Recipients of Lump Sums

When you receive a large sum of money, you could be taken advantage of when you invest it. You could become a victim of investment fraud and lose it all to someone pretending to help you invest. Or you could make a poor investment choice that is just not in your best interests. 

You might receive money from an inheritance, winning a lottery, a lawsuit settlement or when you leave a job or marriage. When this happens, you want to make the most of the money so you will probably think about investing it as soon as possible. 

Take your time

If people around you know about the money, some will offer investment help and advice that may be better for them than for you. You may have gone through a major life change, like losing a loved one, losing a job, retiring, or ending a legal battle. The stress and high emotions that come with big life changes can make you feel you need to “do something” with the money quickly. This feeling can make you more willing to rely on others’ judgement when you are thinking about your financial options. 

In all of these cases, it is important to step back, take your time, and think about this new money as part of your overall financial and personal situation. Putting the money in a high-interest savings account or short-term guaranteed investment certificate (GIC) is a way to keep it safe while you make a longer-term investing decision. You won’t lose any of the money and you will be able to take it out it without paying a penalty when you are ready.

Getting advice

When you suddenly have a lot of money, you need to be careful about who you take advice from. Someone new who approaches you about investing your money may not be trustworthy. If you already have a financial plan and an independent financial planner you trust, meeting with that person is a good first step. The key idea here is “independent.” Of course, the person giving you advice should be qualified and trustworthy. But they should also not make money on your investment decisions. 

Even a financial advisor/registrant that you worked with in the past is not independent if they make money when you buy investments from them. You may want to buy investments from this person eventually but first you need “independent” advice.  An independent financial planner cannot advise on specific investment products. However, they can give you more general advice which will be useful when you have new money. 

Timing your investing

Timing is also important when you have a large sum to invest. If you are buying equity investments such as shares, mutual funds or exchange traded funds, you might be better off investing smaller amounts over a period of time instead of putting a large amount into the market all at once. The market changes every day so spreading out the investment can reduce risk. 

The effect of income tax

You have to pay income tax on some lump sums of money but not on others. The more money you have, the larger the effect of taxes, so you need to know if your new sum is taxable or not. If your new money is taxable, registered account programs, such as Registered Retirement Savings Plans (RRSPs), might help you pay less income tax or pay the tax later.

Options beyond investing

Do you have any debt, like a loan, a credit card bill, or a mortgage? You may want to use some or all of your new money to pay down debt instead of investing it. This is especially true if you are paying high interest, like on credit card debt. An advisor/registrant who will make money if you invest, but will not if you pay off debt, may not suggest this option.  An independent financial planner will look at debt repayment and other options instead of focussing only on investing. 

You may have a choice between taking your new money in one lump sum or in regular payments over time. This is a complex choice that calls for careful analysis. A qualified, independent financial planner will bring in professionals, such as lawyers, tax accountants or actuaries, to help you make the decision that is right for you.

This guide can help

The Investor Rights and Protection Guide is for all investors. But the tips below will help you, as someone who has received a large sum of money, get the most out of this guide.

When reviewing Types of Financial Investments, think about how a temporary investment in a high-interest savings account might be better than investing a large sum in a higher-yield, but riskier, equity investment right away.

When reviewing Investment and Income Tax, think about whether a Registered Retirement Savings Plan (RRSP) can help you reduce or delay the income tax you pay on your new money.

When reviewing Rights for Deposit-type Investments, think about how these low-risk options can keep your money safe while you figure out your longer-term plan for investing your new money.

When reviewing Rights for Security-type Investments, think about how an advisor/registrant’s conflict of interest can cost you more when you have more money to invest with them.

When reviewing Investment Fraud, think about how not sharing the news of your new wealth can protect you from people who want to take advantage of you. Also think about how your particular situation might make you more vulnerable to a fraudster’s pressure to “invest quickly.”

When reviewing Financial Planning by Advisor/Registrants, think about how making an investment decision that doesn’t fit your overall financial plan can easily happen when you take advice from someone who makes money from your investment decision.

When reviewing Fee-for-service/Advice-only Planners, think about how the benefits of an independent financial plan can far outweigh the cost, especially when you have a lot of money.