Saving the Sinking Yacht: Helping the Wealthy Avoid Pitfalls in Financial Planning
I have been a student of money management for over 16 years. During that time, I’ve spoken to thousands of people in a range of socio-economic levels—from millennial students to the ultra wealthy and everyone in between. Each of the individuals I talk to has their own financial situation, concerns and goals. It’s almost as if they’re each in their own type of boat: a rowboat for those just getting started, a speed boat for entrepreneurs on their way up, or a huge 150-foot yacht for those who’ve “made it.” No matter what type of vessel symbolizes your financial situation, it’s not going to float or move forward if it has holes in it.
Everyone wants their financial situation to be stable or, to continue with our boating metaphor, wants their vessel to be seaworthy. But money management isn’t like boat repair or maintenance and no two people approach their finances in exactly the same way. Worse, every single person I’ve ever spoken to has had holes in their ship—whether those holes were tiny cracks hiding in their future plans or gaping holes in the way they were handling the wealth they’d already attained.
Even Yachts Can Have Holes
It’s a very common thing to think, “Oh that person is worth millions. They have everything under control. They are making all the right financial moves.” In reality, unless that person works in some capacity within the financial industry and has their own circle of great advisors, they may not be making all the right financial moves—they just don’t know it yet.
We hear these stories all the time. Think about all the sports and music stars that have ended up with nothing after reaching the height of their careers. Think of Donald Trump, for example, who has gone bankrupt time and time again. No wealthy person or entrepreneur is immune to the possibility of overspending, undersaving, and making bad investments that drive down their net worth. Often, there are very simple things that entrepreneurs can do to prevent this, such as offering a 401(k) to their employees to gain tax benefits and improve employee retention levels.
Not having a properly funded trust or buy/sell agreement is another problem I have come across. Business succession planning is a complex process that deserves at least as much expertise and time as it does to start a business.
There are also instances of the very wealthy not taking care of their estate after working so hard to build it. Here, Prince comes to mind, since he recently died without a will. Dying without a will at that estate level can cost the family millions in taxes, most of which could have been avoided with a proper estate plan. You don’t hear about that often, but I’ve seen the wealthy neglect estate protection, leaving assets exposed to lawsuits or taxes. These are huge mistakes. It’s sad, really. After working their asses off for decades they unknowingly fail to properly tie up the loose ends and their assets end up devalued in a fire sale to pay off lawsuit plaintiffs or the IRS. One simple way this could be prevented is by having adequate life insurance coverage of the right type. Too many people think that life insurance is for income replacement in smaller estates and that once you’ve achieved a certain level of net worth that it’s no longer necessary. But nothing is further from the truth, as a properly designed life insurance policy can be a very powerful tool for a wealthy individual.
Ensuring a Seaworthy Financial Vessel
It’s one thing to see what people—especially wealthy people—do wrong, but it’s also important to consider what they do right. I have noticed that non-entrepreneurs usually invest in run-of-the-mill investments such as stocks and bonds, until they have about $3 to $5 million. Entrepreneurs, however, tend to invest in their own businesses up until that point.
From that point forward things seem to change for both parties depending on their risk profile. If the person is conservative in nature, they tend to enter wealth preservation mode. Entrepreneurs and other higher-risk individuals begin investing in more alternative investments, real estate and commercial property. They may invest in local private companies, they may start a second or third business and invest in themselves, or they may become angel investors. And while each of these moves is helpful in keeping their financial boats afloat, if they ignore the issues discussed earlier, then they still have holes that could very well sink them.
So how should the wealthy mange money? In many ways, they need the same support and guidance as everyone else. Because of the extent of their assets, however, more sophisticated planning measures should be integrated to ensure full protection for generations to come. When they have the right advisors aboard, the wealthy can identify their financial plan’s fissures and holes and make sure their vessel stays seaworthy as they sail into the horizon.
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This information is not intended to be a substitute for specific individualized tax, legal, investment, or estate planning advice as individual situations will vary.