Clients who have become suddenly wealthy—whether through an inheritance, a windfall profit from a real estate deal or IPO, proceeds from selling a business, a lucrative new contract, or even the lottery—present a unique mind-set and specific financial-planning challenges.

Sudden wealth may be highly anticipated, such as receiving an inheritance, or totally unexpected, such as hitting the lottery—but people in both situations can experience issues, says Richard Lehman, adjunct professor of behavioral finance at UC Berkeley Extension and Golden Gate University.

People’s ability to make sound financial decisions depends in part on whether they are generally happy, sad, or frustrated, but unanticipated sudden wealth will throw someone into a very different state of mind that can greatly impact their decision-making, Lehman says.

“When you come into money, that’s going to shake all of that up,” he says. “It’s going to be crafted by whatever state of mind a person had before, but it’s going to create a temporary euphoric state of mind. There also might be a temporary fear or paralysis because they literally don’t know what to do with all of that money.”

A person in that situation will likely go out and celebrate for some time before thinking of getting a financial advisor, Lehman says. They will also likely be plagued with people approaching them, wanting “a piece of their money.”

Coupled with the temporary euphoria, a person in that situation may not know about all of the things that come with wealth. They may also not know what is available to people who are wealthy or what is needed—not just in terms of investments, but in terms of wealth protection, advisors, legal help, and institutions.

“This is probably the most challenging situation,” he says. “They are starting not only from scratch, but they are also in that temporary euphoric state and may be thinking about things like, ‘How quickly can I go to Fiji?’”

“Advisors should say in those situations, ‘Go, take your trip—check out. While you’re gone, I’ll put together a lot of information for you, with different scenarios and options, and I’ll present it to you when you get back.’

“This prevents them from making quick decisions and gives them time to adjust,” Lehman says. “People need that—it’s called hedonic adaptation.” Studies of people who have won the lottery have shown that after the temporary euphoria, people typically revert to their emotional baseline state before they came into substantial wealth, he says.

Secondly, a big part of the psychology behind financial decisions has to do with establishing reference points, Lehman says. When people start bringing in a lot more money, they simply set a new baseline for themselves in terms of spending and lifestyle.

“That’s another good reason for advisors to recommend that people take a trip and chill out, so they’ll be less impulsive in immediately buying a mega house or a mega yacht,” he says. “When they have a chance to really ponder for a while, they’ll tend to think a little bit more rationally about it and will likely feel more inclined to put some of the money away, so they know they’ll have income for the rest of their lives.”

Lehman adds, “If the person does take the smart step and commits to working with a financial advisor, the advisor needs to carefully engage the client in a serious discussion about risk management in all areas of the client’s financial life. On the investment side, risk-managed strategies that have capital preservation at the forefront should play a prominent role.”

Clients who unexpectedly become wealthy, such as from winning the lottery or receiving a substantial personal injury lawsuit settlement, are probably the most vulnerable and often encounter problems associated with “sudden wealth syndrome,” says Daniel Ruben, M.D., MPH, MBA, and founder of Life Strategies Advisers Inc. in Westlake Village, California.

“Some have panic attacks, sleep disorders, irritability, and feelings of guilt,” Ruben says. “Some go into depression and some develop paranoia, thinking everyone is after their money. People with this syndrome often have an extreme fear of losing it all—easy come, easy go.”

One of the major features of the syndrome is feeling alone, which affects their relationships, he says. Their family and friends may become distant from them because they think the person is somehow changed, or, alternatively, they may cozy up to them in the subconscious hope that some of the newfound wealth might rub off on them—through either persuasion or coercion.

“All of these feelings can be very destabilizing for their psyche and for their relationships, but it’s something they need to deal with,” Ruben says. “A lot of what I do when it comes to helping people with managing their wealth is helping them through these emotional issues.”

He tells such clients that they need to let things just happen for a while and take the time to understand it, and that they should not make any big decisions immediately. Ruben also encourages them to read about sudden wealth syndrome and then discusses the issue with them. He also advises them to get support from an experienced financial advisor (whether himself or another advisor of their choosing), CPA, and a lawyer, in part to provide interference for them with friends and family.

“They are going to need someone acting as a fiduciary on their side, to help them make good decisions—and also to help them spot potential attempts at fraud from people trying to take advantage of someone who is not familiar with having and managing wealth,” he says.

When someone anticipates an inheritance, their ultimate financial health depends on how they plan for it. Ruben has discouraged clients expecting an inheritance to use it “as an excuse” for not being responsible with their money now.

“I’ve asked some people, ‘What is your retirement plan?’ They say, ‘Oh, the inheritance,’ but they should throw it out of their mind,” he says. “Sometimes people can be very disappointed, as their parents end up living for a very long time, and they end up spending a lot of their money before they die.”

It’s unhealthy to depend solely on an expected inheritance, and for those who do, it often portends an inability to handle wealth responsibly, Ruben says. “I challenge them about this, but as a doctor who practiced medicine for many years, I’m used to some people either taking my advice completely or not taking my advice at all—but most fall somewhere in between,” he says.

Reuben tries to raise clients’ awareness so that they may learn to use their money wisely in a way that reflects their values and tries to get them to save and invest a little more before receiving the inheritance than they otherwise would.

