Why High-Net-Worth Individuals Need A "Real" Professional Financial Advisor

Financial advisors are professionals who help investors decide where and when to invest their money. These professionals provide guidance on a long list of things, right from selecting suitable investments to planning their redemption. They also assist on other financial topics like tax management, debt management, savings, estate planning, succession planning, retirement planning, insurance planning, etc. Individuals can also hire a financial advisor for the seemingly more minor aspects of financial planning, such as budgeting, managing expenses, boosting savings, and the like. Financial advisors maintain a regular and continued association with clients and help them throughout their financial journey.

A financial advisor can help people plan for immediate goals like buying a car or paying their debt. They can also help with some long-term goals like saving for a child's college education expenses. While all individuals seek out financial advisors for help from time to time, the need for them is relatively more pronounced for high-net-worth financial planning.Typically, the more wealth a person has, the harder it can get to manage it. Individuals who fall in the high-income group can have several income flows and investments to manage. This can be a little difficult to maneuver and can require a more personalized form of assistance. This is why a high-net-worth financial advisor becomes a bit of a necessity for the high-income groups. If you are a high-net-worth-individual and are looking for professional guidance to manage your financial affairs, reach out to a high-net-worth financial advisor who can advise you on the same.

People in two minds about whether or not they need professional high-net-worth investment management, can read this article to decide the course of action.

What is a high-net-worth individual?

While there is no official definition for high-net-worth individuals, a high-net-worth individual can usually be defined as someone with liquid assets worth $1 million or more. This is a generally accepted rule that most financial advisors and wealth management firms use to distinguish clients. The critical thing to note here is that only liquid assets valued at $1 million or higher are counted when ascertaining an individual's net worth. Physical assets like a home, collectibles like fine arts, or durable goods are not considered when computing the net worth. So, if an individual owns a million dollars in the bank or in a brokerage account, they would come in the high-net-worth category, but if they only have a house valued at $2 million. In addition to this, there are two more categories based on wealth. The first is for very high-net-worth individuals who own liquid assets valued at least $5 million and up to $30 million. Individuals with more than $30 million in liquid assets are called ultra high-net-worth individuals.

Here’s a formula to determine the net worth:

Net worth = (total assets – total liabilities)

Here, total assets can include real estate, cars, collectibles, investments, savings, etc., and total liabilities can include loans, mortgages, credit card debt, etc. This formula can be used to calculate individual net worth as well as joint net worth with a spouse.

The U.S. has the highest number of high-net-worth individuals in the world as per a recent 2022 report. The high-net-worth population in North America grew by 13.2% and their wealth by 13.8% in 2021. The U.S., along with Japan, Germany, and China, comprise 63.6% of the global high-net-worth population. The ultra high-net-worth population grew by 8.1% and their wealth by 9.6% in 2021. The very high-net-worth population grew by 8.5% and their wealth by 8.4% in the same year. In addition, the report also found that the gap between wealth groups decreased, implying a noticeable change in investing attitudes and market know-how.

Given the data, the number of high-net-worth investors is only increasing. This means more and more people are now in the ownership of high-value estates. Managing large estates can take time and effort, and, above all, professional expertise, which is why the role of high-net-worth advisors is hard to ignore at this point.

Why do high-net-worth individuals need financial advisors?

With great power comes great responsibility. High-net-worth individuals have vast amounts of money. Managing this money can be challenging. Wealth preservation can be as important as wealth creation, if not more for high-net-worth individuals. This is why professional high-net-worth investment management is vital.

There are a number of reasons to hire a high-net-worth financial advisor. Some of these have been discussed below:

1. Personalized investment advice:

High-net-worth individuals require more detailed and customized advice than other investors. The investment portfolio of a high-net-worth individual can include different types of investments like stocks, venture capital, gold, cryptocurrencies, non-fungible tokens (NFTs), real estate, jewelry, fine arts, and others. A high-net-worth individual's portfolio is unique and can include many alternative investments, hedge funds, etc., too. The higher income groups also invest in international funds and stocks. Managing this can take a similar approach that mutual fund managers take when managing their mutual fund schemes. Such a level of management requires a dedicated advisor who can overlook multiple aspects like taxation, capital gain policies, international laws, and more.

Professional financial advisors assist high-net-worth individuals on several fronts. They help them find suitable investments for their unique needs and interests. For instance, investing in a startup that aligns with their beliefs, finding IPO shares, investing real estate projects, and other similar ventures. High-net-worth individuals also do not necessarily have jobs like others to depend on. A significant chunk of their wealth comes from their investment returns and businesses. Both of these can be volatile and depend on multiple macroeconomic factors. In addition to this, finding the correct investment options for high-net-worth individuals can require investment analysis and using strategies like the bottom up and top down approach, fundamental analysis, etc. This requires time, effort, as well as expertise that can be found with the best high-net-worth financial advisors.

