by Frazer Rice
“No problem, that’s what I’m here for,” I told him. “I’m guessing you’ve built up a pretty large nest egg, but it’s mostly in the form of restricted stock and other equity?”
“That’s right,” he said. “They keep a tight lid on what we can and can’t do with our personal wealth, and most of my wealth is tied up in company stock. That part is going to come offline pretty soon, though.”
“You’ll need to put some thought into what to do with the stock,” I said. “I’m betting that some of it has a pretty low basis, and parts of it are in tax-advantaged structures or specific compensation plans?”
“Exactly right,” he said. “I’d be inclined to sell it all at once. However, I’ve been around the financial services industry for a long time, and I know selling everything at once probably isn’t a good idea. I need a second set of eyes to look at my situation and help me put together a game plan for it.”
“That sounds right to me,” I said. “Have you been in touch with your accountant and estate lawyer to chat about your plans?”
“I’m in touch with my accountant all the time,” he said, “so I know I need to be on top of the tax ramifications. I haven’t spoken to my estate lawyer in six or seven years. I basically had a will done up and had some term insurance put in place but nothing beyond that.”
“OK. Well, this is definitely the time to get everyone coordinated and on the same page,” I said. “Your tax situation is going to evolve, and now is the right time to review your estate plan. A lot has changed since you put your will in place as far as your situation but also the laws and regulations. You may be able to have your insurance policy work harder for you too. I’m sure you have a house or two. Beyond that, what are your other investments?”
“Correct again!” he said. “I have a place in Bronxville and a summer house in Martha’s Vineyard. I have cash for a rainy day, and some investments in my name and some investments in my wife’s name. With our compliance framework, that is all managed on autopilot through my firm’s program.”
“We’ll want to take a look at that too,” I said. “There may be some ways to do that better or, at the very least, more inexpensively.”
“That sounds good. Thanks, Frazer. I’m in the finance world, but having been around the wealth people at my firm, I feel like I don’t know what I don’t know. I’m sure I need some outside advice and coordination. I also know that I don’t want to do it myself,” he said.
“That’s totally understandable and natural,” I said. “It’s also helpful to get other smart opinions in the expertise you need. Think of it like staffing one of the deals you’re working on. You need input from analysts, legal, accounting, and a host of other fields. In your case, when you retire, your wealth is going to be less compensation based and more driven by the cash flow thrown off by the assets you have accumulated. You’ll have to get used to thinking about things a little differently.”
“OKAY that makes sense,” he said. “Personality-wise, how do I choose the right advisors and get all of them on the same track? I have a long working relationship with my accountant, although he’s sixty-five years old. My old college roommate is a stockbroker, a friend of mine at the athletic club is my financial planner, and another friend recommended me to his accountant as well as his lawyer. How do I decide who to put on my team, and how do I determine whether they’re right for me? In other words, how do I staff up the team that will be working with me? Where would someone like you fit in?”
“These are great questions,” I said, “and it’s excellent that you recognized the importance of staffing your life with good advisors, now that your money situation is about to change.”
“You’ll need to decide who is needed in your cabinet and how to evaluate them to ensure they are trustworthy, highly skilled, and work well together for your situation,” I said. “Let’s look at the many aspects to consider when building your team, and the best practices toward building your best team of advisors.”
Choosing Your Cabinet Members
When you get to a certain level of wealth, it’s useful to put together a team of people who can advise you in different specialty areas. The first aspect to consider is that most of your advisors will be specialists, and a few will act as coordinators. If you have a team of experts and don’t know who the coordinator is, then it’s you, and that is not where you want to be.
Think of your team as being similar to a presidential cabinet, staffed by different people with differing roles and levels of specificity. When you’re building your cabinet, you’ll incorporate a mix of problem-specific technical experts. Every advisor, both within their specialties and outside of them, is good at some things and not so good at others. For example, you can expect an estate lawyer to be skilled at drafting wills and trusts if they’ve been working in that field for several years. They’ll likely have plenty of experience with the common issues involving wills, trusts, and legal structures. However, it’s not the estate lawyer’s job to design your investment portfolio. It’s not reasonable to expect them to have good, informed insights on asset allocation or investment management. These are typically outside the scope of the lawyer’s expertise and are not areas the lawyer pays attention to on a daily basis.
From a thirty-thousand-foot perspective, you’ll also need to make sure all forms of expertise are properly integrated with each other. You wouldn’t expect your wealth manager to prepare your taxes—you have an accountant for that. You might, however, find that your wealth manager is able to add some insight that is beneficial to your tax preparation work, based on tax-related issues within your investment portfolio or another aspect of your wealth being managed.
