When Linda and John Wright* inherited $350,000 a few years ago, they thought they were set for life. They had two grown sons, a mortgage-free home and modest savings.

“Like many people, they saw the cash as a financial windfall,” says Jerry Olynuk, vice president and portfolio manager at Matco Financial Inc. in Calgary. The couple made major renovations to their home and loaned one son some of the inheritance to open a restaurant. Although he had a spotty work history, they felt he was going in the right direction.

But that initial loan was just the beginning. Soon the Wrights were fielding regular requests for cash to keep the restaurant afloat. To stem the draw on their savings, they made loan guarantees in lieu of investing. Their reasoning: in a pinch, the restaurant equipment could be sold to pay the loans back.

But when the restaurant failed, the hapless couple learned their son had already flogged most of the equipment. Left on the hook for the loan, they sold their home.

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Unfortunately, “the market did not place the same value on the renovations as they did,” says Olynuk, who counselled the Wrights after they sought financial advice. “They sold at a considerable discount and ended up delaying their retirement plans in order to make up the lost financial ground.”

Such scenarios are far too common

“As many as 70% of individuals who receive inheritances or windfalls fritter the money away in the first one-to-three years,” says Olynuk.

Advisors must intervene so clients can enjoy their newfound wealth while still improving their financial pictures for the long term.

That requires an in-depth understanding of where your client is right now. Cory Daly, owner of Daly Financial Group Inc. in Regina, Sask., says the best thing to do with an inheritance depends on clients’ ages, assets, dependants and financial goals, not to mention issues surrounding taxation, OAS clawback, estate planning and blended marriages.

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“When you receive a windfall, you really have to start from scratch,” he says.

The emotional factor

“The first thing I’d suggest to anybody who comes into unexpected cash flow is to do nothing,” Daly says.

He adds, “Don’t make any plans. Don’t take any phone calls. Don’t do anything until you’ve had a good chance to think.”

Dylan Reece, a financial advisor at Nicola Wealth Management in Vancouver, advises clients to park their money in a high-interest savings account or a short-term bond until they come up with a plan. They may be dealing with their own grief, as well as the emotional fallout from sudden wealth, and may not be financially savvy, he says. “That doesn’t always make for good decision-making.”

Other clients feel guilty about benefiting from death and resolve to preserve the nest egg for future generations at all costs. They may deal with the windfall ultra-conservatively, giving up the chance to reap decent returns on some investments.

Still others treat an inheritance as inexhaustible. “They’ll dip into it and just keep dipping into it until the core of it is gone,” says Olynuk. And, he contends, the bigger the inheritance, the greater clients’ tendency to spread themselves too thin.

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Consider Reece’s client. When he passed away prematurely, he left his two daughters a “couple million dollars,” says Reece. But the women, both in their mid-20s, weren’t working at the time, and now “they’re really not motivated to seek employment.” Instead, for the last four or five years, they’ve been racing through cash, each spending about $150,000 per year—an unsustainable amount if they’re to preserve the capital for the rest of their lives.

The initial number is often mind-boggling. “A million dollars was, and still is, a lot of money,” Olynuk says. “But clients may attempt to satisfy too many personal and family objectives—making major purchases and extending loans to family members—to a point where the principal is whittled down and not really critical mass anymore.”

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