The financial planning requirements of the rich are vastly different and a lot more complex compared to that of a regular investor. high-net-worth individuals (HNWIs) and ultra-high-net-worth individuals (UHNWIs) usually rely on the continuous flow of income and cash flow to cover their future costs, aided by their assets accumulated over the years. Therefore, financial planning becomes paramount for them to maintain the steady inflow of cash through their investments or their existing businesses.
Who are HNWIs and UHNWIs?
A high-net-worth individual is a person that has $3 million or higher in liquid assets, while an ultra-high-net-worth individual (UHNWI) holds assets accounting for $10 million or above. The Securities and Exchange Commission (SEC) has a slightly different definition of a high-net-worth individual for its FORM ADV. According to the SEC, a person with $750,000 as investable assets or $1.5 million as their net worth is deemed an HNWI. It should be noted that there is no industry-recognized standard of wealth that one should acquire to be considered an HNWI.
Irrespective of the amount of wealth amassed, proper financial planning for HNWIs is vital to preserving money for the long term. HNWIs have to make the right investment decisions; a lot of time, this involves investing very large sums in hopes of making a profit. They also need to plan their taxes. Without proper tax planning, HNWIs risk losing a significant portion of their income and miss out on several tax benefits. Hence, financial plans for HNWIs usually revolve around risk management, wealth preservation and multiplication, portfolio management, and asset or estate management.
In this article, we will discuss the importance of managing wealth for HNWIs and UHNWIs, the financial tips they can use to help with their financial planning, and how a financial advisor may be able to help them in managing and preserving their wealth.
5 Financial Planning Tips for High-Net-Worth Individuals (HNWIs)
Before taking a deep dive into what financial planning involves for high net-worth individuals, it is important to take note that no two financial plans are the same. Every individual has a unique financial situation with varying needs. Goals, objectives, and lifestyles differ and thus, it is necessary to get wealth and finances assessments that are suited to your risk profile.
Here are 5 financial planning tips to help HNWIs manage their wealth better:
1) Create a comprehensive financial plan customized to your financial needs
HNWIs require a highly customized and comprehensive financial plan with carefully picked out investments and strategies to manage and grow their wealth. Some are happy with the money they have and choose to build passive streams of income. Others aspire to reach higher and achieve an ultra-high-net-worth status. A lot of HNWIs work hard to provide their future generations with an endowment of financial security and wealth and seek to amass as many assets as possible. These HNWIs would then also require estate planning services alongside wealth management and legacy planning services. Tax planning, retirement planning, cash and debt management, legal advisory, investment planning, etc., are some of the elements that comprise a comprehensive financial plan for HNWIs.
It is highly recommended that HNWIs consult a suitable fiduciary from a wealth management firm or a personal financial advisor who acts as a fiduciary. The first step is to work with an advisor who understands your values and financial goals and who can make financial forecasts based on the current state of your finances. Then, create a suitable strategy to safeguard and grow your wealth. A qualified and capable financial advisor or wealth manager can provide you with a defined plan of action with measurable results (minimizing tax outgo and expenses while generating returns from investments and other sources of your income).
2) Mitigate all possible risks
Risk management should play a major role in your financial planning if you are an HNWI. Given that size of your investable assets is large, you must carefully assess your risk tolerance and risk capacity before making any kind of monetary commitment – be it an asset purchase, a business decision, or a market investment. One type of risk that HNWIs often oversee but are more prone to is the risk of litigation. Lawsuits can be a drain on finances, resources, time, energy, strain relationships, and can hamper your brand image. Once you know how much risk you are willing to take, you will be able to make better investment decisions. In addition to this, you have to be prepared to tolerate volatile markets and the risk of losing or deteriorating income. If you aim to achieve financial stability, you have to get your wealth advisor to give special attention to managing your risk.
3) Plan for your retirement
As an HNWI, you require a holistic approach to retirement planning. You probably have lifestyle goals and are concerned about how it is going to play out in your retirement. This is where a qualified financial advisor can help. You may explore measures to improve your portfolio performance and find ways to increase future cash flow. This will help you create a sizable corpus for retirement. Additionally, do not forget to consider taxes when planning your retirement. Speak to your wealth advisor in your earning days so that your retirement corpus is flush with funds when you need it.
