by Frazer Rice
You can prevent losses and overexposure to market risks by building some liquidity and flexibility into your planning. In addition to avoiding loss, it will help you continue to your wealth. Structuring a portion of your assets with flexibility and liquidity will also allow you to take advantage of future opportunities that arise, providing growth that preserves the spending power of your money and wealth. You want to make the ride as smooth as possible, for as long as possible, to serve your needs as well as the needs of your beneficiaries and charities.
Let’s take a deeper look into four common events that can benefit from some forethought and flexibility in your planning.
Marriages
Unexpected life events are not always bad, and many can have a positive impact on wealth. Marriages, for example, can be wonderful. A marriage to someone with steady employment or assets of their own can help to increase your wealth, and a marriage can also help build and strengthen the values and traditions you desire to pass to future generations.
Divorce
The opposite of marriage, of course, is divorce. Divorce can be an unplanned event that becomes a major risk for nearly all types of wealth. As nonromantic as it sounds, to marry without thinking about the implications of divorce is shortsighted.
Divorces can ruin the operation of a business and create confusion regarding the business’s current and future ownership. A divorce settlement can also lead to the forced sale of assets, and it’s a sale that can come at an inconvenient and disadvantageous time. In many divorces, real estate is a large asset that must be sold whether it’s an opportune market or not. I’ve also seen a trend of couples living together after their divorce, and part of this trend may be caused by the inability to sell their home for the price they need or desire.
Beyond the forced sale of real estate, sometimes an aggrieved spouse will also receive (or ask for) a big chunk of wealth in a divorce settlement. The spouse was accustomed to a certain lifestyle and needs the wealth to maintain that lifestyle. Both spouses may have zero preparedness for the recalibrations that divorce causes. This is when you must again evaluate what things are important to you and see if they can be supported by your new level of wealth, whether it’s larger or smaller after the divorce. This level of reflection is time well spent and will lead to fewer disappointments.
New Family Members
Children add to the number of people under your wealth umbrella. Indeed, each additional generation can dramatically swell the number of people you are safeguarding. Two issues can come into play: a failure to coordinate resources and a failure to transfer values. Wealth passed on to the next generation without education or strong values may be spent without great purpose.
To the extent that you can, you should try to anticipate the strengths and weaknesses of your children and grandchildren. To extend the duration of their wealth, you’ll want to incorporate a plan that takes advantage of their strengths and limits the damage that occur from their weaknesses.
Selling a Business
The sale of a business is a fulcrum event that can shift the type as well as the total amount of wealth you have. Whether you’re forced to sell your business unexpectedly, or you’re planning to sell it next year, bad outcomes can occur if you haven’t thought about what you want to do with your wealth after the sale. This situation can lead to someone who retires for a year, gets antsy, and then dives headfirst into risky or weird pursuits. There’s nothing wrong with that if the pursuits are planned for and funded and do not jeopardize your overall financial plan. However, when you don’t know what to do with your newly accessible wealth, less-than-desirable behaviors and outcomes can surface.
To prevent selling your business the wrong way, you should engage and consult a wealth manager at the earliest stage possible. Ideally, this is well before the business is sold. Your wealth manager will help you plan and structure the sale of the business (and the transfer of wealth) around the various constituencies important to you, whether it’s your family, employees, managers, vendors, community, charities, or others. To address these issues after your business is sold is haphazard, and it can lead to huge mistakes that could’ve been prevented with more forethought regarding the goals you have for your wealth.
Business sales can be complex, and the transactions carry risks and complications. The more coordination you have in place and the earlier it’s in place, the better off you’ll be. You may have an investment banker telling you one thing, while your accountant and estate lawyer are telling you something different. Their input is all part of the execution of a good transaction, and a great wealth manager will help you coordinate between them in a way that accomplishes the goals you have for your current and future wealth.
Last, don’t be afraid to seek the help of a wealth manager early. My experience is that it’s easy to establish a relationship with a wealth manager, even if your wealth is not yet in a form they can work with before your wealth arrives. Great wealth managers look to the future, and it’s normal for managers to spend some time meeting with clients before the client has received the liquidated wealth to fully compensate the wealth manager. The key is to start your relationships early, so your advisors are in place as opportunities surface. You want time to build trust and rapport before a major event occurs.
