It is a truism that great wealth cannot buy great judgment. It's easy to find examples of celebrities losing their fortunes, but their stories are far more common than those of anonymous wealthy people who made unfortunate decisions. This week on Barron's Advisor's His Big Q, we asked financial advisors to explain the most costly mistakes that extremely wealthy individuals make.
Andrew Klei, co-chief investment officer at Crescent Grove Advisors, said: One mistake applies to executives of publicly traded companies who have created wealth through concentrated positions in stocks. Once they accumulate large concentrations over the years, they are reluctant to sell their shares. They may be overestimating their knowledge of the company. Or you may still be in a managerial position where you feel you have some control over performance. And perhaps there are factors that underestimate macro factors and headwinds that can have a disproportionate impact on stock returns. So the idea of not diversifying and holding on to some of these positions for too long is a big mistake that we recognize.
Second, various areas, such as investments, taxes, and estate planning, are often siloed and there is a lack of cross-disciplinary interaction. Therefore, there is no need to necessarily connect the dots between taxes and investments that can produce more efficient outcomes. A specific example would be someone who came to us after the fact and said they had written a check for $100,000 to make a charitable donation, but we wanted to do it in a more tax-efficient way. It would have been better to use securities with higher valuations.
Belinda Stark Herzig, Principal, Global Tax and Senior Wealth Strategist; BNY Mellon Wealth Management: I have been in this industry for a long time and have seen many clients looking to relax or modify their existing wealth transfer plans. If you choose a vehicle that is irredeemable and your circumstances change, your options are limited. There are many stories to be aware of. I encourage all clients to seriously consider their governance instruments and their terms. [do this] Before drafting your estate planning documents, you need to make sure you understand the impact of the various provisions.
One area where there's actually nothing wrong with it, but it's very complicated, is when a client creates a spousal lifetime access trust that doesn't settle a divorce. A SLAT is an irrevocable instrument and difficult to dissolve. If these spouses dissolve their marriage, the corporation will continue to be the beneficiary unless it is planned for divorce. In some cases, there may be a provision such as, “If this person who is my spouse ceases to be my spouse, that interest will cease to exist.'' But in the older SLATs, created in, say, 2011 or 2012, there wasn't as much planning going on.
Sarah Keyes, Financial Advisor, Wealth Enhancement Group: People who are probably in their late 50s or early 60s and have around $10 million in assets really want to share their success with their children and make their lives easier. Often parents intervene and start giving them large amounts of money. I'm not talking about annual gifts or anything like that. I'm talking about large lump sum contributions to 529 college funds, or large sums of money that recipients put into real estate purchases or business ventures, without considering the long-term effects. Now, if the parents aren't spending a lot of money, that doesn't necessarily mean there's a problem. But gifts often follow every other year, if not every year. Additionally, several years of unfavorable market conditions can have a significant impact on the long-term viability of a client's plan.
At higher wealth levels, I've seen many people achieve success in business ventures and very successful investments. And they usually underestimate the luck involved: being in the right place at the right time, knowing the right people, etc. And with that windfall, they invest in private equity and venture capital investments. It's like, “Hey, I made a big bet and won. So I'm good at this, so I can do it again.” What is missing is any proper consideration of the rarity of success, or more importantly, any kind of thought process as to how it fits into the overall financial strategy and goals and objectives.
Philip Richter, President of Hollow Brook Wealth Management: We often see the next generation of customers receiving money and then spending a lot of money. Even if you received coaching or counseling back then, it wasn't something that took place over decades. So you suddenly need a lot of money and don't know what to do with it. It’s critical to be prepared and communicate about wealth early and often.
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Another mistake we often see is that individuals who experience a liquidity event do not take the time to take a deep breath, build a long-term overall strategy, and move cautiously into new investments. There is a tendency to invest too early. For example, when someone has a liquidity event, they obviously have a lot of friends and the calls come in like crazy. “I'd like to open a buffet restaurant, but that would be very unusual.'' I am.”
In this vein, some people who have become wealthy thanks to years of long and hard work tend to appoint themselves or inexperienced family members as family offices rather than hiring professionals. there is. It's a pitfall that affects more people than you might think.
Dane Burkholder, Financial Advisor, Roseville Wealth Management Group (Ameriprise): One thing people really should do more of is donate to their heirs and charities while they're alive. Typically, someone dies at age 85 and their children inherit that money when they reach their 50s or their 60s. But you can actually start contributing that money during your 20s and 30s, when your children are in the formative years of their lives. By doing so, the head of the family or household will help the children realize the joy they can get from the money and determine whether they can manage the family wealth well.
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Another mistake we've seen recently is recency bias. 2021 has been such a lucrative environment that people may be overexposed to risk and lack a diversified approach to their portfolios. Or, in the current environment we're in, we get questions like, “Can you get 5% on the money market or 5.5% on a CD?” Why should I put my money in stocks or bonds? ” We feel it's important to have cash right now, and we haven't seen interest rates like this in a long time. But don't be myopic about the opportunities presented by bond market yields and rising stock prices.
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