Safeguarding Wealth: The Importance of High Net Worth Financial Planning

Many families, remembering more austere times, may be apprehensive that without proper wealth protection, they could revert to those days. The greatest financial fear they have is a personal financial disaster, consequently losing the freedom and choices provided by their affluence.

“I wish to share what’s of utmost importance in my situation,” a prosperous man we encountered at a charity event expressed. “Safeguarding my wealth, that’s my focus.”

In his eighties, the man had accumulated a fortune in the hundreds of millions, comprising real estate, stocks, and a significant investment in municipal bonds.

Born during the Great Depression, he understood the value of each of his dollars. He aimed to protect his wealth from potential losses, ensuring it lasted for generations. After several conversations, he sought our assistance in managing his real estate and overseeing his municipal bond and stock investments.

The more we conversed, the more precise our apprehension became. Could anyone in his family truly grasp the efforts behind the accumulation of such wealth? Who could be trusted to keep this fortune safe once he was no longer there? His niece was employed at a hedge fund but was relatively young—handling such a massive amount of money required more experience. His children showed little interest in the family’s finances. The dilemma was: who could manage the family business, the real estate, and the substantial investment portfolios? Who would continue his role as the guardian of the family’s wealth, ensuring the lifestyle he desired for his family continued for generations to come?

Many ultra-high net worth families echo similar worries. With great affluence comes great responsibility. Who would preserve the family fortune? How would the successors be trained to manage such a significant sum? Who could adeptly oversee this wealth to prevent its loss? What plans would be in place to ensure equitable (not necessarily equal) distribution of wealth?

In high net worth financial planning, everyday worries include maintaining control of a privately owned family business, managing real estate, or even weathering the next unexpected financial downturn. Today’s media gives ample cause for concern, whether issues with China, instability in the Middle East, political antics in Washington, DC, or the VIX hitting an all-time high.

Predictions of looming catastrophes, the potential impact of the Federal Reserve on bonds—how will your ultra-affluent family navigate these challenges? What financial and nonfinancial safeguards can be put in place to secure your assets further?

Table of Contents

• Navigating an Uncertain World
• 8 Critical Components of High Net Worth Financial Planning
• 8 Critical Components — in Detail
  • 1. Investment Strategies with a High Net Worth Financial Planner
  • 2. Estate Planning and the Role of a High Net Worth Financial Planner
  • 3. Retirement Planning: A Crucial Aspect of High Net Worth Financial Planning
  • 4. Tax Planning: Incorporating High Net Worth Financial Planning to Minimize Estate Taxes
  • 5. Allocating Your Assets Based on Individual Goals: Customized Asset Allocation Protects Against Market Volatility
  • 6. Rebalancing Your Portfolio: A Vital Component of High Net Worth Financial Planning
  • 7. High Net Worth Financial Planning: Providing a Predictable Monthly Income
  • 8. Updating Your Wealth Management with a High Net Worth Financial Planner
• Non-Critical Components of a Financial Plan for High Net Worth Individuals

Navigating an Uncertain World

On Black Monday, October 19, 1987, the Dow Jones Industrial Average saw a historic drop of 23 percent. The most significant single-day loss in the U.S. stock market history left a lasting impression on us as we managed client portfolios on that fateful day. Too many investors faced significant losses, swearing never to repeat those mistakes—yet, we continue to observe similar errors in high net worth financial planning.

Predicting the next financial catastrophe is impossible. Remember past disasters? Experts typically explained them as unprecedented, asserting that we were navigating uncharted waters, and conditions were unlike any previously experienced and unlikely to recur. We challenge that narrative. Be assured surprises will happen, although they might appear different.

The Great Depression, the 1973 oil crisis, and the late 1970s’ rapid inflation—all were portrayed as unparalleled surprises. The twenty-first century witnessed additional financial setbacks: the dot-com bubble burst in 2000, the stock market and housing collapse in 2008, and a 28 percent decline in gold value in 2013. These unforeseen challenges caught numerous investment professionals off guard, and we bet the next surprise will have a similar effect.