One efficient way to go about planning for retirement is to list down your expenses. This includes everything from personal and corporate debts to membership fees, donations, and insurance to medical expenses and gifts. Next, spend some time thinking about what your retirement lifestyle will look like, and how you plan to spend your retirement days. This includes travel, spending time with family, or staying at your vacation home. Whatever it may be, note it down. Based on how you plan to spend your time, your wealth advisor will be able to help you create a customized plan suitable to your desired lifestyle and financial standing.
Lastly, assess your monthly retirement income. Know your income sources – passive income from real estate holdings or other assets, your investments (IRAs, equities, bonds, etc.), social security, pension funds, cash accounts, etc. Determine an estimate of the amount of money you require to accomplish your retirement dreams. Seek help from your wealth advisor to formulate a customized plan to optimize your investment performance such that it will enable you to match your requirements during retirement.
4) Explore setting up testamentary trusts
Any number of testamentary trusts can be made through your will. A testamentary trust provides for the distribution of all or parts of your estate and proceeds from your funds, including insurance policies, to rightful beneficiaries. In such a trust, a trustee holds the responsibility to oversee the assets in the event of the passing of the HNWI, and if the beneficiaries are minors or specially abled. These trusts are irrevocable, and therefore rightful distribution is ensured. Testamentary trusts also ensure inheritance to children from other marriages or those who are named in the will. Additionally, establishing a testamentary trust helps reduce estate tax liabilities and provides income tax benefits to the beneficiaries that they otherwise would not receive had they directly inherited the estate. Testamentary trusts also ensure the professional management of assets.
5) Instill financial responsibility in your children
All your efforts to accumulate and protect wealth could seem futile if your future generation is unable to look after it. Self-made millionaires are aware of the tremendous hard work, grit, and perseverance it takes to make money. One must not lose sight of the fact that this inherent value of hard work and the value of money may go missing in your children or grandchildren. If you want your wealth to last across generations, you need to teach your children the importance of financial responsibility and frugal living. You can do so by setting up a monthly budget for the family and initiating children into finance management when they are young. While most parents still do not want to go in-depth on the money challenges the family undergoes, talking to children openly and involving them in budgeting goes a long way to ensuring children grow up financially responsible.
5 Financial Planning Tips for the Ultra-High-Net-Worth Individuals (UHNWIs)
Ultra-high-net-worth individuals have certain additional financial planning options to explore over HNWIs. As their investable wealth increases for UHNWIs, so does the importance of risk analysis, wealth management, and financial planning. While a UHNWI needs to make all the efforts and take similar measures as an HNWI to protect and add to wealth, there are certain additional options one may explore.
1) Consolidate your assets with one trusted financial advisor
Many UHNWIs and their families tend to open multiple accounts with various financial institutions. They believe this helps diversify their investments to mitigate risks. What they do not realize is that several of these accounts offer little or similar benefits. Moreover, portfolio diversification comes from how you’re investing it, not where you hold your accounts. A scattered investment portfolio only leads to further confusion and no real growth. Keeping track is also a painful activity, which is mandatory given the large sizes of investments, and therefore a keen eye is required to analyze and rebalance portfolio mix when required.
Consolidation of assets under one advisor comes with many benefits for UHNWIs and their family members. These include lower expenditure (cost of managing and maintaining multiple accounts), streamlined administration (fewer tax forms and account statements to track), easier and more efficient investment planning (a single advisory to grow collective wealth), simplified estate settlements, and many more such benefits.
2) Split your family income to reduce your tax burden
While consolidating different accounts under one advisory firm makes business sense, a UHNWI need not be the only person bearing the brunt of taxes. The way the tax system is structured, UHNWIs are liable to pay a higher tax percentage than others. Hence, splitting the income, especially among lower-income earners in the family, would considerably reduce the overall tax burden on family wealth. Speak to your wealth manager to create a suitable tax-saving plan to minimize your tax outgo.
