Big win, big life change

20:06, Aug 29 2012
TAKE CARE: Overnight millionaires are a very different breed to those who have grown up wealthy, or built it themselves.

Fancy a gastric bypass? A set of gleaming new bagpipes? A rollicking buffalo-hunting trip in Australia?

For one lucky punter, all these dreams - and many more - could come true tonight. Big Wednesday has jackpotted to $20 million, officially the fifth-biggest prize in Lotto history.

Beyond the quirkier spending on bagpipes and buffaloes, the big winners of the past have often paid off debt, bought a house (or two) and a few celebratory bottles of bubbles.

But even after the initial splurge, the possibilities for investing the remainder are mind-boggling.

So we asked some of the country's top private wealth managers what they would do if a client waltzed through the door with a cool $20 million (or even a little bit less).

But first - to dispose of the prizes. While Big Wednesday does a fantastic job of selling the high-roller lifestyle of sexy sport cars, boats and platinum credit cards, it's all a bit of a gimmick.


A Lotto spokesperson confirmed that all the trappings of the millionaire's club can be traded in for their cash value, and "98 per cent" of winners do just that.

That's a very sensible choice. In the first year alone, we calculated the two cars, boat, and a bach would knock you back close to $1,500,000.

Luxury vehicles in particular depreciate hugely as soon as your bum alights upon the leather upholstery.

For the Lamborghini Gallardo, that's roughly $90,000 gone in the first year and $240,000 over five years.

As for insurance, we couldn't even find someone in New Zealand willing to take a chance on backing the $400,000 speedster.

So forget the glitzy toys - let's take the $20 million in cash.


While expecting to be dazzled with sophisticated investment strategies, the unanimous response from our wealth managers was rather more mundane:

"The first thing you do is make sure it goes in the bank, and stays in the bank, and that they don't rush into any decisions," says Craigs' Investment Partners financial advisor Peter Churchouse.

Why? Because overnight millionaires are a very different breed to those who have grown up wealthy, or built it themselves.

"They need to be really educated into how to handle it," says Churchouse.

Consider that before winning the big one, Dave from the freezing works' financial smarts might only extend to calculating which six-pack is cheapest.

It's easy to see how the horror stories emerge of Lotto winners getting out of their depth and losing the lot.

Churchouse says paying off debt is OK to start with, but the bulk of the cash needs to go untouched.

Once the winner clears their head and sorts out their new life priorities, Churchouse would start gradually introducing the concepts of shares, bonds and property to build a portfolio diversified across the various types of investments.

"I suggest this should take at least six months, if not longer, to work it through," he says.

Your money's not draining away in the meantime. Even earning five per cent interest in bank deposits, $20m will generate an income of $1m a year, or about $666,000 after tax.


So far, so normal. The mantra of diversification across asset classes is the same for any regular investor.

But it's a different story for clients who live and breathe money.

"Most of the very wealthy people will have a particular leaning into a business or asset class that they've made their money out of," says Churchouse.

A property king will probably keep plugging away at property, or an industrialist might reinvest in his company.

For a financially savvy multi-millionaire, $20m opens windows of opportunity that the rest of us will probably never see.

More money gives you better access to investments, says Macquarie Private Wealth financial adviser Brad Gordon.

For example, take the United States Paulson & Co hedge fund, which rocketed to fame in 2007 by reportedly making US$15 billion ($18 billion) betting against property.

It's a big fund and like many others, has equally big entry criteria - a minimum buy-in of US$10m.

Then you have what Gordon calls "habitual investors". If you pass net wealth requirements and are willing to waive some legal protection, you might just get a deal.

Just before Christmas, retirement village operator Metlifecare placed $50m worth of shares to habitual investors and institutions.

While regular shares were trading around $2.40, says Gordon, the habitual investors were able to pick them up at $2.10.

Then there's private equity - the ability to buy a direct stake in a non-listed company. A lot of private equity funds have a minimum commitment of $100,000.

Gordon reckons that should only make up 5 per cent of your portfolio, so you'd need a minimum of $2m just to consider it.

The more money you have, the more you can make - but it's a double-edged sword of risk and reward.

"It all comes back to client goals and needs," says Perpetual financial adviser John Bradley. "If there is no need to complicate things, then things should be kept simple."

He says there's a point where taking on more risk for a bigger return is simply not required. The flipside is that having so much money available means one failed investment won't derail the overall strategy.

As far as minimising tax goes, Bradley says the use of trusts for substantial tax benefits is largely a thing of the past.

It's more about protecting your funds.

"I once met a client who had divorced twice prior to setting up his trust, and at that point was worth a quarter of his original value."

One tax strategy for the mega-rich is the use of PIE funds, which have a top rate of 28 per cent compared to 33 per cent for high earners.

It's clear that anyone who does hit the big time will need to assemble a crack team of trusted advisers around them, including an accountant, lawyer and wealth manager.

They'll probably need all the help they can get to adapt to the total upheaval of their previous lifestyle.

The changes that Bradley has noted range from "the winners divorcing, to investing, to spending badly, and in some cases actually ending up worse off financially".

For Gordon, past experiences with two big Lotto winners has soured him to the whole idea.

"I actually think it's a life-ruiner," he says. All your fundamental values, like hard work and sensible decision-making, go straight out the window.

"All of a sudden, they're put somewhere in society, almost into a no-man's land."

Self-made rich listers don't necessarily want to know them, and their own peers relentlessly pressure them for hand-outs.

So even while legions of hopeful punters will be clutching their tickets close tonight, you won't find Gordon among them: "Funnily enough, since I dealt with both of these guys I've never bought a Lotto ticket!"

What $20 million can buy:

- 40 Auckland houses

- 10 billion jelly beans

- A 301kg lump of pure gold

- 80 trips into space

- A modest NZX-listed company

- 243 elephants

- Any opinions expressed in this article are of a general nature only and in no way constitute direct financial advice. Disclosure statements are available on request.

Comments on this story are now closed.