For high net worth individuals, financial planning comes with different concerns than the average investor. Here’s how a financial advisor can help.
The longest economic expansion in United States history continues, despite new uncertainties arising seemingly every day. It won’t last forever. Everyone knows this, just as they know that expansions don’t die of old age. In reality, no one can truly predict when and why the economy will go into a recession.
Fortunately for investors, our job is to have a well-reasoned plan that allows us to persist and thrive in the face of a wide range of possible outcomes. Wealth management allows investors to take a long-term look at their financial standing and safeguard themselves against an uncertain future. It’s the kind of proactive approach everyone should take when it comes to finances. Unfortunately, not everyone does.
Financial literacy is generally poor in the U.S., which is evident in the way most Americans manage their money. Those who express the most interest in financial planning are often already retired, and their interest often springs out of necessity — they need to ensure they won’t outlive their financial assets.
Curtailing daily expenses, downsizing a home, and making other short-term sacrifices can allow retirees to pay for expensive long-term healthcare or to handle a variety of unexpected situations. Others begin to think more seriously about financial planning as they enter the latter stages of their working years because they want to make sure they can retire.
By waiting too long before engaging in financial planning, however, many retirees and near-retirees have missed opportunities that they simply won’t get back. Later in life, people have fewer options and, frankly, less time to save. As a result, they may be forced to sacrifice their quality of life in retirement simply because that’s the only way to ensure their assets last. In contrast, a younger person who creates and follows a financial plan early prepares for retirement over a longer period and enjoys more options.
In this way, high net worth planning and retirement planning for wealthy individuals are no different than any other type of financial planning. Planning requires long-term commitment, delayed gratification, and making changes when circumstances change. It requires us to accept uncertainty for what it is: an inescapable reality of life. No one can predict the future, but everyone can and should plan for it.
The Challenge of Choice
The only things more debilitating than unknowns are choices. The modern world is filled with options, and financial markets are no exception. Today’s average investor has access to many asset classes, including stocks (domestic and international); bonds (U.S. Treasuries, investment-grade corporate bonds, junk corporate bonds, and foreign currency bonds); REITs; MLPs; commodities and precious metals; derivatives such as options; mutual funds and ETFs; and others. Financial advisors help investors make decisions about these asset classes within the context of their unique financial goals.
Other important financial choices might include whether, when, and how much to invest in a house; which kind of mortgage to use; how much to save for retirement or a rainy day fund; what kind of retirement accounts to open and fund; and how to best save for children’s college educations.
While the fundamentals of sound financial planning investing are universal, wealth management for high net worth investors differs in one significant aspect: It’s filled with even more choices. The average person might be best served by making regular 401(k) contributions and keeping a diversified investment portfolio, but high net worth wealth management requires a more nuanced approach that considers aspects like estate planning, tax planning, and alternative investments that are only accessible to accredited investors. Qualified wealth managers or financial advisors will not only help you make informed decisions about how to incorporate different asset types into your portfolio, but they also can educate you about an array of products, services, and information that may help you grow your wealth, minimize your tax burden, and develop strategies to pass on your assets to the next generation.
Without a strategic approach to financial planning, many wealthy Americans feel overwhelmed. Some experience analysis paralysis and delay crucial financial decisions. Unfortunately, they don’t realize that delaying a decision is still making a decision — and it will likely never be more convenient to begin financial planning and executing on a plan than the present time. Some let their emotions guide them, throwing their money into schemes that ultimately don’t work out so well.
Most people — regardless of net worth — simply don’t plan their finances. Need proof? Ask a dozen people whether they are annually contributing to a traditional or Roth IRA. Many people who do have the ability to save simply don’t realize the benefits of financial planning. The reality is that people who hire financial advisors are more likely to plan their finances. They know it’s important enough to hire someone who will nudge them to create a financial plan.
Only a small percentage of the population truly understands the importance of long-term financial planning, and they may come to that realization in a variety of ways. Some learn about the magic of compound interest from their parents at a young age, intuitively grasping the adage: “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”
Some people experience a financial windfall and suddenly feel compelled to create a plan, and others are genuinely curious about maximizing their finances. Everyone does taxes, for instance, and some people realize that financial planning can make tax season less expensive. They start by asking questions: How might taxes have an impact on your financial plan? What happens to your long-term tax liability with proper financial planning? How does a financial plan reduce the legal bill and tax bill your heirs might have to pay?