3) Put surplus assets into tax-saving investments and charities
Consider using your surplus assets to fetch tax benefits. Set up philanthropic funds or trusts, or consider gifting them to a lower-income family member. Explore investing the surplus in a life insurance policy or even donating publicly traded securities that have run up in value to qualified charitable organizations. All of these options avail you tax benefits. Speak to a wealth manager or a financial advisor to find suitable ways to distribute your surplus assets without hurting your finances.
4) Plan for business succession
If you plan to pass on your business to your children or your grandchildren you have a more demanding task at hand, as you must find the best fit for your business and then involve them in day-to-day business dealings. Once they gain experience, you can ease them into the role over a transition period that typically lasts 5-10 years. Additionally, keep in mind the shareholder’s agreement in this process. Sit with your wealth manager to draft a comprehensive financial plan which incorporates strategies such as individual pension plans, an estate freeze for minimizing taxes, and insurance.
5) Pass on your vacation property to your children through inter-vivos family trusts
Explore inter-vivos family trusts as an effective means to pass on vacation property amicably to your children. An inter-vivos family trust will help you in two ways – firstly, you’ll avoid paying probate tax; secondly, you’ll be able to defer future capital gains.
A co-ownership agreement is another way to ensure equitable distribution of properties. With some planning in advance, you can not only reduce the chances of familial conflict but also save some money in taxes.
Why Do HNWIs and UHNWIs Need a Financial Advisor?
Most HNWIs and UHNWIs have busy schedules. Understandably, it is not quite possible to keep track of every tiny detail of your wealth or the government’s taxation and fiscal policies. The size of your wealth also makes a consolidated view of your finances a challenge, which could hamper efficient investment decision-making. Taxes are yet another pain point for HNWIs and UHNWIs. HNWIs and UHNWIs need help from qualified wealth managers or financial advisors to create strategies for safeguarding and growing their corpus. As such, seeking financial advice from highly specialized advisors can work greatly in your favor. Top-quality services at this level of wealth management are a given, and today you can choose from a wide variety of advisors and advisory firms available. Brokerage houses and investment banks are not the only places to go to when looking for financial advice – Registered Investment Advisors (RIAs) are now increasingly qualified in managing and growing your wealth as well.
To Sum It Up
Both HNWIs and UHNWIs face a set of challenges. Financial planning, along with strategic wealth management, can help them put their mind at ease as far as financial problems are concerned. In such times as ours, with volatile markets, restless social and economic conditions, unpredictable changes, and a much more interconnected world – HNWIs and UHNWIs must stay updated on current events and what effect it has on them and their wealth. A qualified financial advisor can assist them with financial planning and help them gain a complete and comprehensive understanding of their current and future expected finances.
Paladin Registry’s free matching tool helps you find qualified fiduciaries from your area. Answer a few simple questions and our match service will connect you with 1-3 background verified financial advisors who have vetted certifications and qualifications and are skilled in helping you manage your finances and grow your wealth.
For additional questions on the most suitable financial plan for managing your wealth, visit Dash Investments or email me directly at email@example.com.
About Dash Investments
Dash Investments is privately owned by Jonathan Dash and is an independent investment advisory firm, managing private client accounts for individuals and families across America. As a Registered Investment Advisor (RIA) firm with the SEC, they are fiduciaries who put clients’ interests ahead of everything else.
Dash Investments offers a full range of investment advisory and financial services, which are tailored to each client’s unique needs providing institutional-caliber money management services that are based upon a solid, proven research approach. Additionally, each client receives comprehensive financial planning to ensure they are moving toward their financial goals.
CEO & Chief Investment Officer Jonathan Dash has been profiled by The Wall Street Journal, Barron’s, and CNBC as a leader in the investment industry with a track record of creating value for his firm’s clients.
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The blog articles on this website are provided for general educational and informational purposes only, and no content included is intended to be used as financial or legal advice. A professional financial advisor should be consulted prior to making any investment decisions. Each person's financial situation is unique, and your advisor would be able to provide you with the financial information and advice related to your financial situation.