Additionally, wealth management does well when private banking is a component and lending capabilities are a part of the toolbox. Family wealth is often in illiquid form and ready cash is not always immediately available. Many of the major mistakes I see occur when people are forced to sell assets to raise cash for an event that was unanticipated or poorly planned. A common example is when a majority of a person’s wealth is tied up in real estate properties. The person dies and an estate tax is owed, but the family doesn’t have enough cash to pay it and the assets aren’t liquid. Real estate will have to be sold to pay the tax obligation, whether it’s an opportune time or not. In situations like that, access to banks and lenders would be helpful, and loans could be used as a backstop to prevent a fire sale. The family could hang on to the existing real estate assets, using them as collateral for the loan to pay the estate taxes.
Loans can also be used to fuel business growth, and many people build their wealth through the leverage of borrowing. They may not want to continue that pattern of leveraging once they reach retirement, but it can be nice to have the option of leveraging borrowed money in the event an appealing and appropriate opportunity surfaces. Good wealth managers can handle this need.
Death
Our poor squash player’s family is about to find out how well their existing plan works in the event of a sudden death. Luckily, it sounded like he had a plan. I have been in front of extremely wealthy people who have no planning in place. Perhaps they think they are going to live forever. Alas, death—like taxes and the Jets not making the Super Bowl—is inevitable.
Most wealthy people know that there will be a fully functioning world long after they are gone. However, people often create long-term plans with the expectation that they can “set it and forget it.” Guess what? Life doesn’t work that way. Things change, and this happens more often than you would think. Tax regulations evolve (and sometimes reverse themselves), laws get passed or sunset, and catastrophic events or happy occasions can occur. You also have the right to change your mind. Maybe you’ve just walked off a squash court where your friend has died unexpectedly and you’ve had an epiphany that your children don’t need your wealth and you’d rather save the whales or build wells for clean water in Africa.
As we discussed earlier, it’s not enough to devise a plan and put it in place and not expect to have to review it periodically. You must revisit it to make sure it’s up to date with the law, takes advantage of any planning developments, and is current with your aspirations. You can set up a schedule for review—similar to estate planning, which often needs to be revisited every year—but you should also review your long-term plan whe
n any of the following events occur:
A birth, death, marriage, or divorce in your family
Significant new developments within your business
New and substantial business opportunities
Relevant law changes affecting your business or wealth planning
You want your wealth management plan to be viable and relevant for as long as possible, and that will require you to revisit your plan regularly and make adjustments as necessary.
Building Your Plan: Timelines
It takes at least a month to create even the simplest of wealth management plans. I once read a shocking statistic that claimed 40 percent of people do not have a will. That is a troubling statistic, if true. Dying without a will can leave your business and people close to you in a vulnerable position. Creating a will requires a call to an attorney or wealth manager, and that’s the type of simple planning that can take a month to finish.
In a high net worth situation, the wealth management planning process could stretch out to six months or more. This allows time for self-reflection and time for the process of determining your goals for your business, philanthropy, legacy, and also your current living. Your living goals may include world travel, the education of your children, owning three homes, funding a new business, or acquiring a professional football team. Defining those goals will help determine the income stream you’ll need over your lifetime.
Reflecting on your legacy wealth goals often leads to defining the gifts you want to put in place to benefit your family, charities, or community. Frequently, these gifts make a statement about your values. To accomplish legacy goals and transfer wealth, trusts and similar vehicles come into play and require an advanced level of expertise and planning.
If your long-term plan includes the sale of a business, the timeline for finishing your wealth management plan could be much longer. The full process of business succession (ending with the sale of the business and transfer of wealth) could take more than a year. Understanding the sale process and how it integrates with the personal side of your life is part of this exercise. There are often lags between the execution of each step in the succession and sale of a business, especially if your wealth is wrapped up in something illiquid.
Building Your Plan: People
Your plan should come together through a collaborative process, but you’ll want to have an appointed advisor at the helm. A wealth manager can normally serve in this critical role. In chapter seven, we discussed the questions to ask and the signs to look for when choosing a wealth manager.
Your wealth manager may have capabilities across the board or strengths in only certain areas. In the latter case, other experts inside your cabinet of advisors (or even outside of it) will be needed for components of the wealth management planning and execution. Your wealth manager will curate the advice coming in from different directions, thus avoiding wasted effort and expense.
If you can’t find a wealth manager you trust with this important role of oversight and quarterbacking, you could also have this coordination done by a trusted lawyer, accountant, or other expert. It’s a good practice to review the appropriateness of these individuals periodically to make sure that they are willing and able to serve in this role. Many major events can happen without warning. Dealing with personnel issues at a time of stress or death is a bad outcome and can be costly, litigious, and emotionally taxing.