As investors continue to ask these questions, they soon realize there are experts available who can help provide answers. Then, all of a sudden, that specter of risk and unknowns becomes easier to navigate.
What Financial Planning Looks Like for High Net Worth Individuals
Based on the wide range of known and unknown variables they face, high net worth individuals have different financial planning concerns than the average investor.
For example, tax planning is far more important at a higher net worth. It can be a challenge to generate strong investment returns while deferring or avoiding taxes. The decisions you make about saving and investing could result in considerable changes to your tax obligations over your lifetime. Because high net worth individuals generally are in higher income tax brackets, it’s critical to minimize tax exposure — and you can’t always do that with traditional investing and saving strategies.
For instance, it may make more sense for you to consider tax-free municipal bonds, or you may choose to locate certain asset classes that are less tax-efficient in retirement accounts to take advantage of the tax shield. You may want to open a donor-advised fund to take advantage of itemized charitable tax deductions. Financial planning for high net worth investors who are considered to be accredited or qualified investors could also include private equity or real estate investments and opportunity zone funds, which require specialized expertise to execute correctly.
If you’re a high net worth investor who has children, you’ll likely receive minimal financial aid to finance their education. That means you’ll need a plan to finance it yourself, which could cost hundreds of thousands of dollars.
You may have heard about 529 plans, also commonly referred to as “qualified tuition plans.” These plans typically have high contribution limits, allowing affluent parents to set aside most or all of the funds directly related to their child’s attendance at a college or university. Withdrawals for education expenses receive favorable tax treatment (and contributions may have favorable treatment depending on your state of residence), making 529 plans a great vehicle for preparing for the costs of higher education. A financial advisor can help you decide whether these and other plans are right for you, enabling you to maximize your tax benefit through these plans.
How Can a Financial Advisor Help Me?
No matter how you gained your wealth (slowly, suddenly, expectedly, or unexpectedly), you can’t manage those finances haphazardly. It must be done with purpose and planning.
In our experience, high net worth individuals don’t just differ from the general public in terms of investing needs; they also tend to approach investing differently. Success in their careers sometimes causes them to overestimate their abilities as investors. They assume that success in other areas of life will naturally translate into investing, and so they decide to manage their money themselves.
As financial advisors, we commonly encounter these individuals. They might not be ready to entrust their money to someone else, and their overconfidence in their own investing abilities could lead them to make poor financial decisions. Our job is to assess an individual’s relationship with money and determine how to work together in a way that minimizes any weaknesses.
High net worth investors may also be very competitive, which can create its own investing challenges. Rather than set their own financial goals, competitive individuals might want to beat an index or match the returns or exotic investments their friends boast about. As such, they may react more emotionally whenever their money is concerned. An objective and less emotional fiduciary acting in their best interests, however, can be a significant boon while preventing fear or anxiety from becoming bad decision-making.
Like any relationship, the one you share with your financial advisor takes time to grow and flourish. Finding that time is critical to ensuring your advisor truly understands what you want and what to execute on your behalf. For high net worth individuals who haven’t retired, finding the time to invest in that relationship can be a difficult proposition. Other high net worth individuals may check their portfolios daily and call their advisors based on short-term fluctuations in portfolio value, which creates its own investing challenges.
A financial advisor can help investors put unknowns into perspective and keep each end of the spectrum focused on what matters most: growing their money over time.
Do I Need a Financial Advisor?
If you’re wondering whether you need a financial advisor, start with a thorough assessment of your financial situation. Indecisive people who are too emotional about financial decisions or who might be too busy to do the work necessary to make sound financial decisions will generally benefit from partnering with an experienced professional.
If you’ve recently experienced a significant liquidity event (e.g., the sale of a business or home, a divorce, or an inheritance), it may behoove you to enlist an advisor to help manage your wealth and develop a financial plan. If you’ve experienced a major life event such as the birth of a child, impending retirement, or the purchase of your first home, a financial advisor can also help you plan for what comes next.
