Financial planning is a comprehensive process that involves much more than opening a retirement account and balancing your checkbook. This process involves ensuring that your hard-earned nest egg is working to help you meet your life and financial goals.
Financial planning is such a broad topic that it can be challenging to know where to begin. This is why it’s typically best to sit down with a certified financial planner who will be able to offer personalized advice.
Start Sooner Rather Than Later
Financial planning is a time-sensitive topic. In short, the sooner you start, the better off you’ll be.
This is because money can be invested and grown over time—a topic known as the time value of money. And, if left alone, money will slowly lose its value over time due to inflation and taxes. For these reasons, it’s best to sit down with a financial advisor sooner rather than later to create a clear plan. You’ll also sleep more soundly at night knowing that your estate is taken care of.
Create a Clear Plan
You’ll need to answer dozens of questions during the financial planning process. Here are a few of the most common starting places:
- What are your (and your family’s) short or long-term financial goals?
- What do you want to happen to your wealth if you were to pass away?
- If you own a business, what is the plan for succession?
- Do you have any major sources of debt that need to be addressed?
- Do you have any upcoming events to prepare for and pay for, such as college tuition or elderly care?
- Do you currently have an investment strategy? Could it be improved?
- Do you currently have a tax strategy? Could it be improved?
The level of financial planning that you require depends on your circumstances. For example, if you are single with no family and modest financial needs, it will be simple to come up with a financial plan. But if you have a vast family or lead a complex life (for example, collecting income from many sources or owning homes in multiple countries), you’ll likely require a bit more complex financial planning.
However, there are a few common starting points regardless of who you are:
- Hiring the proper financial professionals (taxes, wealth management, insurance, etc.)
- Ensuring that your nest egg is properly invested
- Opening the necessary legal entities to facilitate smooth estate planning
Remember that you’ll have to consider all family members who might be entitled to part of your estate.
Navigate Your Family’s Dynamics
Financial planning for high-net-worth individuals can become more complicated when they have a larger family. This is because there are a lot more people who need to be considered when making financial decisions. Additionally, there is more room for conflicting interests, differing opinions, and potential disputes – all things that need to be minimized.
Disputes are especially common if your wealth has been inherited, which naturally involves more people in the financial planning process. Again, starting the planning process sooner can help mitigate family issues.
However, If you have a small family (or are solely responsible for your nest egg), the planning process will likely become easier since you are the key decision-maker.
Hire a Tax Professional
As a high-net-worth individual, you almost always need a tax professional in your corner.
Over the short term, a tax professional can provide tax planning advice related to filing your return each year. However, they’ll also be able to provide invaluable tax management advice over the long term by helping ensure that you’re protecting your wealth and taking advantage of all opportunities within the tax code.
Remember that the tax code changes constantly, even over just a few years. And if you don’t have time to stay on top of these changes, it’s best if you hire someone to help you.
Properly Diversify Your Portfolio
As a HNWI, you’ve already amassed a sizable nest egg. At this stage, most people’s high net worth wealth management strategy switches from “I want to grow my investments aggressively” to “I want to protect what I’ve built.” And the easiest way to protect what you’ve built is diversification.
Diversification is a risk management strategy that involves mixing several investments within a portfolio. In short, you don’t want to keep all of your eggs in one basket because if you were to drop that basket, you’d lose them all.
The same goes for investing. If you were to invest your entire portfolio into one stock and that stock sank 90%, your fortune would be practically gone. To ensure this doesn’t happen, it’s advisable to spread your portfolio over different stocks and asset classes.
Diversification is especially important for HWNIs because more extensive portfolios are more susceptible to big losses. For example, let’s say that you have a $10,000 stock portfolio. If your portfolio were to drop 50%, you’d lose $5,000. This isn’t ideal. But, it’s also not the end of the world since you can work to earn this money back fairly quickly. But, if you have a $10 million portfolio and experience a 50% drop, then you’d lose $5 million—a significant sum to try and earn back.
How can you diversify your portfolio?
The easiest way to diversify your portfolio is by spreading your investments over a range of stocks, asset classes, or other factors.
