High-Net-Worth Investment Management

Unraveling the Complexities of High-Net-Worth Investment Management

High-net-worth investment management is a customized service designed to meet the financial requirements and objectives of affluent individuals. This unique clientele has specific wealth-related goals, such as desiring a sustainable, high-end lifestyle and the growth and preservation of their wealth. To manage this wealth effectively, these individuals require the services of wealth managers who have extensive knowledge and expertise in this niche area. If you are an individual of high net worth seeking professional advice in managing your assets, feel free to reach out to us for more in-depth information and tailored support.

Partnering with wealth managers specialized in this domain allows access to personalized strategies and solutions that align with your specific goals. These professionals possess a deep understanding of the intricacies and opportunities related to managing significant wealth, offering guidance on asset allocation, risk management, tax planning, and other vital aspects of wealth management. Leveraging their expertise, you can refine your investment strategies and work towards achieving long-term financial success.

Table of Contents

• Unraveling the Complexities of High-Net-Worth Investment Management
• The Expertise of Wealth Managers in High-Net-Worth Investment Management
• Understanding the Concept of Net Worth
• The Challenges Associated with High-Net-Worth Investment Management
• Demystifying High-Net-Worth Investment Management
• Role of High-Net-Worth Investment Management
• Fees and Income in High-Net-Worth Investment Management
• Choosing the Right High-Net-Worth Investment Manager
• Here Are Some Strategies That Will Help You to Minimize Advisory Costs and Fees
  • Cost 1: Capital Gains Taxes
  • Cost 2: Active Vs Passive Funds
  • Cost 3: Spread in Bond Sale
  • Cost 4: Commissions
  • Cost 5: Cultivation of Tax Loss
  • Cost 6: Other Undisclosed Costs and Fees
  • Cost 7: Internal Expenses
  • Cost 8: Actual Fee of Your Advisor

The Expertise of Wealth Managers in High-Net-Worth Investment Management

Wealth managers are highly specialized financial experts offering comprehensive high-net-worth investment management services as mentioned above. Their primary clientele consists of high-net-worth and ultra-high-net-worth individuals, assisting them in securing and managing their wealth for future stability and growth.

The unique feature that distinguishes high-net-worth investment managers from other financial advisory services is their multidimensional approach. Unlike financial planners who might focus solely on retirement advice and planning, wealth managers offer a wider spectrum of services designed to meet the complex needs of clients with substantial assets.

Understanding the Concept of Net Worth

Every individual has different wealth aspirations. Some wish to earn sufficient wealth to live comfortably and occasionally indulge in luxuries. Others aim to endlessly expand their wealth and sustain a high-spending lifestyle. High-net-worth and ultra-high-net-worth individuals typically fall into the latter category.

The definition of high net worth might be unclear to some. To qualify as a high-net-worth individual, you need to possess at least $1 million in assets. However, it’s also crucial to distinguish between high-net-worth and ultra-high-net-worth individuals. An ultra-high-net-worth individual should have at least $30 million in assets, excluding the value of their primary residence.

The Challenges Associated with High-Net-Worth Investment Management

Despite having more opportunities than individuals with an “ordinary” net worth, high-net-worth individuals face many challenges during their careers and into retirement.

These challenges include:

1. Expanding Your Portfolio: High-net-worth individuals often diversify their investments across different types of assets to incrementally grow their wealth and boost their net worth over time. However, without a robust strategy, this could lead to catastrophic losses.
2. Protecting Your Wealth: Wealth protection is crucial for high-net-worth individuals. A sudden market crash or unexpected expenses like emergency medical costs can severely impact wealth, potentially necessitating a significant lifestyle downgrade.
3. Achieving Your Dream Retirement: Retirement can be a significant milestone for individuals with high-powered careers. However, achieving a dream retirement can be challenging without the right plan. Consult with our wealth managers to learn how retirement planning can help you navigate these challenges.
4. Passing on Your Wealth: Proper estate planning is crucial for high-net-worth investors who wish to ensure their wealth goes to its intended beneficiaries. Without a valid will, the distribution of wealth may not align with the deceased’s wishes.
5. Managing Taxes: High-net-worth individuals are typically subject to higher tax brackets. However, there are numerous legal strategies to minimize the tax burden. Tax-planning services can help rearrange your portfolio for more tax efficiency without compromising its performance.

Demystifying High-Net-Worth Investment Management

High-net-worth investors can overcome these challenges with the aid of wealth management services. Wealth management refers to a suite of services related to managing one’s wealth.

