As an adviser to high-net-worth individuals (HNWIs), I stress to our clients that investing is just one of many things that they need to consider as a part of their overall financial planning.
An HNWI is loosely defined as someone with liquid assets of at least $1 million, and the U.S. notably has the highest number of HNWIs in the world.
While I want to share five core areas that HNWI investors should focus on, this is in no way an exhaustive list. Individual circumstances and goals are not uniform. Also, a lot of the following is not just for HNWIs. Many of these areas should be considered even for those just starting out on their path to becoming an HNWI.
If having lots of liquid cash is your goal, then ensuring you’re paying attention to these areas is a great place to see if you’re on track for financial peace of mind.
Diversification and long-term investing
We all hear anecdotal stories of how a single investment created a windfall event and made a lot of money in a short period of time. A very contemporary example is if someone bought Nvidia stock after it was cut in half last year, only to see it skyrocket in recent weeks. Concentration can lead to big investment returns, but it can also cut both ways.
If you’re getting started on your saving and investing journey, you will likely have the ability to concentrate your investment funds. This could be starting a business or investing in only a few areas. If there is a setback or significant loss, the idea is that you would have time to make it up, and it was with money that didn’t jeopardize your well-being indefinitely.
Many HNWIs have hit a point in life with their pool of money where taking a large step back would result in relatively large dollar losses that would take a very long time to earn back. For example, let’s say a person is approaching retirement with $1 million, and they lose 50% of it. That’s $500,000 and a significant amount to try to earn and save again.
If a person starting out on their financial journey and beginning a career invests $10,000 and suffers a 50% loss, their ability to earn that $5,000 back over a working career should be doable.
HNWIs should consider being highly diversified and owning many different types of investments in their portfolio to help mitigate this type of outcome. This isn’t a guarantee you will not have down years. However, it is a good practice to avoid permanent loss of capital.
The other part of investing is having the right time frame in mind. Anytime you are investing in stocks, bonds and alternatives, I usually stress staying invested for a minimum of three to five years. In most cases, I suggest an even longer time horizon.
I also see risk management as an important part of diversification and long-term investing. As mentioned, there are certain points in a person’s financial life phase where significant setbacks can take them off course and jeopardize reaching their goals. Thus, we must manage portfolio risks, too, which could include having a rules-based approach to reducing risk taken at certain points and being more protective for a period of time.
This doesn’t mean taking a portfolio from 100% invested to 100% cash and trying to time the market; it means using rebalancing and/or reducing investment position sizes to keep the portfolio on target with the acceptable level of risk being taken.
It is critical for HNWIs to add a tax professional to their advisory team. This is a person who can help prepare tax returns, advise and develop strategies to help make sure you are taking advantage of opportunities within the tax code. Just because someone may be considered HNWI, doesn’t necessarily mean they have a complex tax return either. In many cases, people on their path to becoming a HNWI have a much more complex tax return than someone with investment assets and receiving Social Security.
Another aspect to employ here is how one manages a taxable portfolio. Paying attention to your tax situation and how certain investment strategies impact you from year to year is quite important.
As an example, look to place more tax-inefficient investments in accounts that defer taxes for a period of time. If an investor in a high income tax bracket wants to invest in an asset that produces high ordinary income returns, they have the ability to use funds in an IRA or other tax-sheltered account that might be better than defaulting to using after-tax money.
Or you can evaluate if you are in the right tax bracket to do Roth conversions from your pre-tax accounts (e.g. IRAs and 401(k)s). I don’t believe in letting the tax tail wag the dog, so investors should lead with building portfolios, but being tax sensitive can help you avoid paying unnecessary taxes.
Insurance and risk management
Another important consideration is having the right insurance for various situations. As an HNWI, protecting your portfolio from having to pay for expenses that can be properly insured is critical.
The most common insurance policies are auto, home and umbrella. The crucial issue here is ensuring real risks are insured at the right level. Let’s say your home is underinsured and it sustains damages in excess of your insurance coverage. You might have to tap your portfolio to make up the shortfall when this could have been resolved by increasing your policy coverage to the appropriate level.