Your advisors will all have unique opinions and experiences, and their input will influence your choices. Coordination is needed between advisors to prevent creating a new problem by solving for another. You can take on some of that coordination yourself, but a good wealth advisor—one who keeps an eye on broader issues—can connect all the pieces and guarantee they work well together.
Next, let’s explore the common types of advisors who can provide value in the differing stages of wealth creation and preservation.
Manager/Agent
If you are a celebrity or professional athlete, you may already have an agent or manager who represents your interests when it comes to signing deals. They can be helpful to be a member of your larger advisory board, because they often know where you come from and have been part of your wealth-building process. You can certainly bring them into your cabinet of advisors, but be aware that they won’t likely be the appropriate person when you need to structure, manage, or cash out your investment assets. Agents and managers may be good at representing your interest in current deals and wealth creation, but they’re not likely to be knowledgeable about wealth preservation or structuring your wealth for the next generation.
Lawyer
From contracts to trusts to wills, you need a lawyer able to draft documents and provide legal advice that is appropriate for your situation. There will be unique legal aspects to the type of wealth you’ve developed, and those legal needs can change over time.
It’s nice to get insights and qualitative advice from the original team of lawyers who helped you build your wealth. However, you can reach a level of wealth where you need advice that exceeds your current legal team’s expertise. In other words, you may need a lawyer who has deep knowledge in divorce or family law, trusts and estates, or litigation. You don’t need all of those specialists to be on call at all times. Your primary lawyer should be a coordinator with a broad knowledge of legal issues and good understanding of your goals and background.
Some law firms provide a full range of services, while other firms specialize in areas like estate planning. It’s okay to integrate different lawyers and firms if that’s a better fit for your needs. Lawyers tend to be fairly collegial when working with lawyers at other firms. Th
is happens often, because it’s unrealistic for one lawyer to handle every type of legal need. You can’t expect someone who advises you on your real estate business to also be current on trusts and estate planning or help you establish a foundation and navigate the complexities of the related tax laws.
It’s extremely difficult for one lawyer to handle a wide range of deeply specialized needs. The lawyers you’ve had so far—perhaps the ones who negotiated your first sports contract or the one who helped broker big real estate deals—may be helpful for advice related to the specific assets they helped you build, but they may not be the right people to drive the advice going forward. The needs of clients come first. Most good advisors respect this, and the great ones know that relationships come from different angles, take different paths, and can take lots of time.
Don’t be afraid to be blunt in detailing your situation and talking about your needs with other legal advisors. There might be good ways to integrate your current strategies with the advice you receive for another set of issues. Issues and specialized needs can intersect in many cases. When a client works with a divorce lawyer on prenuptial planning, it’s possible they’ll also need to work with an estate planning lawyer to protect the current or future estate. It’s important for each lawyer to be aware of how their advice and planning will work in conjunction with the work of other lawyers on your team. The divorce lawyer, for instance, will need to communicate with the estate planning lawyer to make sure that the prenuptial planning doesn’t harm or complicate the estate planning components. This is why some people hire one law firm containing many types of expertise under one roof, hoping for easier coordination and collaboration between specialized experts. Regardless of how large a law firm is, however, there will still need to be coordination with advisors in other areas like accounting and investment management.
Accountant
There’s an old saying that every company has three types of accounting books: the books for the tax man, the books for the investors, and the actual books. Accounting has many types of complexities, and accountants vary in the type of complexity they specialize in. While the language is generally the same, some accountants may specialize in corporate solutions while others handle individual situations. The accountant you have for your family business might be instructive on business income or losses, for instance, but not focused or experienced in personal estate planning strategies.
The most important consideration when selecting an accountant is to make sure you are comfortable with their level of aggressiveness. Some people hate taxes so much that they want an aggressive accountant who will leave no stone unturned when it comes to finding as many deductions as possible and creating structures to reduce their tax bill. Other people (and other accountants) may be more conservative in their approach, preferring not to poke the IRS with a stick. Therefore, a conservative person should not be paired with an aggressive accountant or vice versa.
A good accountant makes sure you’ve filed correctly and have paid the correct tax money owed, and he or she provides a good buffer if you’re audited by the IRS. More importantly, an experienced accountant will canvass the greater landscape to find opportunities for your situation and lay out the risks and advantages. Experienced accountants will also have a well-developed network of advisors to help with your other needs, such as wealth management, insurance planning, or estate planning.