These services typically include:

• Asset management
• Portfolio analysis
• Retirement planning
• Estate planning
• Insurance planning
• Tax planning

Each of these services is beneficial for high-net-worth investors in its own way. For instance, portfolio analysis services can help optimize your portfolio and align it with your long-term financial goals, while estate planning can ensure your beneficiaries receive your wealth promptly after your passing.

Role of High-Net-Worth Investment Management

Wealth managers are specialized financial professionals offering a diverse range of wealth management services. They primarily serve high-net-worth and ultra-high-net-worth clients, helping them protect and manage their wealth for the future. What sets wealth managers apart from other financial advisors is their multidisciplinary approach, offering a breadth of services that cater to clients with substantial assets.

Fees and Income in High-Net-Worth Investment Management

The cost of high-net-worth investment management might prompt curiosity. Wealth managers use a fee structure based on an annual percentage of the client’s net worth, rather than hourly or flat rates. This arrangement lets affluent investors access high-net-worth investment management services without additional costs.

The earning potential for wealth managers, given their primary clientele, is quite promising. Despite charging a modest percentage of their client’s asset value, wealth managers can earn substantial amounts. They usually charge between 1% and 2% of their client’s asset value, providing ample opportunities to generate a lucrative income.

Choosing the Right High-Net-Worth Investment Manager

Professional high-net-worth investment managers understand the complexities and intricacies of managing substantial wealth. They are skilled professionals who are well-equipped to navigate the ever-changing investment landscape and provide expert guidance to maximize returns and minimize risks for high-net-worth individuals. Whether you seek long-term growth, wealth preservation, or a balanced approach, they have the expertise to develop tailored investment strategies that align with your financial aspirations.

With a commitment to exceptional service, they ensure that each client receives the utmost attention and care. By leveraging our extensive experience and in-depth market knowledge, we strive to deliver optimal results and help our high-net-worth clients achieve their financial objectives.

The choice of the right wealth manager to handle your wealth and assets is of paramount importance in high-net-worth investment management. Although searching for a high-net-worth financial advisor may seem challenging, finding the right professional to cater to your needs is possible. Here are some steps to guide you in selecting a suitable wealth manager:

A valuable starting point is to reach out to your network and inquire about recommendations from individuals who have successfully worked with a high-net-worth financial advisor and are progressing toward their financial objectives. Personal referrals can provide valuable insights and help you identify potential advisors with a track record of delivering excellent service.

The internet offers a wealth of resources to aid your search for a high-net-worth financial advisor. Many financial management firms provide online platforms with search features that enable you to find advisors who specialize in serving individuals with substantial financial portfolios. It is crucial to find an advisor with the necessary expertise to navigate the complexities of managing the finances of high-net-worth individuals effectively. In addition to expertise, any advisor you consider working with must be a fiduciary, meaning they are legally obligated to prioritize your best interests. To ascertain this, you can look for the Certified Financial Planner (CFP) designation or request a written disclosure of the advisor’s fiduciary status. Arrange meetings with your shortlisted wealth managers to assess their expertise and learn how they can assist you.

Ensure the advisor you choose has the expertise and experience to help you achieve your financial goals and prioritize those who operate as fiduciaries. By conducting thorough research and considering these factors, you can find a high-net-worth financial advisor who is well-equipped to guide you toward financial success.

The right wealth manager will help you assess your financial goals, risk tolerance, and investment preferences to create a tailored investment strategy that aligns with your objectives. By actively monitoring and adjusting your portfolio, they can capitalize on market opportunities and mitigate risks.

Here Are Some Strategies That Will Help You to Minimize Advisory Costs and Fees

The forthcoming content is seldom discussed among investment firms unless you explicitly compel them to do so. Some may not even provide a satisfactory response, not due to deception, but owing to their inadequate understanding or their inexperience. This can stem from the fact that many advisors only reiterate what they have learned, akin to a parrot’s mimicry.

A common question posed to most advisors is, “What are your fees?” However, the responses to this query are often incomplete. A more comprehensive question would be, “What are your costs?”

It’s a known fact that almost all advisors levy annual charges, generally as a percentage of your assets, between 1% and 2%. But fees are just one of the many costs associated with investing. Every dollar spared from unnecessary costs by your advisor can continue to serve you, contributing to your future and aiding in achieving the retirement lifestyle you’ve worked so hard for.

These seemingly insignificant costs can accumulate to substantial amounts—potentially tens or even hundreds of thousands of dollars annually. At Pillar Wealth Management, we are committed to reducing your costs as much as possible. It forms a crucial part of our custom investment management process as every investor, at various stages in their life, risks incurring avoidable investment costs.

