Last month’s incredible £148 million ($239 million) EuroMillions lottery win by Suffolk couple Adrian and Gillian Bayford will have prompted wistful “what ifs” and dreams of decadence for most of us. But while a huge lottery payout might be a dream scenario, savvy wealth managers know that there is much to be done to prevent the dream going sour – a scenario which happens all too often.

Becoming fabulously wealthy overnight via a lottery win is a dream chased by millions every day all over the world, and the number of lottery players just keeps going up and up (Camelot, operator of the UK National Lottery, recorded an all-time high sales figure of £5.822 billion for the 2010/2011 financial year, for example). Wealth managers will naturally fall over themselves to win the business of these “instant millionaires”, but there is a lot more to serving such clients than meets the eye, senior executives recently told WealthBriefing.

Although it might initially seem counter-intuitive, one of the first priorities for wealth managers should be helping clients deal with the emotional fallout of a big lottery win, Stuart Cummins, managing director within Barclays’ private bank, told this publication. “You have to recognise that the win is quite a shock and that it can be an emotional time for the client,” he said.

The shock factor

Cummins further explained that this “shock factor” is something that wealth managers should be aware of with any client who has experienced a significant liquidity event, such as in the case of a big inheritance, a divorce or the sale of a business. However, it hardly needs to be said that for lottery winners the shock of coming into such a large sum of money is far greater – they have, after all, beaten odds in the region of 14 million to one. (For the EuroMillions lottery, the odds of winning are even more vanishingly small – in the region of one in 116 million).

George King, head of portfolio strategy and head of portfolio consulting at RBC Wealth Management, agrees that when dealing with lottery winners the element of shock is the first thing relationship managers should bear in mind. “It’s very difficult to generalise, but an over-arching lesson is that this group is the most unprepared of any group experiencing a sudden liquidity event,” he said. While someone who was expecting an inheritance or who was planning to sell their business may have an inkling of what they want to do with their new-found wealth, this is often not the case with lottery winners, King continued. Big-winners may be high on their good luck, but even while the champagne corks are still popping relationship managers need to quickly get down to the fundamentals of what the win means for the client and their lifestyle.

For King, the first question to be addressed is “will this win change your life fundamentally?”, and he rightly points out that “by volume most winners don’t actually win that much”. The average Saturday UK lottery jackpot payout per person is £2.1 million, meaning that in actuality most lottery winners would not qualify as high net worth individuals by the reckoning of most wealth managers. “As a category of new wealth-holder, lottery winners are actually a very retail class,” said King.

But even those who are lucky enough to win far more than the couple of million average payout will need a lot of help to ensure that their lifestyle changes for the better permanently – if indeed that is what they want.

Riches to rags

For Cummins and King, helping clients to arrive at a realistic and sustainable new standard of living is one of the biggest challenges facing wealth managers working with lottery winners. They both agree that cash-flow modelling is absolutely essential if a “riches to rags” story is to be avoided. “Clients have to make sure they don’t get used to a lifestyle they can only afford for a short time,” said Cummins. This, schadenfraude-laden tabloid newspaper stories tells us, happens only too often.

In fact, history abounds with stories of winners running through massive fortunes at an incredibly fast rate. Take for example the story of Michael Carroll, who won nearly £10 million on the UK National Lottery in 2002 and who spent nearly the whole lot within 18 months (he reportedly blew most of his fortune on luxury houses, cars and jewellery).

Stories of jackpot winners ending up back where they started after just a few years must be anathema to wealth managers, but as King points out some winners are happy for this to be the case and it isn’t the relationship manager’s place to tell clients what to do, just to make them understand the consequences of their spending habits.

Informed choices

Helping clients to see the reality of what their spending patterns mean might necessitate some difficult conversations, but this is just part and parcel of the delicate balance relationship managers have to strike with all their clients, King continued. “It’s part of your role as an advisor to give advice…the client doesn’t have to take it,” he said. “It’s ultimately their money and their choices. However, with the right advice they should hopefully be making those choices in a more informed way.”

It may be difficult to have these conversations, and bring lottery winners back to earth, as it were, buy nevertheless relationship managers shouldn’t shy away from them, in King’s view.

“Just saying ‘oh well, they are spending all their money, I’d better go and find a new client,' isn’t really the answer,” he said. “The answer is to say to the client ‘well look, I just want to make sure you understand these are the types of implications of the things that you’re doing. If you’re happy with that, if you’re happy having ten glorious years and then going back to your former lifestyle then that’s a perfectly legitimate choice if you want to make it – but you really have to understand that that is what you’re doing.'”

It would seem that for some lottery winners, it really is a case of “easy come, easy go”, but what about those who want their wealth to last past those “ten glorious years”?

Exercising restraint

King is keen to emphasise that serving lottery winners well isn’t just about keeping the purse strings firmly tied and that these lucky individuals should be encouraged to treat themselves and loved ones – just within the bounds of a proper wealth management plan. “You don’t have to be a miser,” he said, but clients do need to keep an eye on their spending – since expenditure levels have a massive impact on future wealth.

