How does financial planning work for high-net-worth individuals?
Discover the challenges of high-net-worth financial planning and the financial strategies you should implement to grow and safeguard your assets.
Summary
Wealth management firms consider people with liquid assets of above $1 million as high-net-worth individuals (HNWIs).
Some challenges they face include distributing wealth efficiently and reducing their tax liability.
HNWIs typically adopt customized strategies around estate planning, risk management, and diversification.
HNWIs can find a financial advisor who offers expert financial advice through Unbiased.
What is considered high net worth?
High-net-worth individuals (HNWIs) typically have between $1 million and $10 million in liquid assets.
Financial advisors define high-net-worth clients based on their investable assets, such as cash and investments. Primary residences, businesses, and collectibles don’t fall under liquid assets.
For some advisors, the high net worth financial planning threshold may be higher, especially for those specializing in ultra-high-net-worth individuals (over $30 million in assets).
What are the biggest financial planning challenges for high-net-worth individuals?
Financial planning for high-net-worth investors is quite different from that of average investors, and the issues they face are also different.
Common issues include:
Distributing wealth efficiently: Ensuring wealth is transferred to future generations or charitable organizations without unnecessary tax burdens.
Reducing tax liability: HNWIs often have complex tax profiles, requiring unique strategies to minimize their tax exposure.
Preserving wealth: Protecting assets against market volatility, legal challenges, or other risks that could erode their wealth.
Meeting long-term goals: Whether for retirement, philanthropy, or future business ventures, HNWIs need structured plans to meet their long-term financial objectives.
What strategies should high-net-worth individuals consider?
Compared to average investors, high-net-worth financial planning strategies must address multiple aspects, from tax efficiency to wealth preservation.
Below are some key strategies to consider.
Tax planning for high-net-worth individuals
HNWIs inherently find themselves in high tax brackets, so effective tax planning helps them potentially reduce their tax liability, allowing them to preserve more of their wealth.
High-net-worth tax planning involves strategies like tax-efficient investments, charitable giving, tax-deferred accounts, and tax-loss harvesting.
Those with international assets must implement international tax planning strategies to remain compliant with foreign tax laws and mitigate their global tax burden.
Estate planning for high-net-worth individuals
High net worth estate planning ensures wealth is passed down efficiently, avoiding the pitfalls of high estate and inheritance taxes.
Wealth managers approach this part of high-net-worth financial planning with wills, various types of trusts, family limited partnerships (FLPs), and implementing solid succession plans for a smooth transition of business leadership.
HNWIs should also ensure they have power of attorney documents designating who will make decisions for them should they no longer have the capacity.
Trusts are legal entities in which a nominated trustee controls the grantor’s assets for the beneficiaries’ benefit. The grantor decides how and when these assets are distributed. Transferring assets into a trust is an efficient way to avoid probate and often has significant tax advantages.
High-net-worth estate planning should also include a will, even where trusts are in place. The will determines what happens to assets not covered by trusts.
Risk management for high-net-worth individuals
Risk is always a factor in investments, and this applies even more to HNWIs.
Typical risks these individuals face include lawsuits, cybercriminal targeting, natural disasters affecting valuable properties, political instability when they've invested internationally, and efficient wealth transfer.
Risk management strategies for HNWIs include asset allocation, diversification, and robust insurance policies.
High net worth financial planning should focus on customized insurance policies that consider all their needs, such as property insurance, protection against liability claims, loss of income, and life insurance.
It is critical that they consult a wealth management advisor to secure adequate insurance for their individual needs.
Diversification for high-net-worth individuals
Diversification involves spreading investments across different asset categories, geographical regions, and industries.
A well-diversified portfolio reduces exposure to market volatility and risks tied to a single asset class.
High-net-worth individuals can diversify by distributing investments and cash allocations between stocks, bonds, fixed-income securities, real estate, and alternative investments like hedge funds and private equity.
Retirement planning for high-net-worth individuals
Due to the significant wealth involved, high-net-worth retirement planning requires careful consideration. It may include maintaining a specific lifestyle or fulfilling philanthropic goals.
HNWIs, along with their financial advisors should approach their retirement planning by:
Calculating the amount they need to save to cover their needs, fund their lifestyles, and account for inflation
Maximizing all retirement plans, including employer-sponsored ones and an IRA
Planning for medical expenses and long-term care
Minimizing tax liability
Possibly relocating to a lower tax areas
Creating sustainable withdrawal plans
Adjusting asset allocations to balance growth with income stability
Do I need high-net-worth financial advice?
If you have investable assets exceeding $1 million and are concerned about efficiently transferring wealth, minimizing taxes, or managing risk, then high-net-worth financial planning is essential.
The complexity of such a financial situation demands specialized guidance that a typical financial plan may not cover.
Get expert financial advice
High-net-worth financial planning is a complex process requiring customized strategies to manage wealth efficiently.
Securing expert advice on challenges like tax planning, risk management, and estate planning ensures that you preserve and grow your wealth for the future.
For expert financial advice let Unbiased match you with an SEC-regulated financial advisor who can provide guidance tailored to your needs and net worth.
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