February 2, 2012 / 9:36 PM / 8 years ago

Advice to new Facebook millionaires: take a breath

(Reuters) - The first thing the 1,000 or so new post-IPO Facebook millionaire employees might need: a reality check.

Financial advisers who cater to entrepreneurs and others who find themselves trading Chinese takeout for caviar say new millionaires rarely think rationally early on.

“It will probably take three to five years to absorb the full impact,” said Susan Bradley, founder of the Sudden Money Institute, a Florida-based organization that coaches the newly wealthy and their advisers.

Advisers say new millionaires are prone to mistakes, like making extravagant purchases or risky deals with friends. Others get so overwhelmed they leave the fortune sitting in the company stock. And some — troubled by the idea of letting even a trusted adviser take the reins — make outlandish investment decisions, often against the advice of a professional.

On Wednesday, Facebook filed regulatory documents for a $5 billion public offering. Many employees at Facebook — at least among those working at the company a few years or more — are expected to be worth between $4 million and $20 million on paper when the company goes public. When the lock up period to sell shares ends six months post-IPO, that paper wealth turns liquid.

Many financial advisers have one piece of advice for soon-to-be-rich employees of Facebook: sit tight.

Financial advisers say it’s best to take the lock up period to make a list of goals, decide how aggressively to spend and plan out with an adviser how to invest without putting those goals at risk. Of course, there is room for some fun with the money, advisers say. But don’t commit to big purchases before the lock up ends; shares could be trading lower by then.


Advisers dealing with sudden millionaires often find themselves acting like a strict parent, an uncomfortable role for someone paid by the client to manage their money.

It isn’t exactly pleasant to tell a client with multiple millions of dollars that one should, say, sock a chunk of that new money away for the future and, no, that $150,000 ring isn’t a good investment.

Greg Friedman, founder and president of the wealth management company Private Ocean in San Rafael Calif., had a client who had been a $250,000 per year earner — and then made $20 million through the sale of his company.

The client said he wanted to maintain his upper middle-class life, with a few extra frills like more nice vacations. But before long, he bought a $5 million house, a horse for his daughter and took his family on a number of very lavish vacations. And, he was eyeing a bigger, $10 million house.

Friedman talked to the client about his spending at meetings that became more contentious. But several years and several million more dollars later, the man accepted that he had to pull back. He gave up on the $10 million house and budgeted his remaining money so he doesn’t have to go back to work.

Caroline Delaney, an adviser and executive vice president with Hillis Financial Services in San Jose Calif., had a client who got rich from a tech IPO and was out celebrating when he called Delaney for help getting a fraud alert on his credit card lifted. He wanted to buy a $20,000 watch.

Delaney knew the down-to-earth guy would not want the watch and cajoled him to hold off on the purchase. “He wasn’t happy with me (then),” she said. “He did thank me the following week.”


Advisers say relationships with newly-rich clients get testy, especially if the person hails from an entrepreneurial environment. Used to being in control, it can be hard to cede power to an adviser or to the whims of financial markets.

What’s more, suddenly-rich clients have been spoiled by the idea of a big windfall. Lower-yielding investments are great for preserving wealth, but the tiny returns don’t always appeal to those who think taking risks is the best way to make a bundle.

The hunger for more easy money can make these clients vulnerable to “can’t-miss” investment deals — especially if a friend is involved or doing the asking. Advisers say they often play the bad guy when they see clients bombarded with requests to invest in the next big thing.

Sandi Bragar, director of planning with Aspiriant in San Francisco, advises newly wealthy clients to have their friends pitch investment opportunities directly to her. “It’s effective in stopping the conversation,” she said.


One big mistake IPO millionaires make: they leave their wealth in company stock. Most are either overwhelmed by the idea of making a plan or are reluctant to sell because they feel loyal to the company that made them rich.

Julie Schatz, a financial planner with Investor’s Capital Management LLC in Menlo Park, Calif., tries to convince such IPO-rich clients that it’s critical to diversify.

She typically advises investing proceeds from an IPO windfall in a mix of U.S., international and emerging market stocks, as well as bonds and real estate investment trusts.

And she slowly weans clients off company stock over several years until they have about 5% to 10% of their portfolio in the company’s stock — up to 20% for the ultra-loyal.

“If somebody gave you $10 million in cash would you go out and only buy Facebook stock?,” Robert Kresek, managing principal with Founders Financial Network LLC in Cupertino, California, said, noting that this is what he would ask any stock-loyal Facebook client.

Reporting By Jennifer Hoyt Cummings; Editing by Jennifer Merritt, Bernard Orr

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