Let’s delve into some of these costs, even if your advisor didn’t mention them or isn’t aware of them.

Cost 1: Capital Gains Taxes

In 2019, the top income tax bracket had a federal tax rate of 37% on total income. The apex long-term capital gains tax rate was established at 20%.

The terminology “long term” is pivotal here, as it signifies a time duration of over a year. Thus, if your wealth consultant refrains from tampering with your investments for a period exceeding a year, your earnings graduate to long-term capital gains.

Conversely, if your consultant indulges in frequent buying, selling, and trading of your stocks and various securities, in an attempt to leverage market timing, the profits obtained from these investments would be subject to short-term capital gains tax. These short-term gains are liable for taxation as standard income.

Do you comprehend the implication?

For those belonging to the topmost tax bracket, the taxes can escalate up to 46% if your consultant regularly adjusts your investments to outstrip the market trends rather than maintaining them for more than a year.

Imagine having $1 million under the management of two separate advisors. The “active” advisor yields a 10% return using spontaneous strategies, whereas the “patient” advisor yields an 8% return, ensuring all your gains are classified as long-term gains.

To give a rough idea, here is a potential outcome:

Active advisor:

$1,000,000 + 10% gains = $1,100,000

Apparent Gain: $100,000

Tax = 100,000 x 0.37 = $37,000

Net Gain: $63,000

Patient advisor:

$1,000,000 + 8% gains = $1,080,000

Apparent Gain: $80,000

Tax = 80,000 x 0.20 = $16,000

Net Gain: $64,000

Thus, post taxation, the active advisor approach results in an account worth $1,063,000, denoting an increment of $63,000.

On the other hand, the patient advisor approach leads to an account worth $1,064,000, marking an increment of $64,000. This is valid even though the patient advisor gained 2% less.

When extrapolated, this minor difference can have significant implications depending on the capital you’re investing. For instance, the difference of $1,000 gets amplified with investments worth $5 million, $10 million, or $50 million. Remember—this scenario presumes that the patient advisor yields lower growth. If they match or surpass the growth, the disparity in actual gains would be substantially larger.

We’ve identified that investors can lose up to 30% of their earnings to taxes when their investment managers impulsively engage in the buying and selling of stocks, thus triggering a series of short-term capital gains tax events.

Cost 2: Active Vs Passive Funds

The allocation of your funds by your advisor can greatly influence your investment outcomes. Many advisors might delegate some (or all) of your capital to fund managers. However, there are countless investment avenues available. But how many of them can be deemed as prudent choices?

There exist two primary categories of fund managers: Active fund managers and passive fund managers.

An active manager or a team endeavors to outperform the indexes that serve as their benchmarks. Conversely, a passive manager merely emulates a particular market index like the Dow or the S&P 500. Thus, if the Dow appreciates by 5%, your investment also appreciates by 5%.

For the moment, let’s focus on the costs. The disparity in costs is predominantly due to the varying fee structures. Active managers invest considerable time and effort in scrutinizing markets, stocks, bonds, trends, and all other elements that Wall Street investors strive to study in their quest to surpass the markets.

As a result, active managers levy higher fees, ranging from 0.60% to over 2%. In our scenario, the passive managers we engage have costs within the range of 0.07% to 0.2%.

Let’s break it down with an example. Assume you have $2 million invested with two different managers. The first one is an active manager charging a “modest” fee of 1%, while the second one is a passive manager charging 0.2%. The returns they generate for now are inconsequential.

The cost incurred to manage these funds would be:

Active Fund – $2 million

Cost: $2 million x 1% = $20,000 in fees

10-year cost in fees: $200,000

Passive Fund – $2 million

Cost: $2 million x 0.2% = $4,000 in fees

10-year cost in fees: $40,000

Cost difference over a decade: $160,000

You can now comprehend why the actual costs and miscellaneous expenses hold higher importance than just the fees.

According to Warren Buffett, investors squandered over $100 billion on Wall Street money managers between 2007 and 2017.

Now, let’s contemplate the combined effect of the first two costs—short-term capital gains taxes and active management fees. Consider a scenario where you invest with an active manager who frequently buys and sells. With such a manager steering your portfolio, you would end up paying five times more in fees, and almost twice as much in capital gains taxes—for the same investment!

