The 8 Critical Components of Financial Planning for High New Worth Clients
Every financial advisor and wealth manager will present you with a financial plan based on the information you bring to them. However, if we may digress for a second, we wish to alert those of you with $5 million to $500 million in investable liquid assets that you can achieve a much broader and deeper level of knowledge by submitting a request for a free copy of the 7 Secrets to wealth management, 70+ page, book here.
STRATEGIES FOR FAMILIES WORTH $5 MILLION TO $500 MILLION
The insights you’ll discover from our published book will help you integrate a variety of wealth management tools with financial planning, providing guidance for your future security alongside complex financial strategies, so your human and financial capital will both flourish.
Clients frequently share with us how the knowledge gained from this book helped provide them tremendous clarity, shattering industry-pitched ideologies, while offering insight and direction in making such important financial decisions.
Most financial planners offer services tailored to clients’ needs on the surface. But in reality, it is entirely different. Almost all financial advisors – especially those from big investment firms with branches dotting the country like fast-food franchises – will give each of their clients the exact strategy by saying that the plans they offer are customized plans.
Table of Contents
Defining a High Net Worth Financial Strategy
If you are someone with around $1 million investable assets, you are one of the high net worth individuals. And if you are someone with around $30 million investable assets, you are included as one of the ultra-high net worth individuals.
People with a high net worth or ultra-high net worth tend to ignore the importance of wealth management. They think that their wealth can last forever. This kind of self-confidence is good but wrong at the same time. Many things can deplete wealth. Therefore if you are a high net worth individual or ultra-high net worth individual, you need wealth management services and financial planning.
With the right financial planning from wealth advisors, you can save your high net worth assets until you are retired or until one of your family members retire.
Wealth management helps us achieve personal financial goals. Therefore, if we want to take part in the wealth management services of an institution, we will be asked to fill out a question form about financial planning. The information must be given honestly. How many assets we have, the amount of debt, marital status, children, insurance, income, expenses, risk profile, and goals must be stated accurately.
There are 8 critical components of high net worth and ultra-high net worth financial planning. Here are the 8 critical aspects you should know about financial planning.
1. Investment Strategies
If you are going to invest, don’t make any reckless actions. It would help if you had investment strategies. Making investment strategies also cannot be arbitrary. You need to consider your financial situation. As an ultra-high net worth individual, you need to make an investment portfolio and open an investment account to keeping track of your investment less difficult. Don’t forget to count your investment risks.
Suppose you want to be an investor for a startup company or any company you need to open brokerage accounts. A brokerage account is an agreement where an investor invests money with a licensed brokerage company, which then executes trades on the investor’s behalf. While the brokerage executes the transactions, the funds belong to the investors, who must normally report any capital gains earned from the account as taxable revenue.
2. Estate Planning
Estate planning entails deciding how an individual’s assets will be stored, handled, and allocated after death or in the case of lack of ability. It also considers the management of a person’s assets and financial commitments if they become disabled. Various tactics, such as establishing trusts and making charitable contributions, may reduce estate taxes.
If you have real estate such as a building, you can try to rent out your building and generate interest. Many lending and borrowing transactions are subject to interest rates. Individuals borrow money to buy houses, finance ventures, start or expand companies, or pay for college tuition. Loans are used by businesses to finance major projects and grow their business by buying fixed and long-term assets such as property, buildings, and machinery.
3. Retirement Planning
it is better to make your retirement planning and open retirement accounts early. Many people don’t consider making retirement planning an important thing. They think their wealth is enough until retirement. But no, a retirement plan is much more than that. Retirement planning is the method of assessing retirement income targets and the actions and decisions required to meet those goals. Retirement preparation entails determining sources of income, estimating costs, putting an investment plan in place, and managing assets and risk. This is part of wealth management. Open your retirement accounts before it is too late. Make your retirement savings now. The sooner, the better.
4. Tax Planning
Tax planning is an effort to reduce or minimize the tax burden paid to the state so that you can keep more of your wealth. One of the practices in tax management is carried out by still complying with applicable tax regulations, aka legal. Legal here means that tax savings are made by taking advantage of things that are not regulated by law (loopholes). There is no violation of the constitution or the applicable taxation law.
Tax planning is the first step to creating tax strategies. There are 6 steps to creating tax strategies :
• Play a part in tax-advantaged accounts. Use tax-advantaged savings plans if you can help offset current and/or future taxes.
• Increase the variety of your account styles. Using a variety of investment account forms allows you to customize sources of income in retirement to help reduce taxes.
• Pick tax-efficient investments. Certain investments can also have tax benefits. The word “tax benefit” usually applies to any tax law that allows you to minimize your tax bill if you meet certain eligibility criteria.
• Adjust investments to the appropriate account type. It is important to ensure that you benefit from tax-efficient investments by keeping them in accounts with the proper tax treatment. Investing in this manner will help guarantee that you are taking advantage of all future tax advantages while not raising your tax liability.
