Don’t let conventional wisdom damage your unconventional wealth.  

  • Conventional advice may be harmful if you’ve accumulated significant wealth.
  • Avoiding critical mistakes in wealth management, advisor selection, asset allocation, and family communication is key.
  • Working with a trusted advisor in a collaborative wealth management environment is crucial.

“Subtract your age from 100 to get your target stock allocation.”

“Keep tight control on your wealth to preserve it for your children.”

“Name your spouse and children as beneficiaries for your retirement accounts.”

The above types of “conventional wisdom” about wealth management are everywhere these days, on television and in the financial pages, in blogs and around the water cooler. Yet what most people don’t realize is that investment advice is almost always geared for conventional portfolios of $5 million or less. Accumulate more than that, and the industry’s many rules of thumb don’t apply. They may even be harmful to your financial well-being.

Unconventional portfolios of $10 million and up require a whole new way of thinking about wealth management, as well as solutions and services that high-net-worth families may not even know they require. “If I asked people what they want, they would say a faster horse,” Henry Ford once said, making the point that people didn’t know they needed an automobile until they saw one in action. In the same way, wealthy individuals may think they want better mutual funds or more responsive brokers, but what they really require is an integrated approach to wealth management that includes investing, planning, banking and lending, and family engagement. 

Following the conventional wisdom may work well for people with $100,000 or $500,000 or even $1 million in investable assets. It’s a really bad idea for very wealthy people, especially those who are beginning to think about transferring their wealth to the next generation. The conventional wisdom, in fact, can lead to critical mistakes in asset allocation, tax planning, advisor selection, and estate planning. Here are some of the most common errors high-net-worth investors make when they apply conventional wisdom to their unconventional wealth.

Mistake #1: Working with an advisor who doesn’t have your interests at heart
Many wealthy people think that it doesn’t matter whether they work with a broker or a fiduciary, but in fact there are significant differences. A fiduciary is required by law to make all decisions based solely on your best interests. A broker, by contrast, is required only to recommend suitable products and services. What’s the difference? A stock fund may be “suitable” for your age and financial situation, but a specific fund, because of its high fees and sub-par performance, may not be in your best interests. A broker might recommend it anyway, because it could offer a higher commission or because it may be managed by his or her firm. A fiduciary can only base recommendations on your needs.

That’s a simple example, but there are many ways in which a non-fiduciary advisor can damage your portfolio. Consider the case of a business owner who sold his company through a Wall Street investment bank, who was not a fiduciary. He planned to invest the proceeds with a wealth management team with whom he did have a fiduciary relationship. When the
proceeds came in, however, they were not 100% in cash as expected, but 50% in bonds and 50% in cash. The investment bank had invested half of the cash in bonds from its own proprietary portfolio. The bonds had been marked up from their market price, so that the investment bank profited on the transaction at the business owner’s expense. As a non-fiduciary, the bank was perfectly free to do this. After a phone call from the business owner’s attorney, the investment bank bought the bonds back and made the entrepreneur whole. But still, the lesson is clear: an advisor who is not a fiduciary can act in his or her own interest, not yours.

Some high-net-worth individuals feel that they are knowledgeable enough to watch out for their own interests when dealing with non-fiduciary advisors, yet even the most sophisticated investors should consider these relationships carefully. Take the case of a former finance professor who had been working with a broker affiliated with an aggressive Wall Street brokerage firm for many years. He enjoyed the intellectual stimulation of talking about exotic investments with this broker, and he felt like he knew enough about Wall Street to protect himself. However, as he became older, he began to worry about his wife, who knew far less about investments. Could she keep an eye on the broker and make sure he was treating her fairly? Could the couple’s children? As a result, late in life, the man decided to transfer his assets to a fiduciary who would look after his family’s best interests when he was gone.

Mistake #2: Investing like a person with a fraction of your assets
One of the more antiquated bits of advice in the investment world is that you should reduce your exposure to equities as you get older to reduce your exposure to risk. That’s fine counsel for people with a few million dollars who can reasonably expect to use up all of their assets before they die. It’s less appropriate for people who have multiple millions and will leave
a substantial legacy to their heirs. 

If you have $10 million or more in assets, you essentially have two portfolios: one for your personal use, and one that will be transferred to your heirs. The portfolio that you expect to use should, indeed, reduce its risk exposure over time. But the remainder, the assets that you plan to bequeath to loved ones, can continue to seek higher returns even at the cost of higher risk. And, paradoxically, the older you get, the more of your portfolio will fall into this second bucket, simply because you have fewer years to spend your assets. If you are very wealthy, your optimal exposure to equities will likely rise, rather than fall, as you grow older. It’s important to work with a skilled wealth management and investment advisor who has experience working with multigenerational wealth and who knows how to best integrate your entire portfolio with your varied needs and objectives.

Mistake #3: Keeping your advisors from talking to each other
Even if you have great advisors who truly look out for your interests, your wealth may suffer if they’re not coordinated. Does your tax advisor know what your investment advisor is doing with your portfolio? Does your attorney understand enough about your assets to structure appropriate charitable or estate planning trusts? Is anyone making sure that all your advisors are working together to protect and grow your wealth now, and transfer it to your heirs in the future? Without  centralized oversight from a dedicated relationship manager, it’s impossible to ensure that each facet of your wealth is working in a coordinated, collaborative, and integrated way. Separating your investments from your estate planning from your family communication and viewing them as separate disciplines is a critical mistake many wealthy families make. As mentioned earlier, working with a fiduciary who is legally responsible for keeping your best interests at the forefront and who has a strategic view of your entire financial picture is key; working with one who embraces this integrated and collaborative approach to wealth management is what separates families that succeed from those that do not. 

Mistake #4: Not letting your heirs make decisions about their wealth
One final mistake that wealthy investors often make is to keep control of their financial situation, rather than sharing decision-making with the family members who will eventually inherit the wealth. Wealth planning, like most disciplines, is best learned by doing, especially with the guidance of an experienced mentor. Successful families begin exposing their children to the group decision-making process very early on, and gradually increase their involvement as they grow up. However, most families simply do not know how to implement open channels of communication, particularly about such important issues. Families who focus on a sense of trust and team-orientation can create an advantage as they seek to transfer values, strengthen bonds, and establish a common purpose.

These are just a few of the mistakes wealthy investors can make when they apply conventional wisdom to their unconventional portfolios. There are many more, affecting every aspect of wealth planning from investment management to tax planning to charitable and estate planning strategies. To avoid these kinds of mistakes, most wealthy families will have to shut off the noise of mainstream financial coverage and find an advisor they can trust, who truly understands their situation, and who has experience helping multigenerational families with unconventional wealth succeed.

This article is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service. This article is not designed or intended to provide financial, tax, legal, accounting, investment or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought.

IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that, while this publication is not intended to provide tax advice, in the event that any information contained in this publication is construed to be tax advice, the information was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax related penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any matters addressed herein.

 

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