2. Risk reduction:

High-net-worth individuals use high-risk investments to build their fortunes. Their wealth is not built on retirement accounts like the 401(k) or the Individual Retirement Account (IRA) but instead on private and commercial real estate, new and upcoming business ideas, etc. These have the potential to double their money, but the risk involved is equally high, and so is the investment value. Moreover, high-risk individuals may be famous personalities who are constantly under the media gaze. Every step they take is looked at carefully and can be open to criticism, lawsuits, thefts, and creditors. The COVID-19-induced recession has also increased the stakes for these individuals. Therefore, it becomes essential to hire a high-net-worth financial advisor who can find ways to curtail risk and offer legal help in the case of litigation.

One of the things high-net-worth advisors do is create a well-diversified portfolio for their clients. The focus is primarily on distributing wealth in a number of options so that if one fails, the others can balance out the losses. High-net-worth advisors recommend investing across industries and market capitalizations to limit risk and improve returns. They also invest in a combination of different asset classes so that the client gets equal exposure to all options. So, for example, if their portfolio contains risky sectoral or thematic funds, the investment is not limited to one sector or theme alone but a number of different funds that invest in varying sectors with non-correlated returns.

The legal risk is also higher for high-net-worth individuals. For instance, high-net-worth individuals are more prone to litigation from third parties or threats from creditors. One way that high-net-worth individuals can lower risk is by hiring fiduciaries. A fiduciary financial advisor is legally bound to place the interest of their clients above their own. These advisors have a fiduciary duty not to use a client's assets for their personal benefit and to avoid any conflict of interest truthfully. In the event that a fiduciary financial advisor does not honor their commitment, they can be legally and financially held responsible. This instills more faith in the client and can be an asset given the high-value investments involved.

3. Tax planning:

A high-income bracket leads to a high tax output. High-net-worth individuals have multiple income sources. The taxes on these can be detrimental to their overall wealth. Hence, hiring a professional high-net-worth investment management firm becomes imperative. Tax planning for high-net-worth individuals can include a multitude of strategies starting from using tax-advantaged accounts to offset tax in the present or picking tax-efficient investments to avail of tax deductions. However, tax planning does not just end here. It also includes other strategies like keeping a long-term investment approach to avoid short-term capital gains tax, which can be higher than long-term capital gains tax. High-net-worth advisors also use tax-loss harvesting to lower the tax output by using investment losses to offset gains earned in a year. The tax loss harvesting strategy ensures that the individual only pays tax on the net profit, not the gross profit. However, while tax loss harvesting may seem like a simple process, it can require a more detailed approach that only a professional can offer. This is primarily because the portfolio can get unbalanced after an investor uses losses to offset gains. Therefore, it is essential to substitute the assets sold with similar ones to maintain the original asset allocation. However, the Internal Revenue Service (IRS) mandates that an investor must wait for at least 30 days before purchasing an asset that is similar to the one sold at a loss. If the IRS picks up any discrepancies, the tax-loss harvesting will be canceled out. Hence, this strategy requires a minute study of several factors to carry it out successfully.

4. Financial planning:

High-net-worth individuals may have several financial goals. In most cases, these individuals cater to the needs of their future generations, including children, grandchildren, and their spouses. The more plans a person has, the higher the chances of deviations along the way. High-net-worth financial planning requires periodic tweaks and updates according to the changing lifestyles and needs of the individual. This can include portfolio rebalancing, altered withdrawal strategies, changing restrictions for trust funds, and more.

Life events like a divorce, losing a loved one, adopting children, etc., can have consequences on a person's finances. A divorce can lead to alimony, adopting children from a marriage can lead to college education expenses, and losing a loved one can create a loss of purpose. All of these events must reflect on the investment portfolio as well. For instance, alimony can be lifelong. So, the person paying the money would need a regular source of income to cover the costs of alimony without it interfering with their personal goals. Similarly, a trust fund set up for a business or a child's education may need alteration if the child changes their plan. If the child gets a fully-paid scholarship or decides not to go to college, the trust fund rules would need to be modified.

All of these events can not only disrupt plans but also affect taxation. Therefore, getting help from a high-net-worth financial advisor can be instrumental in ensuring that the individual's hard-earned money is not wasted but used optimally according to the altered needs of the family members.

To conclude

High-net-worth investment management can be helpful in dealing with planned as well as unplanned financial goals. It can provide streamlined and professional guidance with optimal use of all resources and opportunities to preserve wealth. Moreover, not all high-net-worth individuals are businesspersons or investors who have the necessary market know-how to make timely decisions. Some may also be artists, sportspersons, actors, singers, and lottery winners who may have no knowledge of financial planning. People who become wealthy by virtue of their inheritance also often lack a fundamental understanding of handling their money and preserving it for their lifetime. In all of these scenarios and more, a high-net-worth financial advisor comes out as the obvious choice.

If you are a high-net-worth individual looking for guidance on how to handle your large estate, use the free advisor match service to find the best high-net-worth financial advisors. Get matched with 1-3 vetted financial advisors that can help you with your unique financial needs and goals.