But Why Do They Blow the Money?
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In this era of ever larger judgments and settlements, a sadly consistent number of recipients still deplete their settlement funds in short order. If ninety percent of the funds are truly gone in five years as some allege, my question is: why?
In his book “Everybody Wants Your MONEY” David W. Latko points out that there are five basic ways people acquire big money: they inherit it, marry into it, steal it, win it, or earn it. Of these, only those who earn their fortunes, says Mr. Latko, tend to preserve their wealth. Members of the other four categories are prone to become wastrels.
People who go broke or who bury themselves deeply in debt are really just people who aren’t comfortable having money. The people who run through their money simply haven’t come to terms with who they are and what they want the money to do for them. It may appear that they lack financial discipline, but many times that lack of discipline actually derives from an emotional defect. It’s not about the money; it’s about their emotional relationship to the money. If they don’t have someone watching out for them, someone providing emotional stability, it’s very hard for them to stay grounded financially.
Injured claimants have often struggled in other ways for a long time. Given the harsh experience many have been through, they find it nearly impossible to resist the instant “feelgood” that their new money can provide. It doesn’t really matter which method they use to relieve themselves of their money—rampant spending, injudicious deal making, various degrees of greed, fraud, or poor investing— if they are uncomfortable having it, they’ll soon be rid of it.
Mr. Latko (the product of a middle class family who today manages over $ 100 million) says he “knows real wealth when he sees it”. “If you’re confident, you’re wealthy” he says. “I’ve seen guys who work on a ship channel and they get to a certain point and they’re confident. You can look in their faces, they’re longshoremen, and they have this confidence about them.” He says he can spot a longshoreman who has enough equity in his home and enough money in the bank to feel secure. Other people—no matter how much money they have—never get there. “I’ve seen a lot of guys with millions and they don’t have any confidence” he says, “So they’re not wealthy.”
Surely time and experience are the great levelers in life. No matter what kind of emotional upset you experience, time helps put it in perspective and helps you find ways to deal with it. Given enough time, people can—and repeatedly do—overcome tremendous setbacks.
Unfortunately, time is one luxury unavailable to most claimants at settlement. Already reeling from the underlying physical and/or emotional trauma, they are thrust into the position of making one of the biggest financial decisions a person will ever face. The fact that they must decide both whether to accept a settlement and how it should be arranged in a high-pressure, compressed time period while still in this impaired emotional state only adds to their confusion and degrades the quality of their decision-making.
Cash settlements require a claimant to either already possess effective money management skills or know a competent and trusted financial advisor. Without one of these, most claimants don’t stand a chance. But most of us are not money managers because we’ve never had a large sum of money that needed managing and few of us know competent or trustworthy financial advisors because we haven’t had to.
But even if we did, the odds are stacked against us again. What’s true is that there are relatively few truly “disinterested” personal finance experts around; there are, however, vast legions of expert salespeople who must “produce or perish” (650,000 stockbrokers alone*). They must keep “moving product” or find themselves out of a job. How are claimants supposed to sort through that bunch to find one of the few good (read “honest”) ones? Just like the rest of us, they can’t.
Consider the case of “Mr. Willa”, a middle aged, working class gentleman who never experienced significant financial prosperity until he received a settlement of $450,000. Although offered the chance to structure a portion of his settlement, Mr. Willa believed he could “do better” with a financial advisor he had just met “through a friend”. Over his own attorney’s objections, he opted for an all-cash settlement.
A few months later I asked Mr. Willa’s attorney how he was doing. She advised me that, after an “active” start, the new financial advisor had stopped returning Mr. Willa’s phone calls.
He became so upset that he asked his attorney to look into the matter. She found that the financial advisor had locked Mr. Willa into investments that carried staggeringly large up-front commissions and long-term, expensive surrender charges. Mr. Willa’s money was now—quite legally—tied into investments that paid maximum commissions to the financial advisor but could not be changed without costing Mr. Willa more than $26,000 in surrender charges. Mr. Willa isn’t feeling too “wealthy” right now.
So the question is: can claimants ever achieve the kind of “wealth” that Mr. Latko describes? Yes, by crafting a distribution mechanism that gives them some money immediately but preserves the rest of it for later when they have hopefully learned some lessons. They can burn the initial money any way they like: loan it to friends, fall prey to aggressive financial planners, or simply go shopping. But no matter how badly they blow it, they haven’t blown all of it.
After that original money is gone, imagine the relief when their first structured settlement check arrives. They now have a guaranteed stream of income coming in, whether they learned any lessons or not. Given this fresh start, a remarkable number of recipients settle happily into their newfound security, glad to have been given a second chance to earn the kind of “confidence” Mr. Latko describes. Viewed this way, many of our claimants do indeed become “wealthy”.
Care to give your claimants the opportunity to experience ‘real” wealth? Call Frank C. Kilcoyne, C.S.S.C. at 800 544 5533. I am here to help.
* According to the National Association of Security Dealers.