• Keep investments for a longer period of time to prevent unneeded capital gains. It is rarely worth hanging on to a stock you are willing to sell to escape taxes.
• Losses could be used to cover gains. You will have to substitute the return on your investment every year using investment loss – a practice known as “tax-loss harvesting” – to help minimize the income tax liability.
It is also wise to consider your tax bracket. The term “tax bracket” is a set of earnings subject to a specific income tax rate. Tax brackets produce a progressive tax structure in which taxes rises slowly as a person’s individual income rises. Low-income taxpayers are taxed at comparatively low rates, whereas higher-income taxpayers are taxed at higher rates.
You have to think about many kinds of taxes from now on, such as inheritance taxes, estate taxes, or capital gains tax, so that your money doesn’t run out to pay taxes.
5. Allocating Your Assets Based On Individual Goals
According to many financial advisors, asset allocation is the most critical component of any investment plan. Your allocation is based on your risk tolerance, in part. But your risk tolerance also is subject to your goals and the results of your stress tests, and the historical data. You need to understand the importance of your risk tolerance. You must be realistic about your ability and willingness to tolerate major fluctuations in the value of your investment; if you take excessive risk, you can gamble and sell in a bad direction.
For example, we had a client come to us once whose previous wealth managers believed they could outperform the market. (Hint: That’s a major warning sign you need a new advisor. For all 7 warning signs when choosing a financial advisor, click here)
That manager opened eight accounts with various money managers, all of them positioned for massive growth, allocating 100% of his assets in equities. No bonds. Only one of eight beat the market. And this is not unusual at all.
After running his lifestyle goals and plans through our process, we found this client only needed 30% of his assets in equities. Far from 100%! With a conservative asset allocation, he would have lower taxes, all his investments in one place, peace of mind, and assurance he would achieve what mattered most to him.
His plan revealed his risk tolerance. It did not determine his plan.
See the difference?
An optimistic high net worth investor, or someone that has a higher risk tolerance, is prepared to gamble more dollars in return for the likelihood of higher returns than a cautious investor, who has a smaller risk tolerance. As high net worth investors, you might also want to look at historical disastrous returns for various liquid assets to determine how much money you are willing to lose if your investments have a rough year or series of terrible seasons.
6. Rebalancing Your Portfolio
To stay on track with the market, consider rebalancing your portfolio.
Not all your assets will perform as expected. Some will do better, and some will not. But the allocation is what keeps the plan safely intact in 75-90% of your stress test scenarios. So a critical component of your financial plan is rebalancing your assets regularly to preserve that financially secure asset allocation.
Rebalancing is the method of purchasing and selling parts of your portfolio to restore the weight for every asset class to its original level.
7. Paying You A Predictable Monthly Income
The only way to have true peace of mind, even during retirement, is with assured monthly income. Thus, your financial plan must include a monthly amount you can count on, just as if it were a paycheck. With the right wealth managers and the right wealth management, you can predict your monthly income.
As a high net worth individual, you surely need to have a predictable monthly income to sustain your lifestyle and goals. It must also be an amount that keeps you within the 75-90% Comfort Zone we keep referring to.
8. Updating Your Wealth Management
Your goals, plans, finances, and priorities will change. It’s inevitable. No plan stays intact and relevant for decades. Thus, if your financial plan doesn’t get updated regularly, its relevance begins to diverge from your life until, eventually, it disconnects altogether.
Assume that your initial financial scheme included a substantial portion of your fortune to send your two grandchildren to the most prestigious university. But then, one grandkid lands a full-ride scholarship, and the other decides on a different life path and doesn’t need the money. Now you’ve got hundreds of thousands of dollars you weren’t anticipating having. And suppose on top of that, you get divorced.
Just these two events will change your entire financial plan. Those extreme (though widespread) examples highlight the many more small events that slowly erode every financial plan over time.
You must update your plan, your goals, your asset allocation, your rebalancing, your monthly income, your financial investments – all every quarter.
At Pillar Wealth Management firm, this includes re-running the 1000 stress tests to ensure your financial plan remains on track – according to your updated lifestyle goals and situation: our wealth manager not only provides advice and information but also plans your wealth management according to your needs.
As a reminder, these eight components of a financial plan must function as a single unit, not in isolation. Hopefully, you’re starting to perceive the depth behind this approach.
Non-Critical Components of a Financial Plan
What you don’t need in your plan are:
• 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 plan is based on your lifestyle goals and how your money can help you achieve them. Using the stress-tested historically-backed approach, you have that security baked into the plan regardless of how your specific performance looks.
Your performance matters – it’s how we achieve the plan. But the performance itself is not the plan.
If you want a financial plan created for you based on these eight foundational components, personalized for your specific situation, start a conversation with Pillar today.
If you want a cookie-cutter plan that’s the same for someone with $50,000 in assets as it is for someone with $50 million, then visit your local franchise. And grab a burger with fries while you wait. Start a Conversation
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