With enormous wealth comes enormous complexity, particularly when investors are seeking to protect and provide for their family. Ultra-High Net Worth investors, defined as investors who have over $30 million in investable assets, have an entirely unique set of challenges and opportunities when it comes to their portfolio, and to the legacy they hope to leave behind. Accruing extraordinary wealth does not shield them from risk or threats, they just appear different than they might for a standard, or even HNW, investor. From leveraging opportunities to strategies that can help preserve wealth in a downturn, UHNW wealth managers are well-versed in the threats that UHNW families face – and how to mitigate them. Here are some of the top threats keeping UHNW families up at night, and how working with a wealth management firm that specializes in UHNW investors is critical for these clients.
Protecting Your Family’s Wealth: Top 10 Risks to UHNW Families
UHNW families have investable assets of at least $30 million and are considered “accredited investors,” meaning their annual income invested is at least $200,000 in each of the past two years.Because their portfolios (and, eventually, estates) are so uncommonly valuable, UHNW investors typically seek wealth managers that specialize in working with clients like them and that can provide global resources and guidance to preserve and grow their wealth and legacy. Part of creating the right financial strategy for an UHNW family is understanding the risks and threats associated with the wealth and lifestyles they maintain. Here are the top 10 threats that UHNW families face and how to avoid them.
Learn the most common threats UHNW families are vulnerable to in 2021 and how they can protect their wealth.
1. Cybersecurity
Because of the complexity of the various financial institutions, law firms, real estate, and other business entities involved in a UHNW family’s investment strategy, they often have a larger amount of critical and confidential information online. Even if it may seem innocent, or unrelated to financial activity, hackers can utilize information on seemingly innocuous documents or files to cause serious problems for UHNW families. UHNW families face issues of extortion and revenge if hackers are able to access confidential financial, medical or legal information, or private photographs. In some cases, hackers can frame UHNW families, planting illegal documents on their computers using malware or “cuckoo’s egg attacks.” These events, unfortunately, are not uncommon and can cause long-term problems for UHNW families. One study found that more than 25% of family offices and family businesses lost revenue and 1/5th suffered blackmail or ransom or another type of loss or delay in company activity.
2. Physical Safety and Security
Sadly, UHNW families can be targets both at home and while traveling for theft, and physical safety, even with staff they have come to trust and rely on. UHNW families may vet a new employee, but often do not continue to enact ongoing reviews or monitor employees once that person has been hired – and someone can easily be compromised in the weeks or years after they begin working at their home. All employees should sign strict nondisclosure agreements to avoid even innocent posting of pictures or information about the family, as this provides fodder for those with more nefarious intentions to work with. As the Family Wealth Report states, safety procedures will not always be convenient, but they can save lives if they become habits.
3. Safety While Traveling
UHNW families have the enviable opportunity to engage in frequent and exotic travel, both domestically and abroad. Even before the time of COVID created safe-haven travel bubbles for the ultra-wealthy, traveling made UHNW families more vulnerable to risk, in part because travel requires us to carry important, identifying documents and display name and address information on luggage and reservation information. Another reason that travel can pose a threat to UHNW families is because of the scale and glamour of the type of travel they undertake. Criminals are less likely to show up at a mid-range family resort than they are to target a high profile, luxury event, which is rife with opportunity (and, likely, a higher payoff).
4. Protecting Collectibles
UHNW families are more likely than the average investor to invest in nonstandard investments like valuable collectibles. Antiques, wine, cars, rugs, paintings and sculptures are more complex to protect than equities and bonds. Because these investments do not throw off income prior to being sold, and can fetch a hefty 28% income tax when they do sell, UHNW wealth managers are critical to planning for how to best leverage these types of assets.
5. Mitigating Tax Impact
Financial investments may seem easier to protect than a Fabergé egg, but there is significant complexity and nuance to continuing to accrue wealth for an UHNW family and preserving wealth for their legacy while mitigating risks and downside from market volatility and shortsighted tax planning. Tax planning is a critical component to an estate plan, particularly for UHNW investors whose estates will exceed the estate tax exemption limit. Beyond ensuring your estate doesn’t end up in probate or hacked to a fraction of its size by the government, tax mitigation strategies can help UHNW investors set up trusts, give to charity and give money to their beneficiaries during their lifetimes to help with education and other expenses.