King, like most wealth managers, says that today clients are more aware than ever of the concept of the risk/return payoff in this environment of rock-bottom interest rates. However, while clients might know that they need to add risk to get desirable returns, King warns that it is essential that they don’t see “risking-up” as a fail-safe way to fund an extravagant lifestyle into perpetuity.

“The question we get from all clients is ‘I recognise that there’s a tradeoff between risk and return. If I take some more risk can I get some more returns to meet my spending needs?’” King said. “However, if you do the analytics, the conclusion that it shows you is that it’s not symmetrical. For the additional risk you take on to try to support your spending you dig yourself into a bigger and bigger hole.”

“To put it another way, if you are going to change one factor, changing your spending, or turning that spending knob has a greater impact on your future wealth than changing that risk-profile knob,” he continued.

“All things being equal if you ratchet down your spending your wealth growth over time is going to be more interesting than if you kept your spending high and tried to ratchet up your risk to try to compensate for it. You would have to ratchet up that risk knob much, much more to get the same kind of outcome,” he said.

Other pitfalls

Persuading lottery winners to enjoy their luck, while keeping spending within reasonable bounds, is clearly a priority for relationship managers, but there are also many other pitfalls to watch out for – one obvious one being bad investments. Returning to the case of Carroll, we see that he invested £1 million in his favourite football club, Glasgow Rangers. At the time of his investment he is reported to have said: “I’ve always been a big Rangers fan since I was a kid. I can’t think of a way I’d rather spend my money.” But while this trophy investment was no doubt very enjoyable for him to make, it was undeniably ill-advised in terms of diversification, representing as it did over one tenth of his wealth. We should also bear in mind that Glasgow Rangers subsequently went into administration.

As well as trying to prevent lottery winners from making ill-advised investments, relationship managers may at times also have to restrain their clients’ generosity towards family and friends – a slightly unpleasant task, maybe, but one which is essential, King and Cummins agree.

Aside from large capital expenditures, like properties or cars, the urge to give money away appears to be the second biggest reason that lottery winners’ wealth can be eroded very quickly. “For many individuals, they see their new-found wealth as an opportunity to help their family and friends, or to do something for charity,” Cummins said, adding that while this is certainly laudable this giving needs form part of an in-depth financial plan made with a wealth manager - ideally one which also has an in-house philanthropy advisor.  Importantly, such a plan will help clients to ensure that any gifts are made as tax-efficiently as possible, and this of course applies as much to lottery winners as it does to any other type of client.

Attracting lottery winners

It would seem that lottery winners are a particularly interesting type of client for relationship managers to serve, and it is doubtlessly very satisfying to guide them through their initial shock towards implementing a plan for an enjoyable - but sustainable - lifestyle and long-term wealth. However, securing the business of these clients seems to be a real challenge from a marketing perspective.

Here, we return to the “shock factor” intrinsic to a lottery win – this meaning that it’s impossible for these clients to be marketed to “in advance” to any great effect. Cummins believes that global banking groups might be at a slight advantage here, since clients faced with the shock of a large win will “typically select a wealth manager they know and trust”. However, lottery winners’ familiarity with the big banking groups can be a double-edged sword, he continued. “Familiarity definitely helps and there can be loyalty if they’ve had a good relationship with their bank…but a win could also act as a catalyst for change if they haven’t,” he warned. As such, a bank’s failure to treat all clients well - no matter what their current level wealth - could prove to be a very costly mistake.

Becoming the “go to” bank

Lottery winners are certainly desirable, if somewhat unusual, prospective clients for wealth managers, but securing their business seems to be a slightly tricky task since, as Cummins says, “one of the unique things about lottery winners is that they can come from any walk of life” and therefore they may not even be aware of the abundance of wealth management firms available. Here again, the larger, more “visible” firms are probably at a big advantage and it is usually the case that “winners choose the firm they have heard of”, a spokesperson for Camelot told WealthBriefing.

In fact, the process by which private banks are put in front of lottery winners is shrouded in secrecy to an extent – despite the best efforts of this publication to investigate how big lottery winners are handled by Camelot. The lottery operator confirmed that it provides an admirable level of support to winners (those receiving over £500,000 are offered an independent advisory panel of financial and legal experts within a month of their win), but it would not be drawn on which banks it works with.

It would seem that the biggest winners must have their winnings deposited into a private bank account initially, but although Camelot did say that it works with an “approved” list of institutions it declined to comment on which firms are on the list – and how they got there. Given the high likelihood that this first deposit-taker will be able to retain the future business of the client, this list is no doubt a very desirable place to be, and WealthBriefing would be delighted to hear from readers who can shed any light on this issue.

While the specifics of Camelot’s list of approved banks remains a mystery for the present, it should be said that the organisation is doubtlessly doing right by its winners to introduce them to reputable wealth managers and hopefully helping them to avoid the many pitfalls which can lay in wait. A MORI study commissioned by Camelot following up on the fates of past winners of £1 million or more found that nearly 80 per cent said that they were as well off, or better off, than when they first picked up their win – but that leaves 20 per cent who were not. One wonders what a good wealth manager might have done for them.