As people progress through their careers, typically, their needs for financial services change as well. This natural evolution occurs for professionals, entrepreneurs and business owners — as you advance along the wealth continuum, the complexity of your financial situation increases. And while there is no one-size-fits-all solution, given the different challenges people face, there are many common issues individuals encounter along the way.
The beginning of your wealth journey…
At the beginning of the continuum is where the majority of Americans find themselves. These individuals have a net worth of less than $1 million, typically have limited experience investing, and have likely earned the majority, if not all of their money, themselves. These individuals are considered “mass market” by practitioners in the financial services industry.
The advisers who focus on this segment often work for brokerage firms and insurance companies and are usually compensated, at least in part, by commissions. This often leaves mass market clients grossly underserved, as there can be a substantial gap between “suitable” and “fiduciary” counsel. These terms describe the extent to which a financial adviser is required to provide advice that is in the best interest of the client.
An insurance agent or a broker dealer typically works under the suitability standard, which means that the products they recommend must be suitable for the client’s stated goals, but it does not mean that they are necessarily the lowest cost, or most appropriate option available. A registered investment advisor (RIA) operates under the more stringent fiduciary standard, which means that any recommendation they make is required by law to be in the client’s best interest.
Clients in the mass market segment are likely to be cost conscious, and may find a lower-cost adviser appealing, but they would be wise to understand the standard under which they operate, and what their compensation structure is. Regardless of what they feel comfortable spending on an adviser, clients in this segment will likely need someone to identify investments that are appropriate for their risk tolerance, liquidity needs and overall financial goals. These investors will also have a smaller cash reserve set aside in case of emergency, so insurance will likely play a role in their financial planning. To properly serve a mass market client, an adviser should have a thorough understanding of life insurance, long-term care, disability, property and casualty insurance. This protection is sometimes overlooked, but can be even more important than investment management, which typically gets all the attention.
Moving along the continuum…
As wealth accumulates, an individual’s needs may move into the mass-affluent region of the continuum, generally classified by a net worth in the range of $1 million to $20 million. These individuals have increasingly complex financial lives, which require additional expertise from their adviser, particularly in areas of estate planning, tax planning and potentially with more specific issues like executive compensation. To effectively serve this population, advisers will need an advanced knowledge of trusts, estate tax planning techniques and charitable gift giving. Not only do advisers in this space need to understand these concepts, they need to know how to employ comprehensive strategies, coordinating the various components of a client’s financial life to support their lifestyle needs and long-term goals.
Advisers serving the mass-affluent will likely work in tandem with the client’s other professionals, such as accountants and attorneys, to execute these strategies and to help the client quantify the risks and benefits of the decisions they face.
At the far end of the wealth continuum are the wealthiest individuals and families, known as the affluent, or ultra-high net worth (UHNW). These clients have a net worth of $20 million and up and are faced with all the challenges as the mass affluent, as well as more complex issues, which require additional skills from their adviser. These clients are typically highly successful professionals, inheritors of family wealth and/or business owners.
Of particular importance for clients in this segment is a comprehensive understanding of estate tax planning, as most will find themselves exposed to the 40% federal estate tax, and depending on where their primary residence is, state inheritance tax as well. Without careful estate planning integrated with comprehensive tax planning strategies, even substantial family wealth can be decimated by taxes, particularly during the transfer of wealth from one generation to the next. Advanced knowledge of illiquid investments, such as private equity, venture capital and real estate, can be of great benefit as well. These types of investments are more common with UHNW investors, as they generally can afford to have a portion of their assets tied up for longer periods of time. Where their adviser can provide unique value is understanding the risks involved, the timeframe of the investment, the tax implications and the integration of a potential illiquid asset into the client’s long-term strategy.
Clients in this space will likely require counsel on how best to integrate advanced life insurance planning, including private placement life insurance, and advanced trust planning, to help successfully pass assets on to future generations. Another planning strategy of interest to UHNW clients is the loaning of money to trusts, businesses and family members. A comprehensive understanding of intra-entity receivables, in conjunction with gifting, is essential to providing effective counsel to clients looking to transfer wealth to their heirs in a tax-efficient manner.
Wherever you are along the wealth continuum, when you decide you need a financial adviser, it’s of vital importance to find a service provider who has the expertise your situation requires. Because marketing is a consistent feature of advisers at all points along the continuum, and a lot of the language sounds the same, the onus is on you to take a step back and understand what you need help with and what your goals are.
Casey Robinson is the Managing Director of Wealth Planning at Waldron Private Wealth (opens in new tab), a boutique wealth management firm located just outside Pittsburgh. He focuses on simplifying the complexities of wealth for a select group of individuals, families and family offices. Robinson has extensive experience assisting multi-generational families with estate planning strategies, integrating trusts, tax planning and risk management.
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