Given the unpredictability of the next crisis, your objective should be to insulate yourself from such risks. This article will equip you with strategies to protect your investments, estate, and family.

We’ll delve into risk management and asset allocation that serve as safeguards for such unforeseen yet recurring events.

The aim is to minimize the damage. Like us, you’ve reached a stage in life where you no longer want to worry about matters that consumed your thoughts a decade or two ago. Having earned enough to create a substantial cushion allows us to put many financial concerns behind us.

Reflect on the 1987 crash or the Great Recession of 2008, when trillions vanished from portfolios and real estate values. How did it impact you? How did it affect your family and friends? Are you financially prepared for the next crisis?

Even families with significant net worth can face personal financial crises. Remember Adolf Merckle, the German tycoon? Once one of the world’s wealthiest men with an estimated net worth exceeding $9 billion, he made a substantial bet in the stock market in 2008 that proved catastrophic, leading to his eventual suicide.

This is an extreme example; hopefully, you’ll never experience such an ordeal. Nonetheless, such tragic instances are plentiful. Whether your net worth is $25 million, $50 million, $100 million, $500 million, or even a billion dollars, you are not exempt from financial crises. Merckle’s situation wasn’t unique; many other ultra-high net worth families and individuals have faced financial collapse.

Consider these examples:

• Baseball pitcher Curt Schilling, who earned over $100 million and had two World Series championships, later confessed to losing money in investments and being $60 million in debt.
• Mike Tyson, who earned about half a billion dollars during his career, went bankrupt.
• Academy Award-winning actress Kim Basinger, who earned over $10 million per movie, also filed for bankruptcy.
• Musicians Marvin Gaye, Willie Nelson, MC Hammer, Meat Loaf, and 50 Cent declared bankruptcy or had close encounters with it.
• Even Michael Jackson, the King of Pop himself, who signed a $1 billion contract and sold over 760 million records, was on the brink of bankruptcy in 2007 when he couldn’t repay a $25 million loan on his Neverland Ranch. At his death in 2009, he reportedly owed over $300 million.

With this article, we aim to help you and other ultra-high net worth families avoid such financial calamities. The key to safeguarding your family is to maintain a portfolio resilient to surprises, regardless of the investment climate. We believe many of these disasters could have been prevented with a focus on protection and prevention—before the crisis. Even minor adjustments in high net-worth financial planning can have significant impacts without rocking the boat!

8 Critical Components of High Net Worth Financial Planning

1. Investment Strategies: Developing customized investment approaches that align with your financial goals and risk tolerance.
2. Estate Planning: Structuring your assets and ensuring a smooth wealth transition to future generations or beneficiaries.
3. Retirement Planning: Creating a comprehensive plan to secure a financially comfortable retirement for you and your loved ones.
4. Tax Planning: Strategizing to optimize tax efficiency and minimize tax liabilities within legal frameworks.
5. Asset Allocation: Determining the appropriate allocation of assets across different investment vehicles to maximize returns while managing risk.
6. Rebalancing Your Portfolio: Regularly reviewing and adjusting your investment portfolio to maintain a desired asset allocation and adapt to changing market conditions.
7. Paying Yourself a Predictable Monthly Salary: Designing strategies to generate a consistent and reliable income stream to support your lifestyle.
8. Updating Your Wealth Management: Continuously evaluating and adapting your wealth management approach to address evolving financial circumstances and goals.

For individuals classified as high or ultra-high net worth, it is crucial to consider the importance of wealth management. While self-confidence in maintaining wealth is commendable, it is essential to recognize that wealth preservation can be at risk without proper planning. To safeguard your assets and achieve long-term financial security, engaging the services of a high net worth financial planner is paramount.