6. Illiquidity
UHNW investors can get into trouble by not understanding the timeline of their investments and balancing (and re-balancing) it accordingly. UHNW investors are, overall, comfortable investing in illiquid assets and there can be a strategy to do so, as these types of investments can be more resilient to swings in the market and, because they are long-term investments, they tend to pay off. The problem comes when you need to make a change in the short term. Finding a buyer for an illiquid asset on a short timeline can be difficult and in some types of investments can incur heavy fees and adverse consequences if redeemed early.
7. Secretiveness
UHNW parents can be concerned about their children’s ability to handle the legacy of wealth they will inherit, as well as about jealousy or conflict with other family members and close friends. This can cause them to become highly secretive, and, in some ways, this is a good instinct. Where it fails UHNW families, however, is when there is a lack of transparency around the information and assets. If you are concerned about your family inheriting your estate in a timely manner and to your wishes, probate is not where you want things to end up. It’s critical to have open and honest communication with your wealth managers and family members, so that your financial plan can be followed to your wishes and to establish the values that will guide your heirs as they continue to preserve your legacy and wealth.
8. Poor Insurance Planning
Many of the threats facing UHNW are of the mundane variety (like tax and insurance planning), but the effects of poor planning in these areas can be devastating and severe. Being underinsured both from a liability standpoint and from property damage and real estate damage. Real estate investments are often non-primary residences and can be extremely valuable. Often located in coastal areas, these investments can fall victim to the increase in flooding in recent years. The Private Risk Management Association (PRMA) surveyed agent and broker members in 2017 about their high net worth clients and found nearly 54 percent were unprepared for flooding. Life insurance can also be a powerful tool for estate planning, providing privacy and payout that is not included in their estate. Careful insurance planning can help UHNW investors protect and preserve their valuable investments, real estate and otherwise.
9. Not Planning For Health Care
Whereas most average investors have the opportunity to participate in an employer-sponsored health plan, many UHNW investors do not elect to get health insurance. With concierge doctors and the ability to pay cash for superior medical care, they may not think they need a health insurance policy. Unfortunately, health care costs can be astronomical and UHNW investors often have not factored in the cost of a sudden, medical crisis into their financial plan. Should a serious medical event take place, the UHNW family may not have the liquidity to maintain their current lifestyle without making a change and – with assets locked up in long-term investments – they may have to make choices they wish they didn’t have to make. Timing can compound the impact of poor medical financial planning, if an event occurs at the same time as a divorce, business sale, significant financial venture, retirement or another medical event in the family.
10. Relationships and Happiness
Possibly the saddest item on this list is the fact that their extraordinary wealth can make life isolating and lonely for UHNW families, and the feeling of risk and fear of theft, extortion, physical attack and hacking can understandably add to this feeling. While COVID has certainly added to their feelings of anxiety and isolation, UHNW individuals are more than 3x to suffer from addiction and mental health issues, exacerbated by feelings of shame and the lack of empathy from the (largely less wealthy) public. The good news is that, by taking the steps to become more secure and protected up front, UHNW families can minimize their risk overall, which can allow them to live a more normal and carefree life, without constantly fearing for the future of their family and their family’s wealth.
How UHNW Families Can Avoid Loss of Fortune
The Best Way to Preserve UHNW Wealth
Ultra-High Net Worth investors have an entirely different set of challenges and obstacles to face than the average investor. At Weber Global Management, we provide global resources and seasoned expertise to help UHNW families grow and preserve their wealth and legacy. From serving as a trusted advisor, to guiding and optimizing a comprehensive financial plan, Weber Global Management serves as a true partner and fiduciary to UHNW families, helping them foresee and avoid common pitfalls that can be financially and personally devastating. Volatile markets and sudden medical or other significant life events are not theoretical, they’re inevitable; an UHNW wealth manager understands this and uses their expertise to create an agile, proactive strategy to withstand market downturns and unexpected events. To learn more about how we specialize in the reasoned, rational guidance and services that UHNW families need, reach out to us here.
