Short and long-term financial goals for CEOs, other executives and business owners might include buying a home, putting their children through college, retiring at a certain age or leaving a legacy, perhaps their business, to their heirs. It’s important for high net worth people to determine now what they’d like to achieve, develop a plan to reach their goals, write it down and then follow it strictly, experts said.
“It’s crucial. [Wealth management] is a comprehensive and consultative process that involves several different disciplines, the goal being to provide the client with all of the information and resources they need to make sure all aspects of their financial life are handled properly and efficiently,” explained Mike PeQueen, managing director, partner and senior portfolio manager of HighTower Las Vegas, a Henderson-based wealth management company.
The payoff to wealth management is peace of mind and security, knowing the path to attaining their objectives is in place and, if they follow it, they’ll be successful in those endeavors, said Jeffrey Burr, tax and estate planning attorney and president of Jeffrey Burr Ltd., a law firm with offices in Las Vegas and Henderson.
“So many [clients] say, ‘Oh, I wish I would have done this sooner. I feel so much better,’” he added.
The Full Picture
Financial planning usually begins with, and expands from, an individual asking a question. They might ask how to develop a budget; how to save for a child’s education; how much is needed to retire; when is retirement possible; how much should a business sell for or how much income can be gleaned from a portfolio’s gains in retirement?
“They start realizing these are complex questions, they are multilateral,” said Brian Loy, president of Reno-based Sage Financial Advisors, which helps people “make smart financial decisions.” Loy works primarily with business owners, healthcare professionals and retirees.
The answers typically hit on cash flow, investments, taxes, retirement/estate, risk management and business considerations, he explained. A comprehensive dive into the specifics of each, as they relate to the person and a path forward that encompasses all of these components, is essential.
Due to the range of fields involved, the process of financial planning involves a cadre of professionals—a wealth manager and/or financial adviser, a certified public accountant, an attorney (or a tax and estate attorney) and, potentially, an insurance broker and others.
Wealth management is a “long-term engagement,” PeQueen said. A plan, once developed, needs monitoring and periodic revamping to accommodate altered circumstances. Changing circumstances could include shifts in the economy, the market and changes in one’s personal life. In addition monitoring is needed to address prospective transactions such as divesting of an investment or selling a business. Thus, individuals should meet regularly, at least once a year and perhaps more often, depending on their individual situation, with experts.
The plan should be in writing, Loy said. It keeps the person who owns it on track and, should they become incapacitated due to illness or death, it allows for a co-trustee or co-executor to seamlessly take over. The wealth management process overall requires honesty and commitment.
“The investor needs to be more serious about their financial life than anybody on this planet,” Loy added.
What someone’s portfolio looks like depends on their ability to tolerate investment risk financially and personally, PeQueen said. These levels may shift and, therefore, should be “discussed and measured over time,” said Loy.
Generally, people should have in their portfolio a combination of growth investments–stocks, income investment bonds, potentially some real estate or other elements that generate income, PeQueen noted. A growth component is important to help generate cash flow to live off of in retirement. Also, it will help offset likely increasing, future inflation, which will keep people from having the same purchasing power they did when it wasn’t a factor, a point people often overlook.
“You want to mix and match a little bit. You want to have diversification. You have to have a mix of assets that won’t be negatively impacted at the same time if something happens,” said PeQueen, noting that a common pitfall he encounters is people not adequately diversifying their array of investments.
A trend that has gained momentum recently is impact investing, putting one’s money in stocks of companies that the investor believes benefit society or the environment—for example, those that produce solar energy—or purposefully not putting one’s money in companies the investor believes are not aligned with their personal beliefs.
“Everybody realizes there’s a premium attached to companies that are considered positive for society, the environment, work-life balance, all manner of things,” PeQueen said. “It depends on your personal viewpoint.”
As for what to avoid, Loy recommended people not put their money in investments they don’t understand well or can’t find an expert to assist them.
Tax planning is “extremely important” in wealth management, particularly when it comes to cash flow, said Bernadette Mashas, certified public accountant and tax partner at Fair, Anderson & Langerman, an accounting firm in Las Vegas. Mashas specializes in working with high net worth individuals and medium to large-sized businesses and their owners.
It’s critical for CEOs and the like to know ahead of time what their taxes are going to be and to determine how they’re going to be paid—this could involve liquidating an asset—so when tax time rolls around each year, they have the cash to pay them. A common mistake Mashas sees is people not planning for or paying their taxes. Another one, according to Burr, is people underestimating their taxes and, consequently, incurring penalties for underpayment.