Another example is most auto and home policies have maximum limits on coverage. If you are involved in an auto accident, or someone gets hurt on your property, the claim might be bigger than those policies carry on a standalone basis. This is where having extra liability insurance, known as umbrella insurance, can kick in to protect your financial assets from paying to settle claims. Having the right level of insurance to match your financial assets is something to pay attention to on a regular basis.
In addition to property and liability insurance, you should evaluate your need to insure future earning potential or large future expenses if you were to suddenly pass away. This is where life insurance can be a useful tool.
Health insurance is also important, and if you’ll sign up for Medicare when you turn 65, you need to evaluate if you should maintain the same level of coverage you had before turning 65. Medical expenses usually rise with your age, and this can put a strain on investment portfolio withdrawals if there isn’t proper medical insurance in place.
As you can see, insurance covers many different avenues, and it’s critical to review these regularly to make sure you have both the right level and type of insurance in place.
Estate planning isn’t the most fun topic to bring up, since it involves putting plans in place in case a person passes away or becomes incapacitated. This, too, is not one-size-fits-all, and everyone, not just HNWIs, should have a plan that is based on their state of residence. For example, California probate law is different from Washington.
In this area, evaluating the use of trusts, wills, healthcare directives and powers of attorney comes into play. A lot of HNWIs also use this area to help mitigate potential federal estate taxes on their passing. There are also states that have their own level of taxation when someone passes away with a certain level of assets.
The important part is making sure you have the right documents in place now so your family knows your wishes, and it is not left up to a court to decide what happens with your money and assets.
Rarely is this a one-and-done exercise; laws change, as does tax code, and it’s important to review plans to make sure they will still accomplish your wishes in the current environment.
Last, but definitely not least, building and maintaining a financial plan encompasses all of the items above. Financial planning is a process in which advisers try to project future needs and liabilities and match them up with financial resources. It can be a valuable tool in helping inform how much risk should be taken in a portfolio to try and achieve goals, too.
Regularly going through planning allows you to see if you are on the right course, or if areas need to be addressed before they become a problem.
If you are still working and looking to retire, it helps address strategies you should consider before you reach retirement. In a lot of cases, people have an age at which they wish to retire, and they want to know what it will take to hit that goal with confidence.
Planning for the future will always have uncertainties and events that are not controllable, but a good financial plan can provide a path with the options to adjust along the way with confidence.
It can appear overwhelming to focus on all five of the above areas at once. Setting a strategy to accomplish each over a certain period is the first step. A financial adviser can help you determine where to start and how to prioritize each, as well as determine when to review again in the future as circumstances change.
This entire process helps to uncover what is really important to a person and family. Things like charitable giving and the best ways to fulfill those goals may come into the equation.
While investing is often the first thing that comes to mind with HNWIs, there are many other areas that are just as important to discuss and consider to help you achieve your goals.
Halbert Hargrove Global Advisors, LLC (“HH”) is an SEC registered investment adviser located in Long Beach, California. Registration does not imply a certain level of skill or training. Additional information about HH, including our registration status, fees, and services can be found at www.halberthargrove.com. This blog is provided for informational purposes only and should not be construed as personalized investment advice. It should not be construed as a solicitation to offer personal securities transactions or provide personalized investment advice. The information provided does not constitute any legal, tax or accounting advice. We recommend that you seek the advice of a qualified attorney and accountant.
Brian Spinelli is based in Halbert Hargrove’s Orange County and Long Beach offices. His responsibilities encompass running the firm’s investment committee as well as advising individuals and institutions on their investment and wealth advisory needs. Brian was named to HH’s management team in 2012. He earned his Bachelor of Arts in Business Administration – Finance from Loyola Marymount University in 2002 and his MBA from LMU in 2005. He is a CERTIFIED FINANCIAL PLANNER™ professional. Halbert Hargrove is the creator of LifePhase Investing and headquartered in Long Beach, Calif.
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