In general, a larger net worth leads to a more complex financial situation. While additional wealth may increase your ability to take risks, it also could mean you need to put together a more detailed financial and estate plan, obtain a high net worth umbrella insurance plan, or shift assets from taxable to retirement accounts (or vice versa) to be more tax-efficient.
Successful investing requires a deep understanding of markets and the factors that drive them. But advising high net worth individuals and families also requires knowledge of the tax system and the ability to identify the most suitable investment choices in a sea of options. Not many people outside of wealth management firms have those skills — and not everyone inside these firms has them.
When to Get a Financial Advisor
You’ve probably heard that people who win the lottery tend to lose their money almost as fast as they acquire it. That’s because most people who receive sudden wealth generally don’t know how to manage their money.
If you’ve experienced a significant change in financial status, the first thing you need to do is make a plan. Put together a list of your assets and liabilities, estimating your current and projected future income from all sources along with your current and projected future expenses. Imagine several possible scenarios that might create additional expenses, such as an adverse health event or early death, and consider how you might prepare. Finally, assess your immediate and long-term goals and try to get as specific as possible. If you do decide to talk with a financial planner, you’ll want to share this information so that your advisor can customize a financial plan for you.
Even if your financial situation hasn’t changed in years, an impending change to your lifestyle — the sale of your home or business or an upcoming retirement — should be treated similarly to a significant change in your wealth. A financial advisor can help you prepare for that step by prioritizing retirement and estate planning, and the sooner you begin preparing, the better. Before you talk to an advisor, try to come up with answers to some of the following questions:
- How old will you be when you retire? How long will you have to rely on your investment portfolio to sustain your standard of living?
- When will you begin receiving Social Security? How much will you receive?
- What other income sources (pension plans or an inheritance, for instance) will you depend on?
- How healthy do you expect to be in retirement? How long do you expect to live?
- What will your tax rate be during your retirement years?
- How will retirement change your ability or willingness to take risks?
In addition to these questions, you’ll want to consider any other financial goals and obligations you may have. These goals will affect your retirement inevitably, so apply the same line of questioning as above to assess the best- and worst-case scenarios that may affect you in retirement.
While financial advisors don’t create estate plans, they can help you determine whether you need one (to avoid probate court expenses, minimize estate taxes, or something else) and refer you to an estate-planning attorney. If you talk to a financial planner, he or she can help you understand how to be ready for those and any other scenarios that may arise.
How to Choose a Financial Advisor
Not every financial advisor will be able to get you where you want to go. The key to finding the right advisor is to be transparent about your needs and goals. As you have conversations with different advisors, gauge their ability to listen. You want to be sure that they understand exactly what you’re looking for and can answer hard questions about your financial situation.
Likewise, you want someone who is a fiduciary and an investor. Some money managers today are simply salespeople who may not have your best financial interests in mind. They stick your money into high-cost insurance products such as whole life insurance or annuities — or horribly expensive private REITs that ultimately cost you money but offer big commissions for the salespeople. A financial advisor who is a fiduciary is legally compelled to make financial decisions and recommendations on your behalf that are in your best financial interests.
The right advisor will also make you a priority. At large institutions, you may be considered an afterthought unless your net worth exceeds $50 million, or you may work with a different advisor every year. The best advisors care about their relationships with clients. They’ll strive to give you a thoughtful financial plan that’s understandable and actionable, and they’ll make themselves readily available to discuss your progress and goals.
When you work with the right firm, your portfolio will be made up of investments that align with your personal values, let you sleep at night, and, ultimately, grow your wealth.
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This article is prepared by Pekin Hardy Strauss, Inc. (“Pekin Hardy,” dba Pekin Hardy Strauss Wealth Management) for informational purposes only and is not intended as an offer or solicitation for business. The information and data in this article do not constitute legal, tax, accounting, investment, or other professional advice. The views expressed are those of the author(s) as of the date of publication of this report, and they are subject to change at any time due to changes in market or economic conditions. Pekin Hardy cannot assure that the strategies discussed herein will outperform any other investment strategy in the future; there are no assurances that any predicted results will actually occur.