Life"s pretty dandy when you"re wealthy and you can buy anything you need or want. But what happens when, all of a sudden, the money"s just no longer there?
When the money flows and the good times roll, the super-rich are coveted by private banks and wealth managers. They never have to look far for advice about which investment to add to their equity portfolio or how to set up trust funds for their nearest and dearest.
Their pot of gold is also an obvious sign of their success and hard work, as well as a comforter for family and a powerful way of making friends. Having serious money opens doors to a way of life that many of us can only imagine, from five-star hotels and first-class flights, to flash cars, numerous properties and private education for the children.
But what happens when the gravy train derails? When the well-paid job ends, the divorce gets nasty or when the investment goes horribly wrong?
How should high-net-worth individuals react when their worst fears are realised and they become low-net-worth? Both practically, in re-arranging investment portfolios to meet their new circumstances; and emotionally, with the change in fortune and status?
History is littered with rich and famous people who lost either all or big chunks of their wealth. Showman PT Barnum lost his fortune through bad investments and loans; singer Marvin Gaye through a costly divorce; and footballer George Best just spent the lot. In recent times, software anti-virus creator John McAfee was unable to protect his wealth from crashing from a reported $100 million to under $10 million following a series of bad real-estate investments.
The effects of lost wealth can be devastating. It forces individuals to make intense personal decisions that affect not just themselves but their families. They often have to liquidate assets, sell the beautiful house and car and perhaps end the private-school fees. It can be humiliating, cause tremendous strain in family relationships and, in some cases, lead to thoughts and attempts of suicide.
And the fall from grace can be extreme. Following the dotcom crash there were tales of former internet millionaires finding themselves on the street, being forced to beg to get by.
A change in thinking
Greg Davies, behavioural finance specialist at Barclays, says the emotional and practical reactions to sudden wealth loss are intertwined, making it harder for people to make sensible choices. “There are very strong emotional components that can get in the way of making good decisions,” he says. “Take two people with the same wealth. One is content with the level because it is the most money he"s ever had, while the second isn"t happy because he was divorced yesterday and previously had twice as much cash. He"ll struggle to make future decisions because of that loss.”
He says people in these situations may be unable to give up the past and “hanker for what used to be”. This leads them to indulge in "casino" type investing. “They dial-up their investment risk taking. They"re tempted to roll the dice and put it all on 17 to get the wealth back,” he explains. “It then leaves them even worse off.”
Conversely, they can miss out on opportunities to restore at least some of their fortune by turning inwards and losing confidence. “The other extreme is to go ultra-defensive and keep everything in cash,” he says.
Davies says people should try and forget past events and return to investing and wealth-creating basics. “Establish the right level of risk and invest in a diversified way,” he says. “It"s not easy, but you have to get rid of the emotional baggage. You have to let the emotional catch up with the financial.”
The best answer for that, he suggests, is the simple passing of time. “Give yourself some breathing space and don"t make any big financial decisions straight away,” he says.
The emotional hit, he adds, can differ depending on the way wealth has been lost.
“A divorce is clearly very emotional, and you will find it hard to make decisions. But your emotional state is independent of the finance,” he says. “If you have had a bad investment you will feel you have to stay away from that asset class. In the credit crunch, people sold out of shares or property at the bottom because they couldn"t live with the stress of it getting worse. They moved into collectables such as wine because it was something they felt more comfortable with - they could touch and feel it. But it was dangerous because I don"t think they really weighed up the financial risks. They bought emotional comfort.”
Lavinia Osbourne, Director of Personal Finance Consultants Butterfly Wealth Creation, reiterates the point about going back to financial essentials. “You have to review your investments and find out what"s working and what isn"t. Are you utilising all your tax allowances, such as capital gains, and getting the best saving rates out there?” she asks.
It"s a basic point, but these are issues Osbourne believes some extremely wealthy people just don"t know enough about. “They delegate - in fact abdicate - the responsibility of their wealth to others. When it goes, they are faced with the responsibility and they don"t have the financial education,” she argues.
Starting over
This tends to happen to those with inherited rather than created wealth. “The creators have taken risks to get their wealth - they had the drive to attain that lifestyle,” she explains. “They will pick themselves up again because they have the financial skill sets. The inherited haven"t had to train their mind to make wealth, and perhaps their self-worth is more tied up with their net worth. It will be harder for them to get back on track.”
Steve Meiklejohn, Partner at law firm Ogier, urges the culling of costs and liabilities. McAfee is a good example here - selling off properties, planes and landing strips to even his losses.
Meiklejohn says costs can also be cut from expensive administration costs around trusts or companies. “We managed to change the administration of a trust for one family to bring fees down, and we closed or sold loss-making businesses,” he explains. “We turned the losses tap off.”
He also says emotional help can be sought from psychiatrists. “It sounds dramatic, but they can help people who have known a life of no financial worries. It"s a mix of the psychology and the practical help of how to manage a smaller pot of cash.”
Mo Baluchi, Business Development Director at Quilter Cheviot in Jersey, believes a wealth manager can play both roles. They will sit down with clients who have lost wealth to find out their new aspirations and goals, and what investments they want to protect, such as their kids" education, child trusts or equities.
“We"re there to preserve wealth and help it grow,” he says. “Our philosophy is to develop long-term relationships with our clients, and we"ll be there through good and difficult times.”
Losing wealth and the lifestyle that goes with it is traumatic. It can be a blow not only to your wallet, but your confidence, self-esteem and future life hopes too. Obviously, the more money that"s lost, the greater the difficulties faced are likely to be. But it could be a time to reassess and appreciate the simpler things in life unfettered by concerns over dividends, share prices, or which luxury destination to go skiing in this year.
Stem the losses, evaluate what you have left and protect what"s important. The financial capital may have dwindled but the human capital - your experience, education, emotional health and family support - is still there, and will help you build again.
How I lost my fortune through gambling
In 2009, Justyn Rees Larcombe was a director of a privately owned financial services firm in the City of London with a six-figure salary. Three years later, his wife and two sons had moved out of their home after he blew £750,000 of their family fortune on internet gambling.
“I"d only ever bet on the Grand National before, but I got addicted to the buzz,” he remembers. “I"d been so careful with my money but now I had spent all my savings, my wife"s savings, the equity in our house and the deposit we had for a new place. I also lost my job after using my company credit card to make bets.”
He sold his car, family antiques and paintings to raise cash, and had to reduce the support given to his ex-wife, who lived in Jersey with their son, who had attended Victoria College private school. As a result, their son moved to a state school in the island.
“I didn"t think about my pension or the return on my investments. I took out short-term loans with ridiculous interest rates and stopped making long-term financial planning decisions,” he says. “I had sound advice from financial advisers but I kept them at arm"s reach. I didn"t want to discuss it.”
After his wife found out his secret, via a bank statement, he moved back in with his mother. “I lost my self-esteem and became withdrawn,” he says. “I was no longer a husband and father, and had lost my wife"s trust.”
Justyn got help for his financial problems and is now reunited with his wife and children. He"s returned to the City, written a book about gambling called Tails I Lose, rescheduled his debts, and is working with a financial adviser to sensibly plan to finance a house deposit and for potential private-school education.
He"s also learned a valuable life lesson. “I used to hold money in a tight fist, but my relationship with it now is much healthier. As long as we have food on the table and my kids are looked after, I"m happy.”