Cost 3: Spread in Bond Sale

The first two costs were relatively straightforward. The third cost is slightly complex and mostly applies to bonds. Without delving too deep into industry jargon, here’s the basic concept:

When you buy and subsequently sell a bond, the difference between the selling price and the buying price is termed the spread.

However, when a bond manager sells bonds, the manager can retain a percentage of that spread as payment. We have been informed by people that their wire house broker claims to charge “zero” fees. This is evidently misleading, as no one offers their services for free. All it implies is that they refrain from levying a fee to manage your bond investments. But that’s only one among several potential costs, as you’re now beginning to comprehend.

Any bond broker asserting zero fees is essentially earning their income from the spread. This is, in essence, a hidden cost for the investor. You’ll never observe it or even be cognizant of it.

The spread is akin to a used car dealer who procures a car from a seller and then retails it at their price. The difference in these two prices resembles the spread, and the dealer pockets the difference.

The spread can amount to millions of dollars in costs for large accounts. And you’ll remain oblivious. If your advisor is buying and selling bonds with your funds, you need to inquire about how much they’re earning on the spread.

Cost 4: Commissions

When your fund manager sells a security, you could be charged a spread, as in the case of a bond, or a commission. The outcome is the same—this is yet another cost that bears no relation to the management fee. Although the broker is obligated to disclose these commissions in the prospectus, it’s common knowledge that not everyone has the time (or the inclination) to trudge through these 90-page documents. Consequently, many investors are unaware of these additional costs they may be incurring.

Commissions can be levied for numerous other transactions in investing. Some investment firms might sell specific products like annuities, target date funds, or wrap programs. These pre-determined investment packages invest based on a formula. That formula bears no relation to you, your particular situation, or your life goals. It lacks customization entirely. Moreover, they likely earn fees and commissions for selling it.

The primary point to note is that you have to dig through a prospectus to unearth these types of costs. But they exist, gradually eating away at your assets. These costs can reduce your net growth by tens of thousands or more, a few dollars at a time.

Cost 5: Cultivation of Tax Loss

Effective investing in the stock market hinges partly on how your advisor manages gain and loss. Some equities rise and yield realized gains, while others result in losses within the same month or year.

An attentive wealth manager keeps a keen eye on this, and leverages losses to counterbalance some of the gains. Why should one do this? Because it decreases your tax liability. In a recent instance, we saved a client $34,000 in taxes simply by adeptly managing his gains and losses.

This type of work demands time, effort, awareness, and meticulous attention to detail. But as you’ve observed with other costs, each dollar you save employing strategies like these adds up to tens of thousands of dollars annually. These savings are entirely independent of the reported performance rates that everyone zeroes in on.

Cost 6: Other Undisclosed Costs and Fees

A financial advisor or money manager can concoct many more costs, and we don’t have the bandwidth to delve into all of them. But here’s one we frequently encounter, particularly in situations where the advisor is motivated to augment the amount of money they’re managing (which represents a conflict of interest—something a fiduciary can’t do without disclosing it to you).

It’s referred to as margin. This process allows the client to borrow money against their assets in the same account, thereby liberating additional funds for their use. That money is placed on margin and incurs interest. All the borrowed money boosts the amount under the manager’s control. So, does an advisor offer this service to assist the client or to increase their managed amount and consequently their “cut”?

We took on a client who had fallen prey to this scheme, and she was losing $20,000 per year on investment advisory fees and margin interest costs. We extricated her from this situation and significantly extended the life of her money.

Cost 7: Internal Expenses

These include expenses incurred by fund managers and the companies that oversee them. The variety, types, and causes of these expenses are as diverse as the number of companies and types of investment plans. But they do exist.

And to avoid any misconceptions—we’re not suggesting in any way that by employing Pillar Wealth Management to invest your assets, you will be circumventing ALL these costs.

Our objective is to enlighten you about the plethora of additional costs you might be paying your advisor beyond the reported management fee. But as you can discern, with diligent fiduciary management combined with a personalized investment process not found anywhere else, you can save significant amounts of money by minimizing many of these costs.

Cost 8: Actual Fee of Your Advisor

Finally, we arrive at the cost everyone queries about. And it holds significance. By and large, most wealth advisors charge around a 1% fee. Some employ a sliding scale that adjusts for individuals with considerably greater wealth. Some also levy upfront commissions or performance-based fees in addition to this fee.

Remember—if you’re paying a significantly low fee to your advisor, be certain that they ARE compensating for that low fee with higher costs elsewhere. You just don’t know where, or by how much. Or, they’re merely parking your money in a pre-set investment plan and letting it develop on its own