Maintain Your Wealth
Once you’ve earned enough capital to reach your number, whether that’s $5 million or $20 million, what’s the next step? Your discretionary investment advisor should be the one responsible for the maintenance of your assets. Some examples of maintenance include:
- Tax-efficient investing: ETFs help you control your own tax basis. Hedge funds, not so much. In fact, after-tax hedge fund performance is rarely worth it for individuals.
- Removing unnecessary costs: If you’re still paying 12b-1 fees, your portfolio is stuck in the 90s. Fiduciary advisors are vigilant on commissions, rakes and unnecessary expense ratios. Why? Because they follow the fiduciary legal standard—their interest is closely aligned with their clients' interests.
- Risk constancy: Risky assets won’t notify you before doubling in value or dropping by half. Risk constancy includes the discipline of selling through surges and buying through dips across all markets.
- Asset location: Increase after-tax return by sorting specific higher yielding, cash-flow producing assets into tax-deferred and tax-free accounts.
- Experts: Your investments should be coordinated with your taxes, estate planning and insurance needs.
Tell the Story of Your Wealth
There’s an old adage about family wealth: “Shirt sleeves to shirt sleeves in three generations.” How can you equip your children and grandchildren to protect, not squander, the results of your hard work?
Charlie advocates telling your stories. Tell family members about the drama, uncertainties, sweat equity, risks, rewards and struggles you went through to accumulate wealth. Stories provide context and make your family members feel valued and included in something special. Later generations tend to spend more thoughtfully when they feel connected to the source of their wealth. Stories help reinforce that connection and build appreciation. We recommend making it a regular habit.
Maintain Your Lifestyle
No fortune is too big to fail. Reckless spending and careless investing can quickly drain your financial capital. (Ask anyone on the ever-growing list of Hollywood stars and athletes who exhaust their massive fortunes.) It begins and ends with expenses.
As a rule of thumb, you’ll need a portfolio approximately 25 times larger than your annual expenses to support your lifestyle in perpetuity. Why 25 times? Because that’s the inverse of 4%, and a large, diversified investment portfolio can reasonably support a 4% withdrawal per year over the long haul. Maintaining your lifestyle and freedom of choice is directly linked to keeping your draw-down in check.
Many clients have told us that hiring a discretionary investment advisor has helped them stop and think carefully before withdrawing from their portfolio for a new investment idea, brand new vacation home, etc… Separation can be a powerful tool for preserving and growing your wealth.
Build Core Competencies
If you get blank stares from family members when you mention asset allocations or diversification, think about how you can help them learn what they need to know. Charlie says to define what you think are the core financial competencies for anyone from a barista, to a college student or a nurse.
cr. https://www.investopedia.com/advisor-network/articles/021417/family-wealth-depends-maintaining-financial-capital/
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