Other Helpful Tips
There are a few other best practices and considerations I’ve found helpful in long-term wealth management planning and execution. These fall in the categories of determining your provider structure, utilizing insurance and liquid assets, and optimizing your communications. Let’s look at each of those elements a bit more closely.
Determining Your Provider Structure
There is a tug-of-war between using multiple providers or using one provider in terms of financial institutions and firms. When you use one institution with several types of advisors under one roof, you may capture advantages in pricing, coordination between advisors, information sharing, and execution of your plan. The disadvantage is that you leave yourself open to an individual institution’s risk. Think of the clients associated with Lehman Brothers, an institution full of terrific advisors who were unaware of the risks being carried by the institution.
Often, I do like the idea of teams from the same institution approaching a client. When you purchase multiple services from one institution, they can usually cut you a break on your fees. Having everything in one place can mean fewer phone calls and better coordination. You avoid a redundancy of information, and a certain level of institutional memory can be created. At the same time, when wedding your affairs to one institution, there is a danger that the institutional memory may evaporate at any moment and be replaced with an 800 number.
There are also many advantages to having multiple advisors. You’ll have several good people minding the store, structuring meetings, and providing oversight for your wealth. In industries such as real estate where borrowing funds is a crucial part of the business model, having multiple providers can offer an advantage in lending. You’ll have more than one connection who can lend you the money needed for an investment. In the event that there’s a change in market conditions, increases in fee structures, or turnover in personnel, it’s nice to have multiple options on the table in case service standards drop. Being multiply-banked is generally a good idea, especially for people who are continuing to grow their wealth.
Mitigating Risk: Insurance and Cash
The real purpose of insurance is to mitigate certain risks, notably to replace income or cover your estate taxes. There’s an art and science to finding a good insurance advisor, and people receiving poor advice end up overinsured in the wrong areas or underinsured where they need it most.
Only under narrow circumstances can insurance be viewed as a good investment or an investment of any kind. Insurance can be complex, and it may not always grow as expected or projected. In the early 2000s, for example, some people borrowed money to pay life insurance premiums with the expectation that the growth of the life insurance would perform well enough to cover the loans. Then 2008 happened, bringing with it a minefield that blew up the complex life insurance transactions that did not play out as expected. The more complex the proposed investment strategy, the more your advisors’ scrutiny is warranted.
I’m a big fan of having excess cash on hand for emergencies and opportunities. At a minimum, you should have enough cash to cover your living expenses and spending for six months to a year. This is your safety net in case something goes haywire. You might also think more broadly and have additional cash at hand in the event of investment opportunities. Using available cash will prevent you from whipsawing your portfolio to pursue urgent opportunities. The extra cash and its liquidity may also prevent the fire sale scenarios that can lead to losses in asset value and wealth.
Optimizing Communications: Advisor Meetings
In the early phase of your relationship with your wealth manager and advisors, quarterly meetings are a good standard practice to keep providers honest and on top of things. It also helps you as a client to be aware of your planning and progress. These meetings should review where your wealth management plan stands and why. This doesn’t necessarily need to be a three-hour discourse—a quick check-in may be sufficient. People who are busy or have simple wealth plans may find it adequate to meet only once or twice per year.
Outside of your regular meetings, you should not hesitate to pick up the phone and call any of your advisors if you have a concern. If something blows up in the first quarter and you don’t meet again until the end of the year, you could lose nine months of recovery if the issue goes unfixed. This is another reason that the frequency of quarterly meetings can be effective in reducing the risk of neglect on both sides of the aisle.
When it comes to your regularly scheduled meetings, it’s impera
tive that you establish communication guidelines to guide the expectations of what will be communicated during the meetings, as well as outside of the meetings. During the meetings, you want to hear ideas, but you also want to keep them brief to keep things moving. Outside of the meetings, establishing how much and how often the provider and the client communicate is a way to ensure there are no surprises at the meetings and also increase the efficiency and productivity of meetings.
Optimizing Communications: Defining Roles
Each advisor in your cabinet should know their exact role and why they’re there. Problems arise when advisors are not clear about their roles or are asked to do something outside the scope of their role.
Additionally, when advisors promote new ideas, they should also explain (or ask the group) how the execution of the idea would harmonize with the other parts of your overall plan. For example, if your accountant has an idea for a tax strategy, it’s a good idea to run it by your legal advisor, business manager, and maybe even the wealth manager. They’ll be able to inform the team of the ramifications of the idea based on their areas of responsibility. Complications can arise if many different ideas are being generated by advisors charging by the hour, and if that happens, you should prescreen these ideas to make sure they’re applicable to your goals and existing plan.