“One of the reasons is that I want them to go through the process, so they know what it looks like before they inherit a lot of money,” he says. “They need to learn how to make decisions that will translate to the results that they desire.”

When it comes to managing their wealth, there are issues such as taxation, deciding how the money should be allocated for both the short and long term, and determining their ultimate goals, Ruben says. Going through the process is very important because it puts them in a better position when they do inherit wealth.

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Mary Lyons, a financial advisor and founder of Wealth Woman Inc. in Dallas, says that she worked with a couple for several years and both had successful careers. They had a substantial combined income, with the husband making the larger share. A few years later, he passed away. As part of the financial plan developed with Lyons, more than adequate protection was in place and the surviving spouse received several million dollars in life insurance money.

“He had become terminally ill and they prepared for it, but she still had to get used to dealing with so much money, along with grieving for her husband,” Lyons says. “Her initial reaction to losing the primary breadwinner was fear, and she told me that she needed my help to make sure she didn’t spend the funds before we could put her plan into place.”

Lyons and the client then agreed upon a plan to invest her money in an actively managed investment portfolio, as well as an annuity, and put away significant savings for her kids’ college tuitions. But Lyons also told the client that it was OK to spend some of the money now “guilt-free.” She paid off a small debt for a family member and took a trip with her daughter.

“It was very wise that her financial plan included an insurance mechanism to alleviate her fear that she would spend all of her money and would not have any for the rest of her life,” Lyons says.

Lyons also has been introduced by divorce attorneys to spouses receiving settlements who haven’t been used to dealing with investments. Some of them agree that it makes sense to develop a full financial plan, wanting to make sure the money lasts. Some decide not to, saying they simply want to maintain their current lifestyle until they find a new partner.

“That’s harder for me to deal with, as there’s only so much I can do,” she says. “We do talk about what-ifs. Putting things on hold while money is running out is not, to put it mildly, the best plan, but sometimes people don’t want to hear the truth.”

Most of the time, if someone ends up in her office, Lyons says, they tend to be logical regarding finances. Sometimes, though, clients can be paralyzed about making decisions or, conversely, make some very impulsive ones.

“I am speaking to someone now who came into about a million dollars and then immediately invested most of it in stocks that they picked themselves without a truly sound rationale or as part of an overall comprehensive investment plan.”

Lyons is patient with this client because she is committed to trying to foster a productive long-term relationship that will ultimately help the client get on a path to responsible money management. “Empathy is the most important thing in these situations,” she says. “It’s important to try to understand where people are coming from when they suddenly find themselves wealthy.”

While many professional athletes expect to earn “decent sums of money,” they realize that, eventually, they will still have some issues dealing with wealth, says Peter Roe, a founding partner of Masters Private Client Group in Asheville, North Carolina, a wealth-management firm affiliated with Horizon Financial Group.

They have internal pressures about whether they are making the right decisions, and external pressures from family and friends who helped them in their athletic careers—and therefore feel entitled to a portion of their wealth, Roe says.

“Even if those expectations aren’t there, often athletes feel an obligation anyway, and want to buy a house for mom or a car for dad who has always supported them,” he says. “I let them know it’s OK to do that, but in a financially responsible way.”

If it’s going to be an appreciating asset such as a house, Roe has them make sure that it’s structured correctly, so that all of the different benefits and costs are handled in the most efficient manner possible. If it’s a depreciating asset such as a car, they should put that in their budget category that is set aside from the money they are putting in their retirement savings.

Roe also helps clients analyze prospective investment deals that people bring to them, such as flipping houses or investing in a small business. It could be a good deal overall, but not a fit for the client, so then he recommends what needs to be done to make it viable for his client. In those cases, he uses it as a learning experience to examine how the structure of an investment—and the relative liquidity associated with it—can have a big impact on the client’s overall financial health, exclusive of the investment merits of the deal.

“For new clients who are just starting to make money, my first piece of advice is to take your time to learn,” Roe says. “Affiliate yourself with a good team of advisors and you will be well-served in the long run.”

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People can come into newfound wealth for myriad reasons—and their resulting emotions can vary widely. Advisors can help clients through these complex issues by educating them on what to expect both emotionally and behaviorally. Advisors should also help such clients understand sound principles of risk management and capital preservation. They will then be better equipped to navigate the potential minefields that often come with windfalls, so their wealth will last a lifetime.

The opinions expressed in this article are those of the author and do not necessarily represent the views of Proactive Advisor Magazine. These opinions are presented for educational purposes only.

Daniel Ruben is a registered principal, offering securities and advisory services through Independent Financial Group LLC (IFG), a registered broker-dealer and investment advisor. Member FINRA & SIPC. Life Strategies Advisors and IFG are unaffiliated entities.

Mary Lyons is a registered representative and investment advisor representative of and securities offered through OneAmerica Securities Inc., a registered investment advisor, member FINRA, SIPC. Wealth Woman is not an affiliate of OneAmerica Securities or the companies of OneAmerica and is not a broker-dealer or registered investment advisor.

Information is provided by Peter Roe and written by Katie Kuehner-Hebert/Proactive Advisor Magazine, a non-affiliate of Cetera Advisors LLC.