee Private Investors in Bradford, Ont., works in the heart of one of Ontario’s main agricultural regions. He has seen a number of clients who are hard-working, salt-of-the-earth farmers come into millions of dollars through the sale of their land.

It’s good to see people who have worked on the farm all their lives suddenly come into $5 million, Mulcahy says, but these people are usually over 60 and often unsophisticated when it comes to investing.

“The biggest danger is the unscrupulous advisors out there who know what’s going on [locally] as far as the sale of land and will put the clients into different types of investments that the clients are really not comfortable with or know anything about,” he says.

Some advisors would put these clients into high-risk stocks, which are not appropriate for retired farmers.

He has also seen people such as these go to banks for advice, and have their money put into managed portfolios that charge unreasonably high fees. He saw one such client who had his money invested through a bank in a bond portfolio account that charged a 3% fee.

“That particular client’s portfolio wasn’t all triple-A or B bonds, either,” Mulcahy says. “Some were Ds, and he actually ended up losing money on them.”

When a client is about to receive a large amount through the sale of property, Mulcahy goes through a list of issues with the client that usually includes grandchildren’s education, charity, cash flow, estate planning and helping children.

Mulcahy usually recommends conservative investments for these clients. “We usually go the annuity route, the seg fund route to avoid probate and some mutual funds — usually balanced funds and some GICs,” he says. IE