We frequently get the question: “Why focus on wealth preservation?” And it’s a valid one.
An investment strategy that emphasizes preservation may appear modest and unambitious when equities are rising and people are feeling bullish. In such cases, it is important to remember how fleeting financial upturns and downturns are. Every market rise is followed by an eventual, unavoidable decline. Additionally, during a downturn, investors run the risk of overcompensating and responding too cautiously, even as the benefits of a preservation-first strategy suddenly become apparent.
Instead, by creating portfolios that protect and increase wealth for future generations, it is crucial to see beyond the market swings of today or tomorrow. Growth is necessary, but it is necessary to do it wisely and without suffering irreversible losses in the process.
The wealth of today’s ultra-high-net-worth individuals (UHNIs) far surpasses the expectations of earlier generations. UHNIs have more time to appreciate their money and reflect on what wealth means to them and their family as they retire early and live longer. Many of them understand that having an abundance of riches leads to a plethora of challenging choices—and obligations. They have more money than they can spend in their lifetime. Through philanthropic endeavours or donations and bequests to heirs, they hope to pass on as much as they can to future generations.
This is a major paradigm shift: financial plans that prioritize wealth preservation are replacing strategies that just focus on wealth accumulation.
From consumers to custodians of wealth
The wealth of UHNIs and the super-rich will not be consumed by them in their own lifetime: it will exceed across generations, which makes the family principals custodians of wealth. Thus, the view they take of their portfolio is very different from a consumer of wealth who may only have it in the present. Thus, the ultra-rich must consider different factors while looking for someone to help with wealth preservation, A fee-based wealth advisory model is aligned with this custodian view.
Reinvestment risk mitigation: The wealth management sector encourages investors to act as consumers of wealth, which means they will occasionally take advantage of newly developed goods and services that can help increase wealth, which may be a greater risk considering the vastness of the truly wealthy. Reinvestment risk and associated inefficiencies must be reduced by the advisers’ involvement in balancing portfolio strategy and a long-only investing approach.
Allocating assets rather than choosing managers: There is sufficient data to conclude that all managers experience performance cycles, and very few managers consistently stand out. UHNI investors need to understand that the investment process is more crucial than choosing a manager. The wealth advisor will play a bigger role in helping customers develop their asset allocation plan over the course of the next 10 years. Products are, after all, ancillary to the plan.
Establishing a proper structure: The custodian’s time should be devoted to the investment structure that will enable them to investigate public and private markets, offshore investments, real estate, impact, philanthropy, and the whole spectrum of wealth. Finding the right partners to create an appropriate framework is largely the advisor’s responsibility.
Why a family office?
Clients generally consult with several third-party advisers when developing a preservation-focused asset management plan. Attorneys, CPAs, insurance agents, and even investment brokers can help develop a complete, forward-thinking strategy. The challenge is managing these numerous third-party connections efficiently. Many UHNIs lack the time to manage a big number of advisers or lack the competence required to evaluate or implement their advisers’ recommendations. As a result, they may end up with a strategy that sits on a shelf or does not meet their evolving goals and requirements.
A family office model can benefit ultra-high-net-worth families looking to diversify their asset management techniques. In this scenario, an objective family office adviser coordinates and manages the family’s interactions with various advisers. This lowers the family’s administrative burden. It also guarantees that all aspects of a comprehensive wealth management plan are addressed and coordinated, allowing families to leave a legacy through a more meaningful understanding of “family wealth”.
While accumulating wealth is fairly straightforward, preserving family wealth is more complicated. In addition to financial security, there are other, equally important dimensions of family wealth that must be developed. These include a shared history, a shared vision of wealth and a shared commitment to creating an impactful legacy that also aims to give back to the community. Successful succession planning is a critical aspect of this as well, which makes it integral to optimize accumulated wealth.
Views are personal.
Rajmohan Krishnan is the principal founder and managing director at Entrust Family Office.
