Dan Dobry

Surviving and Thriving After Experiencing a Liquidity Event

Coming into a large sum of money is a dream for most of us. But for those who actually experience it – whether after signing an excellent work contract, taking their company public, selling the business they have poured their energy into for years, or simply inheriting a significant fortune – the excitement of sudden wealth can give way to more complexity than they imagine. It could damage personal relationships, poor financial decisions, psychological strain, and dangerous behavior. 

The Emotional Challenge that Comes with Financial Event

The enormous emotional and intellectual burden that comes with a life-changing financial event. It seems that the reality of the dream is significantly more complex than the dream itself.

As an advisor to individuals and families who have accumulated or inherited significant wealth, I have witnessed these complications firsthand and have assisted many clients to navigate this transition. Although each person’s path is unique, several elements can frequently lead to happier endings.

Many who have experienced a liquidity event are surprised to find out that there is a great void between how they imagined they would feel and how they feel. 

First, there is often a puzzling challenge of new economic and legal issues to deal with, along with unfamiliar technical jargon. This can lead to a sense of anxiety. 

I read an article about an entrepreneur who built a company and sold it for a sum beyond his wildest expectations and he wrote, “I knew my business, and I knew my industry. But now, I don’t even know what I don’t know.”

Regardless of what they do, many reports having crazy fears about spending, investing, or running out of money. And frequently, the attempt to address these challenges and decide to create, a sense of defeat.

It is also common that the event can affect relationships as well. Sometimes jealousy, and uncertainty over how to deal with jealous behavior, can damage even the closest relationships. This can lead to suspicion, loss of trust, and social isolation. 

Why are There so Many Emotions Around Accumulation?

The complexity of human emotions around accumulating wealth derives from several different sources. For many of us, the money messages that are transmitted by parents and grandparents are a primary influence on our spending decisions and financial habits for the rest of our lives. 

Our parents talked about saving for education, the challenges of everyday life, budgeting holidays, and watching hard earn income being spent. 

One such person who has bought and sold several companies admits to driving his car further than he needs to so he can refuel at a gas station that charges a few pennies less – a habit that he inherited from his mother. 

Cultural norms can be a major influence as well. Many people report an aversion to talking about money at a personal level, such as how much you have, how much you earn, and how much you spend. 

There also seems that the public has a deep fascination with stories about other people’s money, particularly when things go wrong.

In addition to this as you grow wealthier your choices also grow and complicate things. 

For example, TripAdvisor reports that there are 75 five-star hotels in London City alone and close to 200 in Greater London. How can anyone be sure that they have chosen the best one? Perhaps the vacation might have been more fun, more relaxing, or more romantic at a different five-star hotel. For some, the constant second-guessing associated with having too many options can turn the blessing of ample resources into a curse.

Often, objective, trusted third parties are well-positioned to help.

A Good Financial Planner will Guide You Through the Process of Building a Game Plan for your Capital

When selecting advisors, it is important to follow a formal process. Interview potential candidates carefully, check references, and ensure that they have worked with others in a similar situation. Your advisors who must commit to a total loyalty to you, (fiduciary standard) should be able to help not just with your technical, logistical, and quantitative needs, but also be sensitive to more qualitative issues, such as your family’s need for education, patience, and frequent communication.

A good financial planner will lead for you a team of tax, legal, and alternative investment managers will guide you through the process of building a game plan for your capital. Just remember you still call the shots; it’s up to you to direct the course of your financial ship.

With The Help of Your Tax Advisors, Build A Tax Plan That Serves Your Short-Term and Long-Term Interests.

When it comes to tax planning, your mileage may vary. Everyone has a unique tax situation, and it is imperative to build a tax-efficient and tax-compliant plan for your money.

This tax plan should assist you in the short-term (income taxes), medium-term (capital gains taxes), and long-term (estate planning).

Build A Plan That Focuses on Wealth Preservation

Risk and return are the yin-and-yang of building a portfolio. As you start making your money work for you, devote as much focus to capital preservation as you do to capital growth.

A financial advisor that specializes in High-Net-Worth Individuals will help you build a portfolio that serves your risk and investment objectives well.

Assume Your New Role as a Passive Investor

The hardest transition following a liquidity event may be the evolution from an active business owner to a passive investor. However, having your money work hard for you is anything but passive. To ensure long-term capital preservation and growth, you must still be at the helm, conducting due diligence and deciding when to pull the trigger on different investment options.

This new role may let you utilize your existing talents: the same combination of work ethic, wits, and persistence that helped build a successful business will come in handy when making tough decisions. The advice of your financial and tax advisors will also contribute to your success.

As a Passive Investor, Leverage the Expertise and Experiences of Others

While there are many ways to make a fortune, there are just as many ways to lose one. Your success in previous ventures may be proof of great talents, but sometimes these talents do not translate into other fields.

For example, take private real estate. Real estate may be the world’s oldest investment vehicle, but that doesn’t mean it’s all a matter of “buy it and forget it.” Like any business venture, there is a steep learning curve that could take years of trial and error to master.

Why devote your scarcest resource (time) when you can devote it to opportunities better aligned with your core competencies? Leveraging the expertise of others (such as investing in Private Real Estate funds) may be your best option.

Incorporate Alternative Investments as Part of Your Portfolio

Public equity investments such as stocks and bonds are the most popular vehicles to put your money to work. However, in a world rampant with high volatility and market swings it may be beneficial for you to consider alternative investment vehicles such as private real estate.

Private Real Estate investments, managed by MLG Capital, have historically provided consistent, low-volatility returns not correlated with the public markets. Such investments may help provide both long-term growth and capital preservation, providing potential sustainability of the proceeds from your liquidity event.

Begin Assessing Alternative Investment Opportunities

Now that you have devised a tax planning strategy and a portfolio strategy, it’s time to assess individual investments. While your financial and tax advisors will play their part, you make the final call.

When you experience a liquidity event, the steps outlined above can serve as a guide to achieving your long-term goals.

About the Author
Dan Dobry was the founder and a director of the GlobalNET Investment House, he was one of the founders of the Union of Financial Planners in Israel (UFPI) and served as the first Chairman and President of UFPI. Dan was the Global Council Representative for Israel for the Global Community (FPSB) from 2012 - 2018 and was a member of the Committee for Standards and Qualifications for the European Union (SQC) until December 2021.
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