A feeling of security and happiness is something everyone strives for. For most of us, a secure financial situation is a necessary part of this picture. And it’s not as straightforward as some might think. In fact, the more money a person has, the more work it is to maintain and grow their assets. It is often best for these individuals to seek expert assistance in investment strategy, estate planning, and tax planning. We’re talking about High-Net-Worth Investors.
What Defines High-Net-Worth Investors (HNWI)?
This is a term used by financial institutions and in the financial services industry to describe an investor with a certain amount of investable assets. While there are a few different numbers used to classify a HNW investor, they generally have at least $3 million in investable assets. We can compare this to Ultra-High-Net-Worth Investors (UHNWI) who typically have $30 million or more in investable assets.
A similar classification to describe the wealthy is a High-Net-Worth Individual, which takes into account a person’s liquid assets. You are therefore High Net Worth if you have at least $1 million in assets that can easily convert into cash.
The country with the highest number of HNW investors is the United States, which has 96% of the HNW investors in North America. The other top three countries for HNW investors are Japan, Germany, and China.
While HNW investors all have large amounts of investable assets, they can come in all sorts of personalities. It’s important to understand that the financial and personal worlds of HNW investors often vary heavily from person to person.
Investment Strategy for High Net Worth Investors
How a HNW investor invests their assets is not something to take lightly. Their investments affect how their assets are maintained and how they grow. It also helps them meet financial goals and, if done right, offers long-term security.
One thing to consider in terms of the goals of HNW investors is that they almost certainly differ from those of less wealthy investors.
While the average investor may be mostly concerned with securing their retirement and leaving some money for their children, the HNW investor’s retirement is probably already financially secure. Hence their focus is instead on the estate they will pass on to their children. For UHNW investors, it means focusing on ensuring their wealth will last for generations.
Any effective investment strategy relies on smart portfolio construction aimed at meeting the investment goals. These goals inform just about every aspect of the investment strategy, from the types of investment accounts in your portfolio to the way it’s managed. It’s why finding a wealth manager who is willing to go the extra mile to understand where you are and where you want to be is so important.
Along with goal-setting, the risk-return tradeoff is another important concept in investment strategy. HNW investors are wealthy, but that doesn’t necessarily determine their risk tolerance. Depending on the types of assets they own and their plans for the future, losing any sizable portion of their wealth could be detrimental.
These investors require a different strategy from those willing to weather short-term losses in favor of long-term gains.
Another factor is personality, some people are simply more risk-averse than others. Peace of mind is important, and a strategy that allows the investor to sleep easy while meeting their financial goals is ideal.
The time horizons of HNW investors’ goals can be unique to those of other investors. Since HNW investors may be planning much further into the future, the best strategy could be different from that of someone looking mostly at planning retirement.
Longer time horizons can mean a couple of different things depending on the investor.
One benefit of having longer time horizons is that the investor has the time to make up short-term losses over time, yielding higher returns. The right financial advisor can help identify stocks that will provide substantial returns for years to come.
The Right Asset Allocation
For investors of any amount of wealth, asset allocation is the crux of a solid investment strategy. The right distribution of funds into varying asset classes like stocks, bonds, mutual funds, and cash is what will provide an investor with the best results. Generally, diversity is key.
Throughout 2018, declining markets saw the global HNW investor population shift to more conservative investment options, as noted in the 2019 World Wealth Report. However, the right distribution for one investor can be very different from that of another.
If you’re a HNW investor, the right asset allocation is something that a wealth manager can help define after taking into consideration your goals, timeline, risk tolerance, and the current economic environment.
Estate Planning for HNW Investors
Effective estate planning is a very important part of wealth management.
For HNW investors, the goals of estate planning include, at the minimum, protecting inheritances and minimizing taxes. This can be where expert guidance is most important for some HNW investors, especially if their retirement is already planned out.
One part of estate planning to consider is wealth transfer tax. Wealth transfer taxes include gift taxes, estate taxes, and generation-skipping taxes. In seeking the most tax-efficient way to transfer wealth, strategic planning is paramount. Therefore, understanding just how the 2018 Tax Reform Bill affects investors and what it means for you is essential.
And this is why having a trusted advisor by your side is a major advantage. Navigating the best tax-mitigating practices requires expertise.
Tax Planning for High Net Worth Investors
Taxes aren’t notorious for being fun or straightforward, but they are a part of life. Tax planning is something everyone has to deal with, but for HNW investors it can be extra important. Improper tax planning can mean saying goodbye to very large portions of wealth. To do this unnecessarily would be a serious shame.
Capital Gains Tax and Opportunity Zones
One tax that most investors run into at some point is the capital gains tax. It’s the tax owed on money made from investments and is important to be aware of. There are both short-term and long-term capital gains taxes, depending on how long you hold your investments before selling. This is yet another aspect of tax planning that has been affected by recent tax reform.
Fortunately, there are ways to defer the capital gains tax in certain scenarios. Opportunity Zones is a Federal program aimed at encouraging economic development and creating jobs. It is designed to encourage investments in distressed communities in the USA.
Here’s how it works for investors.
Say you sell an investment and make a sizable profit. Normally, you’d have to pay a significant amount of capital gains tax on it. With this program, however, you can invest the otherwise taxable gains into an Opportunity Zone. This defers the capital gains tax you would normally owe.
Now, depending on the amount of capital gained, this tax break can mean huge savings. This option has the added benefit of having a positive effect on a community in need. Saving money and having a positive influence on the world is a big win for all.
It’s probably not a surprise, but HNW individuals are subject to the highest tax rates. This makes having a tax professional by your side an incredible asset. They can help you hold on to more of your wealth with a thorough understanding of the tax system and how it applies to you.
The Right Time for Expert Guidance
There are many specialized services offered specifically for HNW investors, and there are plenty of reasons why. Managing a large amount of investable wealth is a task that deserves to be treated with care. If it’s to be done well, it requires expert attention and insight.
As reported in the 2019 World Wealth Report, the population and wealth of HNW investors worldwide dropped last year for the first time in seven years. Now more than ever there is a need for personalized wealth management services. It’s the best way to protect and grow wealth amid unstable economic climates.
A Personal Approach
There is no catch-all best investment strategy. Not only do the portfolios of HNW investors need to be different from those with less investable assets, but they also have to meet the needs of the specific investor.
Behind every wealth management portfolio is a person. They have goals and relationships and personalities to take into consideration. This is something that Saddock Wealth understands. We value the relationships we build with client-partners very highly. It’s how we’re able to maintain long-term relationships and become the trusted advisors that our clients need.
Finding a financial advisor who takes the time to get to know you and treats your financial decisions with respect is the wisest move you can make in wealth management. Schedule a meeting with us here to find out more.