Tax professionals help their clients avoid these problems, and they also offer guidance on ways to reduce and defer taxes, which includes structuring transactions in certain ways, Mashas said. One option is a 1031 exchange, the selling of a property to reinvest the proceeds in a new property, thereby deferring all capital gain taxes.
Also, it’s important to structure one’s business in the right way for the most benefit. For instance, it might be best for a business owner to have their operations in an S Corporation but their land and building in a limited liability corporation, with the latter leasing the property to the former, said Burr. The different entities will help minimize taxes, maximize return and afford some protection from liability.
“Proper tax management will allow individuals to keep a larger share of what they earn and also help them be able to pass on to their heirs more assets,” Burr said.
Quite a bit is new in the realm of taxes, thanks to the passage of the federal Tax Cuts and Jobs Act of 2017. Some resulting tax law changes are pertinent to the taxes aspect of wealth management.
Tax rates for individuals overall are lower under the Act for top earners, it dropped to 37 percent from 39.6 percent.
For corporations, the top tax rate is now 21 percent versus the previous 35 percent. Whereas C and S corporations get tax breaks, not all do, so it takes some figuring out which ones qualify, Burr said. Also, with the new pass-through deduction, partnerships, S corporations and sole proprietorships that meet certain revenue levels and parameters could get a 20 percent deduction, Mashas said.
The reduced corporate tax rates “may have dramatically changed the value of someone’s business, hopefully upward,” PeQueen said. This could allow the owner to retire earlier and have more options for how they financially support their non-working years.
The new tax law includes changes in itemized deductions, which can impact high net worth people, Mashas said. For example, the maximum amount an individual can deduct for state and local income, sales and property taxes is now $10,000 whereas previously it was unlimited. They no longer can deduct the fees they pay their financial advisers.
A 1031 exchange now is allowable only with real property (land and buildings). Before, it applied to both real and personal property (airplane, car, machinery, equipment, all for business use).
The percentage of someone’s adjusted gross income they can give to charity in cash donations increased to 60 from 50 percent.
Retirement and Estate Planning
Retirement planning is a significant part of wealth management, especially considering men who reach age 65 today can expect to live, on average, until age 84-85, and women, until age 86-87, according to the Social Security Administration. This element of the process takes into account future income and living expenses, particularly those related to future healthcare and long-term care, the costs for which are rising, said Loy.
For business owners, retirement planning likely involves succession planning, as their business tends to be entwined with their personal life and it’s probably one of the largest assets in their portfolio.
“Because most people don’t want to work forever, they’re trying to find a way to build freedom to do whatever they next want to do,” Loy added.
Estate planning helps protect one’s assets and ensure, upon their passing, they’re distributed according to their wishes and at the desired time(s), Burr said. For instance, structuring one’s estate in such a way can minimize exposure to liabilities. Similarly, if someone receives an inheritance or brings assets into a marriage, the property or money should be held in a separate vehicle like a trust. This protects it from becoming commingled and, in the event of a divorce or death, keeps the owner from losing half of it to their spouse. Burr said he frequently sees people not taking this precaution.
Now, due to the new federal tax law, an individual may transfer up to about $11 million by gift or when they die without it being subject to an estate tax; the previous cap was about $5.5 million, Burr said. Any property they transfer above $11 million is taxed at 40 percent. This could impact people with large estates and dictate whether they should give away more money.
“There are techniques that are accepted and legal that will allow them to reduce that estate tax significantly,” Burr added.
Along with capitalizing on tax, investing and legal strategies to minimize the risk of someone not achieving their financial goals (mentioned above), in some cases, certain insurance policies might be the best option.
“If they have a large net worth, they may find that without a good insurance policy, the estate tax may take a big chunk of that,” PeQueen offered as an example.
Experts recommended people begin managing their wealth sooner rather than later, initially getting at least three wealth manager/financial advisor referrals from trusted sources. They suggest interviewing each in person to determine who is experienced, knowledgeable and shares similar values and with whom they feel they have chemistry and are most comfortable. After choosing an advisor, they should be complemented with a CPA, attorney and, as needed, other experts.
One alternative is using a robo-advisor, or online, automated portfolio management service, such as Wealthfront, Wealthsimple, Betterment, Ameritrade, Vanguard and Charles Schwab’s Intelligent Advisory. They can differ, in terms of specialization, fees and required account minimum for instance, and some do offer access to a financial advisor.
“They’re pretty cool and inexpensive, but they’re impersonal,” Loy said of robo-advisors.
When asked their top recommendation regarding wealth management, experts said not to put off taking the plunge, to shop around for an advisor and to stay in constant communication with one’s team of specialists. In offering his advice, Loy quoted motivational speaker Denis Waitley, “Expect the best, plan for the worst, and prepare to be surprised.”