By working with skilled wealth advisors, you can benefit from tailored high net worth financial planning strategies. These strategies are specifically designed to preserve and grow your assets, whether for your retirement or to provide financial stability for future generations. To initiate the wealth management process, financial institutions typically request accurate information through a detailed financial planning questionnaire. This includes disclosing your assets, debts, marital status, children, insurance coverage, income, expenses, risk profile, and financial goals.

8 Critical Components — in Detail

1. Investment Strategies with a High Net Worth Financial Planner

When venturing into the realm of investments, it is crucial to approach the process cautiously and seek guidance from a high net worth financial planner. Developing tailored investment strategies that align with your financial goals and risk tolerance is essential. As an ultra-high net worth individual, working with a financial planner can help you construct a well-diversified investment portfolio and establish investment accounts to facilitate efficient tracking of your assets. Assessing and considering the associated risks is vital before making investment decisions.

Suppose you aspire to invest in a startup, or any company. In that case, a high net worth financial planner can guide you in opening brokerage accounts. These accounts serve as agreements between investors and licensed brokerage firms, enabling the execution of trades on behalf of the investor. While the brokerage executes the transactions, the funds remain the property of the investor, who is generally responsible for reporting any taxable capital gains earned by their accounts. Collaborating with a high net worth financial planner ensures that your investment efforts are strategic and aligned with your overall financial plan.

2. Estate Planning and the Role of a High Net Worth Financial Planner

Estate planning plays a vital role in high net worth financial planning, encompassing the strategic decisions involved in the management and allocation of assets after an individual’s passing or in the event of incapacity. It also addresses the management of assets and financial obligations in the case of disability. Within this context, a high net worth financial planner becomes an invaluable partner, providing expertise in developing tailored strategies to optimize estate planning outcomes. By leveraging tactics such as trust establishment and charitable contributions, these specialized professionals can assist in minimizing estate taxes and ensuring the seamless transfer of wealth according to the individual’s wishes.

Additionally, within the scope of high net worth financial planning, various assets, such as real estate investments, can generate interest and contribute to overall wealth growth. Borrowing and lending transactions, subject to interest rates, play a significant role in financing ventures, property acquisitions, business expansions, and educational pursuits. Businesses, too, rely on loans to fund significant projects and acquire long-term assets. With their comprehensive understanding of the intricacies involved, high net worth financial planners provide valuable guidance and expertise in incorporating these activities into a holistic financial plan, ensuring optimal outcomes for their affluent clients.

3. Retirement Planning: A Crucial Aspect of High Net Worth Financial Planning

Regarding high net worth financial planning, retirement planning holds significant importance. Many individuals must recognize the significance of preparing for retirement, assuming their current wealth will suffice. However, a comprehensive retirement plan encompasses much more than that. Within high net worth financial planning, retirement planning involves assessing retirement income targets and formulating the necessary actions and decisions to achieve those goals.

Retirement preparation entails a meticulous evaluation of income sources, cost estimations, implementation of an investment plan, and effective management of assets and risks. This vital component is an integral part of high net worth financial planning. To ensure a secure retirement, it is advisable to open retirement accounts early. The sooner you begin saving, the better, as time works in your favor to build a substantial retirement fund. By proactively addressing retirement planning as part of your high net worth financial strategy, you lay a solid foundation for a financially secure future.

4. Tax Planning: Incorporating High Net Worth Financial Planning to Minimize Estate Taxes

Among the vital aspects we address in our comprehensive process, which encompasses high net worth financial planning, is the strategic management of estate taxes. Failing to implement advanced estate planning can result in significant portions of a $100 million estate being claimed by the government, with the highest estate tax rate currently standing at 40%.

In a simplified scenario, if two equal beneficiaries were to inherit such an estate, neither would receive as much as the federal government, with each heir receiving approximately $30 million, while the government’s share would be around $40 million. Surprisingly, numerous families with substantial wealth have not implemented sophisticated estate-planning strategies, leaving their personal and business fortunes vulnerable to potential risks.

