Having a great deal of wealth to preserve might seem straightforward. But as your wealth increases so does the complexity it takes to safeguard and manage it well. There are numerous wealth-preservation and investment principles that are applicable to everybody — such as establishing a tax policy or assessing a portfolio’s risk exposure — but there are critical dangers that rise alongside your net worth.

You’re Being too Risk-Averse

When it comes to preserving a great amount of wealth, your instinct might be to air on the side of safety. Why risk it with stocks when you can retire comfortably with just treasuries and CDs! Although safety will likely be a mainstay of your strategy, being “too safe” is also a risk. Inflation erodes all returns, and if you’re in low-risk/low-yield investments you could be gaining money on paper while you lose it in real life. For example, if you left money in a high-yield saving account earning 3.5% this year while inflation ran rampant at ~7%, you’d be losing (1.035 / 1.07) – 1 = -3.27% this year. That’s -$32,710 down the drain on a $1,000,000 account annually!

Moreover, investing solely in low-risk asset classes exposes you to unique and idiosyncratic risks that aren’t as strong in a diversified portfolio. For example, staying almost entirely in bonds greatly increases credit risk (company backing the bond goes under), reinvestment risk (reinvesting income received at lower rates), and interest rate risk (bond price goes down when interest rates go up). These risks can be mitigated when your money is spread across many different asset classes, but they’re magnified when you double down on the proverbial “safe stuff”.

Collectibles Are Forgotten in Your Estate Plan

Investing in collectibles, such as rare or historic items or artwork, has traditionally provided good returns. Keeping up-to-date appraisals on record, however, is a common mistake among the affluent. A low appraisal could lead to a larger tax bill for your estate upon your passing, which could impact estate liquidity. It’s important not to neglect this step.^[1]

Having All Your Eggs in One Basket

Often time senior-level employees and executives of companies accumulate large stock positions in their firms over time. ESPP plans offering discounts on stock are a great way to build wealth, as are company stock options that go deep in the money. But loading up and overweighting on company stock creates a unique risk that pins your future retirement success to the fortune of your previous employer and the C-suite’s ability to execute. This can be dicey, especially as management turns over, technology changes the competitive landscape, and new regulations come into play.

Few financial advisors recommend a non-diversified portfolio but determining precisely where to draw the line and how to minimize taxes as unload your highly appreciated shares is complicated. You can speak with a financial advisor to determine how to diversify your equity in a tax-efficient manner to mitigate this risk. 

Doing Too Much on Your Own

Intelligence, hard work, and self-confidence are among the most important qualities for successful people. Those who are successful typically believe that managing a successful company is similar to managing a lot of money. Managing finances, however, requires a variety of knowledge and experience that doesn’t strictly correlate to running successful businesses in other areas. (Overestimating your abilities for a certain task when your knowledge, skills, or experience in that area are low is a well-documented bias known as the Dunning-Kruger effect).

It’s probably best summed up as this – You don’t know what you don’t know. A good financial advisor can provide expertise to save you time, avoid mistakes, and provide the peace of mind that comes with knowing your doing the right things with your wealth.

No Cohesive Plan for All of Your Assets

Wealthy people often distribute their money in different financial firms or advisors, believing that they will get higher returns by diversifying their trust across institutions and by placing it in the hands of more attentive managers. However, key needs like risk management and tax efficiency are lost in larger portfolios because there is no unified vision and strategy that can guide them in the right direction. Independent professionals who operate autonomously and with the best intentions may not produce the greatest results.

It’s like asking three different surgeons to operate simultaneously on your one knee. They’re great individually, but you may have too much of a good thing going. A single team to handle your assets, or at a minimum a single advisor to coordinate your collective strategy, can benefit you.

With increased wealth comes even more unique challenges beyond those covered here. If you’re looking to optimize your wealth management strategy, talk to us today to get started.