One easy way to diversify your portfolio is by buying exchange-traded funds (ETFs) instead of individual assets. An ETF is an investment tool that tracks a wide range of stocks or other assets. For example, you could buy shares in the Vanguard S&P 500 ETF, which tracks the combined movements of all 500 stocks in the S&P 500. Most experts consider this safer than buying individual stocks since your investment is spread over a wide range of stocks.
You can also diversify your portfolio by buying a range of different assets. Is your portfolio primarily concentrated in stocks? If so, consider diversifying into bonds, real estate, precious metals, or other assets. This will protect your portfolio against a potential stock market crash.
One famous example of diversification is Ray Dalio’s All Seasons Portfolio, which he claims will perform well in all economic or political environments (i.e., “seasons”). The breakdown for this portfolio looks like this:
- 30% domestic stocks
- 40% long-term bonds
- 15% intermediate bonds
- 7.5% commodities
- 7.5% gold
That said, do not immediately mimic Ray Dalio’s portfolio. What works well for him may not work for you or match your financial goals.
At its core, diversification is simple: invest in a range of assets. But, on a deeper level, it can get complicated quickly. Which assets should you buy? How much? How long should you stay invested in certain assets? Different asset classes have different pros and cons. This is another reason why speaking with an investment management professional before making significant updates to your portfolio is best.
Protect What You’ve Built
Again, most HNWIs are more concerned with protecting their wealth than growing it. Fortunately, there are plenty of simple measures that you can implement to protect your wealth.
Most importantly, you’ll likely want to create legal entities that can “own” your assets. This includes vessels like asset protection trusts, family limited partnerships (FLPs), and limited liability companies (LLCs). Each of these entities has its own unique purpose. But, the general idea remains the same: shifting ownership of your assets to a legal entity helps separate them from you under the eyes of the law. This helps protect your assets from lawsuits, gives you more flexibility during tax season, and can make estate planning much easier.
For example, let’s say you own a beachfront rental property, and a guest falls and sues you, claiming their injury is your fault. If you own the property under your name, this guest could come after all your personal assets (checking accounts, personal vehicles, businesses, etc.). Not ideal.
One way to protect yourself is to create an LLC which “owns” the property. If a guest decides to sue you, they can only come after assets that the LLC owns—not your personal property.
Do you need additional insurance policies?
Insurance policies are another core part of financial planning, especially for HNWIs. Almost everyone has traditional forms of insurance such as health, auto, and home. However, as someone with significantly more assets than average, you may want to consider signing up for additional insurance policies to help protect your estate.
Paying for a few extra insurance policies can be a great way to protect your wealth from accidents or lawsuits. Here are a few policies to consider:
- Life insurance: This policy helps secure a benefit for your family or loved ones in the event of your passing.
- Private placement life insurance: A “permanent” variable universal life insurance that provides both death benefit protection and a cash value component that accumulates investment growth within the policy.
- Umbrella plans: These plans offer additional coverage in addition to home and auto policies and can help cover injuries, property damage, certain lawsuits, and personal liability situations.
- Errors and omissions insurance: Helps protect business owners from lawsuits that claim they’ve made a mistake in their professional services.
- Cyber liability insurance: Provides businesses with a combination of coverage options to help protect the company from data breaches.
Signing up for additional insurance plans can help provide you with peace of mind at night. But they can also be life-saving in certain situations.
Update Your Plan Consistently
The final tip for high-net-worth financial planning is to revisit your financial plan at least once a year—if not semi-annually or quarterly. Life happens quickly and even just one year can bring massive life changes that will impact your finances or taxes. A few common examples include:
- Getting married or divorced
- Welcoming a new child
- Moving to a new location (or buying new properties)
- Opening or closing a business venture
- Making a significant move to your portfolio
When creating and updating your financial plan, the team at ARQ Wealth Advisors is here to help. Our team of financial advisors manages a combined $555 million in assets and each advisor has an average of 15 years of experience. If you’re interested in receiving customized financial planning, please book a free consultation with a member of our team to get started.