Banker/Lender
Most people at a certain level of wealth use multiple banks. It’s understandable after reading news stories about banks running into financial or regulatory problems. People who borrow money—especially real estate investors—like to be connected to multiple lenders in order to negotiate the best terms on deals. While there’s nothing wrong with doing business with multiple banks, it’s useful to have a relationship with one bank or lender who offers a level of advice above the pitch book. It keeps everybody honest and builds a strong relationship that will benefit you when you need it most. For instance, if a lender pulls out of a real estate closing at the last minute, three days before you were set to close on the property, you could benefit greatly by having a trusted relationship with another lender. You don’t want to try to forge a new relationship from scratch three days before a closing.
It can make sense to build multiple long-term relationships with lenders. People will typically forgo some level of investment returns to maintain a trusted relationship, but if you’re not being presented with competitive options because the lender believes you’re willing to pay for the relationship, that’s a reason to have ties with other bankers. This dynamic can be summarized by one of my favorite quotes: “Loyalty is worth a quarter point.”
The ideas of being multiply-banked and diversifying relationships are also useful in investment management. This strategy allows you to gain an understanding of what options exist beyond what’s being presented by any individual advisor. You get multiple viewpoints and different points of emphasis. This opens the door to state-of-the-art advice and helps keep investment advisors on their game, so they’re not just pushing what’s coming off the shelf. It also forces your advisors to keep the quality of their game up, because the threat of competition is always there.
Investment Banker
An investment banker is different than a personal banker or lender. Investment bankers advise people on what to do with their businesses. These types of bankers can be among your most important advisors, because they are knowledgeable on how and when to acquire the types of businesses that offer the right type of growth and value for your needs. They also advise on the sale of businesses or assets. If a company finds part of its business is underperforming, the company may want to sell it. If so, they’ll normally bring in an investment banker to help with that deal.
Investment bankers tend to be transaction based, but the best ones develop long-term relationships with business owners. An investment banker is critically important in the sale of a business, because they will not only find a buyer for your business but also find a way for that buyer to pay for the deal. They structure the sale (or the currency of the sale) to make sense for both the buyer and the seller. For people who are cashing out without any intent of returning, an investment banker represents the final step in the process. For people who are continuing to build and grow businesses, an investment banker can bring an understanding of the broader business climate, and provide strategic thinking toward the ownership and management of businesses.
Investment bankers are instrumental in wealth creation, not necessarily wealth preservation. They look out for good deals, provide help with acquisition and implementation, and bring ideas on how to grow the asset. Take the case of a house. A real estate broker is not going to be that helpful once you own something. An investment banker, however, brings ideas of how to grow your business and sell it. An investment banker will be involved in how the transaction is financed and make sure it comes to fruition, whether you’re buying or selling. Investment bankers normally get a percentage of the purchase price of the transaction, which is usually 6 percent for large deals.
Insurance Advisors: Life Insurance
Several types of insurance have important applications for the wealthy. Life insurance, to me, is a product with two and a half functions. The first function is income replacement. You don’t want your death to leave your family in a lurch, so you buy a certain amount of life insurance to replace your income and provide for your surviving family or other benefactors. A burgeoning offshoot of this concept is the idea that life insurance be put in place as a source of funds for medical expenses and end-of-life care.
The second function of life insurance is to fund estate taxes, which have historically been as high as 50 percent. If your estate’s assets were primarily comprised of real estate holdings, you may not want to force your inheritors to liquidate real estate assets to pay the estate tax. Life insurance proceeds can be used to pay your estate taxes and prevent any forced or unwanted
sale of assets in the settling of your estate.
Last, the “half” function of life insurance can be its consideration as an investment. Life insurance brokers call me three or four times a day, pitching life insurance as a tax-advantaged way to save money for your retirement. I believe insurance products can be expensive ways to invest and should generally be viewed with a degree of suspicion when it comes to their function as investments.
It’s important to choose an insurance advisor you feel good about, who takes care of the first two functions of income replacement and estate tax coverage and can provide some analysis on its investment-related functions. It is also imperative for your insurance advisor to act in conjunction with your estate planning lawyer and accounting advisor.
An insurance advisor has a role to play when you’re updating your estate planning and financial planning, because the markets change. There may be an insurance policy that provides the same value more economically than the policy you currently have in force. A good insurance advisor can help you evaluate the varying options offered by an insurance company, and I also like insurance advisors to have the ability to canvass across multiple insurance companies. That’s often how you find the best deal for your situation, especially if you have unusual health issues. Reliance on one insurance company’s underwriting guidelines and policies may not land the best option.
Insurance agents are in the business of selling insurance, and they are paid for the sales. In evaluating those offerings, make sure you have an honest broker. Consider using someone recommended by your lawyer. You can check references and talk to lawyers, accountants, or other advisors who deal with the broker.