Why High Net Worth Families Need A Different Style Of Wealth Management
In a fast-paced world awash with economic volatility and overrun with robo-advisors, “investment” apps, and cookie-cutter financial advice, finding the right wealth management guidance is challenging. Have you ever asked yourself if your current financial professional is doing everything they can to help you maximize the protection, growth, and tax reduction on your portfolio? This question is one that many high net worth families ask themselves, but, because of the relationship they’ve built with their financial professionals, they are often uncomfortable and unsure of how to proceed in getting an answer.
I’m going to give you three key steps you should take to help ensure you are taking advantage of each opportunity available to you to better steward your wealth.
- Make sure your financial advice is truly independent.
A truly independent financial firm is one that has the ability to offer and work with any investment structure or tool that exists in the marketplace today. Many firms hold themselves out to be independent but often lead to their proprietary investments. This style of advice can potentially lead to higher fees and lower-performing investments, which usually aren’t the most suitable for the investor. Instead, they are usually more advantageous for the firm itself.
One of the ways you can tell if the advice you get is truly independent is to read the fine print and see if the firm is affiliated with one of the “household names.” Bigger isn’t always better; financial history shows this to be true on many accounts (pun intended). I like to think about it this way: If you were rapidly approaching an iceberg, would you rather be steering the Titanic, which was cumbersome and difficult to maneuver quickly, or a speedboat? The answer is obvious.
- Utilize nontraditional strategies as a portion of your portfolio.
Nontraditional portfolio components can appear in a variety of forms. These strategies can help either provide a greater level of safety or give you more potential for a higher rate of return. Venture capital, alternative investments, private equity, and annuities backed by insurance companies are several forms of “out of the box” portfolio strategies. These structures are not appropriate for everyone and can often have minimum net worth requirements. By utilizing a custom strategy tailored specifically to your needs, you have the ability to mitigate some risk related to the stock markets while also sharing in growth not correlated to these markets.
Venture capital is, characteristically, the idea of investing in early-stage companies with tremendous upside growth potential, offering a longer investment horizon and a higher degree of risk. If the venture capital fund you invest in is well-diversified, it may have the ability to achieve a higher compounded rate of return.
Alternative investments are often connected to hard assets. These can be a diverse array of real estate offerings or land development deals, but they can also be invested in business development companies and bridge loans. Through comprehensive due diligence, these investments could potentially provide an opportunity for increased rates of return with calculated risk. Usually, the hold time for a properly structured alternative is 4-7 years. Some of these investments give the investor the ability to participate in tax-favored income.
Private equity’s main focus is, typically, pooling investors’ funds to invest in other private funds as well as buy out companies that were formerly publicly traded. The purpose of purchasing these companies is to restructure them so that they will be more profitable. These investments are often illiquid and held for much longer than average.
Annuities that are backed by insurance companies can come in a wide variety of forms. The most common types are immediate, variable, fixed index, and fixed. Each one operates differently, and many companies offer their own versions of each one. It can be overwhelming to sort through, and unfortunately, much of the financial industry tends to have a negative bias toward annuities, most often derived from not fully understanding how these products operate. Correctly designed annuity strategies aligned with your objectives can allow for the opportunity for reasonable growth while limiting or completely removing stock market risk.
- Be open to new investment ideas.
Often, we think we are open to new ideas, but the reality is that we are not as open as we may like to be. Think of how much our day-to-day life has changed, even from how we used to live just 5-10 years ago. Advancements in technology and other fields are constantly changing the way we interact, do business, and live life. As these advancements continue, we need to constantly be looking out for new investment opportunities that allow us to enhance our overall portfolio structure.
Sometimes high net worth families can be unaware of and/or grow complacent with their current investments because their everyday lives are unaffected by portfolio fluctuations until there is a major market crash. After a market crash, it is easy to wish you had been more proactive in understanding how your portfolio was structured so as to help prevent a major loss in the first place. Therefore, it is imperative to be open to new ideas and seek truly independent advice when it comes to your financial future.
Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results. Consult your financial professional before making any investment decision.
Michael D. Wall is an author, speaker, and founder/CEO of Wall Private Wealth, Inc. and Wall Leaman, LLC, a consulting firm. He has been seen on national media outlets, including CNBC, FOX Business, Bloomberg, USA Today, and the Wall Street Journal. In addition to helping affluent families protect, grow, and reduce taxes on their wealth, Michael also coaches other financial advisors on how to grow their practice and increase efficiency in their business. He is the host of The Michael Wall Show, heard in over 100 countries and on your favorite podcast app.