To safeguard your assets and ensure a smooth transition of wealth, it is crucial to assess your advanced estate plan regularly. This process requires the expertise of various professionals, such as an attorney, a CPA, and a high net worth financial planner, each contributing essential insights to devise a customized plan that aligns with your family’s unique needs, desires, and goals. At Pillar Wealth Management, we have extensive experience working on estate plans for affluent clients and collaborate with specialists in this field whenever necessary.

While the realm of estate- and tax-planning strategies offers numerous complex options, the primary goal is to transfer wealth either to beneficiaries or charities, rather than to the government. It is essential to consider utilizing techniques such as leveraging the annual gift tax exclusion and lifetime exemption. However, for estates valued at $100 million or $1 billion, these measures alone may have minimal impact on reducing estate taxes.

Here is a selection of additional options that warrant consideration:

• Crummey trust
• Private foundation
• Defective trust
• Generation-skipping trust
• Grantor-retained trust
• Life insurance
• Irrevocable life insurance trust
• Charitable remainder trust
• Charitable lead trust
• Family limited partnership

To effectively implement any chosen strategy, it is crucial to ensure unified agreement within your family. Furthermore, relying on a team of expert advisors is vital for a successful outcome. By employing the appropriate tools and strategies at the right time, you can ensure that your vision for your family’s future extends beyond your lifetime.

This critical aspect is an integral part of Pillar’s commitment to providing customized wealth management and portfolio planning services. We believe in securing your wealth for the benefit of future generations, reflecting our dedication to holistic financial planning.

5. Allocating Your Assets Based on Individual Goals: Customized Asset Allocation Protects Against Market Volatility

Customized asset allocation is a strategic approach to investing that involves tailoring the distribution of investment assets in a portfolio to meet an individual’s specific financial goals, risk tolerance, and time horizon. One significant advantage of a well-designed and customized asset allocation strategy is its ability to protect against market volatility.

Market volatility refers to the rapid and significant fluctuations that can occur in asset prices in the financial markets. These fluctuations are influenced by various factors such as economic conditions, geopolitical events, and investor sentiment. When markets experience heightened volatility, it can lead to significant price swings and increased investment risk.
A customized asset allocation strategy takes into account an investor’s risk profile and seeks to create a well-diversified portfolio that includes different asset classes, such as stocks, bonds, cash, and alternative investments. By diversifying across multiple asset classes, the impact of market volatility on the overall portfolio can be mitigated.

During periods of market volatility, different asset classes tend to perform differently. For example, stocks may experience sharp declines, while bonds or cash equivalents may provide stability or even generate positive returns. A customized asset allocation strategy considers this dynamic and allocates assets in a way that balances risk and potential returns.

By spreading investments across various asset classes, a customized asset allocation strategy aims to reduce the impact of market volatility on the overall portfolio. When one asset class experiences a decline, the performance of other asset classes can potentially offset or mitigate those losses. This diversification helps to smooth out the portfolio’s overall returns and reduces the potential negative effects of market fluctuations.

Additionally, a customized asset allocation strategy takes into account the investor’s financial goals and time horizon. It considers factors such as the desired level of income, capital preservation, or long-term growth. By aligning asset allocation with these objectives, investors can maintain a disciplined approach and stay focused on their long-term goals, even during periods of market volatility.

It is important to note that while customized asset allocation can provide protection against market volatility, it does not guarantee profits or shield against all losses. Market conditions can be unpredictable, and no investment strategy is entirely risk-free. Therefore, it is crucial to regularly review and adjust the portfolio’s asset allocation based on changing market conditions and individual circumstances.

In summary, a customized asset allocation strategy is designed to protect against market volatility by diversifying investments across different asset classes and aligning the portfolio with an individual’s risk tolerance and financial goals. This approach reduces the impact of market fluctuations, providing a more stable investment experience over the long term.

6. Rebalancing Your Portfolio: A Vital Component of High Net Worth Financial Planning

As part of your total high net worth financial planning, it is crucial to incorporate portfolio rebalancing into your strategy.

In the realm of financial markets, not all assets will perform as anticipated. Some may exceed expectations, while others may underperform. However, maintaining a well-defined asset allocation is critical to preserving the stability and resilience of your financial plan, even in the face of various stress test scenarios. Therefore, an essential element of your financial plan is regular portfolio rebalancing, which ensures the preservation of your financially secure asset allocation.

Rebalancing involves strategically buying and selling portions of your portfolio to realign the weight of each asset class to its original target level. By engaging in this practice, you can effectively manage risk and maintain the desired balance within your investment portfolio. With the guidance of a high net worth financial planner, you can navigate the complexities of rebalancing, making informed decisions to optimize your investment performance and safeguard your financial well-being.

7. High Net Worth Financial Planning: Providing a Predictable Monthly Income

As a high net worth individual, having a reliable and predictable monthly income is imperative to support your desired lifestyle and achieve your goals. Ensuring a steady income stream is essential to effective high net worth financial planning. By working with the right wealth managers and high net worth financial planners, you can create a customized financial plan that includes a monthly income amount you can depend on, much like a regular paycheck. This ensures not only peace of mind but also keeps you within the Comfort Zone, typically 75-90%, that we consistently emphasize as crucial for your financial well-being.

8. Updating Your Wealth Management with a High Net Worth Financial Planner

Your goals, plans, finances, and priorities will inevitably change over time. No matter how meticulously crafted, a financial plan cannot remain intact and relevant for decades. Therefore, regular updates are essential to ensure its continued alignment with your life circumstances.

Consider the scenario where your high net worth financial planning includes allocating a significant portion of your fortune to sending your two grandchildren to the most prestigious university. However, circumstances change as one grandchild secures a full-ride scholarship while the other pursues a different path that doesn’t require the allocated funds.

Suddenly, you find yourself with unexpected hundreds of thousands of dollars. If you were to also experience a divorce, your entire financial plan would undergo a significant transformation. These are just two examples that illustrate how various events, big or small, can gradually erode the effectiveness of any financial plan over time.

It becomes imperative to update your plan regularly, including your goals, asset allocation, rebalancing strategy, monthly income, and financial investments. At this stage, the expertise of a high net worth financial planner becomes invaluable. They can guide you through reviewing and revising your plan every quarter, ensuring it remains in line with your evolving lifestyle goals and current situation.

At Pillar Wealth Management, we take it a step further by re-running 1,000 stress tests to confirm the continued viability of your financial plan. Our wealth managers provide advice and information and tailor your wealth management approach to cater specifically to your needs.

Remember, these eight components of a financial plan must function cohesively as a single unit rather than in isolation. By recognizing the depth and interconnectedness of this approach, you can ensure that your wealth management strategy remains robust and aligned with your ever-changing circumstances. With the guidance of a high net worth financial planner, you can navigate the complexities of wealth management and maintain a plan that reflects your evolving goals and aspirations.

Non-Critical Components of a Financial Plan for High Net Worth Individuals

What you don’t need in your high net worth financial plan:

• Projections or goals for a specific rate of return
• Pre-packaged products (especially ones with high fees, which most of them have)
• Non-data-backed goals like trying to outperform the market

Your high net worth financial plan is centered around your lifestyle goals and how your money can effectively contribute to achieving them. Working with a skilled high net worth financial planner, you can adopt a stress-tested and historically-backed approach that ensures the plan’s security, regardless of your specific performance.

While your assets’ performance plays a crucial role in achieving the plan, it is essential to remember that performance itself is not the plan. Instead, the plan encompasses a comprehensive strategy tailored to your unique circumstances and objectives.

Suppose you are seeking a personalized financial plan crafted by an experienced high net worth financial planner based on these eight foundational components. In that case, we invite you to start a conversation with Pillar today. Together, we can create a plan that aligns with your specific situation and empowers you to navigate the complexities of your high net worth finances.