Over the last seven years, we’ve seen the number of high-net-worth-individuals (HNWI) explode from approximately 15.4 million to 22.4 million, for an increase of seven million, or almost 50%. With so many newly minted HNWI’s entering the economy, it makes us wonder what these people are doing to preserve their newly acquired wealth.
Key Takeaways
- The number of high-net-worth individuals has grown by nearly 50% in seven years, reaching 22.4 million people.
- Wealth managers provide customized investment strategies based on individual risk tolerance and financial goals, actively managing portfolios across stocks, bonds, and mutual funds.
- Key services include estate planning to protect family wealth, tax optimization through legal avoidance strategies, and comprehensive financial planning.
- Wealth managers typically charge a 2% annual fee on assets under management plus 20% of profits generated, helping clients navigate complex financial decisions and market opportunities.
- They offer protection against risky investment decisions by providing expert market analysis and risk management strategies, particularly important during market volatility.
- Wealth managers can create tax-efficient strategies, such as structuring residency in lower-tax states like Florida or Puerto Rico, to minimize tax obligations legally.
It’s one thing to build wealth, and another to keep it. The reality is, money can slip through your fingers just as fast as it comes into your bank account. Consulting with a wealth manager is the best strategy for holding on to your wealth and growing it above market-related returns.
But what is a wealth manager, and why do you need one? Every HNWI understands that they need to build a team around them to manage their financial and business affairs.
Wealth Management Strategies for High-Net-Worth Individuals
Wealth managers look at your unique financial and investment portfolio, designing custom strategies to grow and protect your money.
These professionals have excellent education and training, and many of them work for investment banks or financial firms before branching out into wealth management. When you meet with a wealth manager, they assess your risk appetite and develop an investment plan around your risk tolerance.
Let’s unpack a few of the strategies wealth managers use to tailor your investment strategy.
Investment Management and Financial Planning
As mentioned, a wealth manager has one job; to protect and grow your wealth. They do that by allocating your cash holdings into investment assets, offering the best return possible, in accordance with your risk tolerance.
But what does that mean exactly? Well, if you’re a 65-year-old woman who’s close to retirement, you probably have less risk appetite than a 20-something HNWI who has a lot of time left until retirement, and thus a bigger appetite for taking risk. Essentially, a wealth manager is in the risk business, and they tailor your investment portfolio to your needs.
The wealth manager follows your basic risk appetite instructions, and they’ll allocate your free cash to stocks, bonds, mutual funds and the like to diversify your holdings and ensure you don’t have all your eggs in one basket.
The wealth manager actively manages your portfolio, meaning they don’t just pick a dividend stock and sit on their laurels while it earns 2% a year.
A wealth manager understands the markets, and they’ll choose stocks offering above-average market returns. They’ll allocate a percentage of your cash to low-risk assets and another portion to higher-risk assets, with the promise of making higher returns.
That’s not to say you don’t have a say over their investment strategy. Let’s look at a practical example of wealth management in action. The Nasdaq tech bubble is currently going to the moon, making new all-time highs almost every other week.
If you don’t have any investment experience or knowledge, you might start to feel like you’re missing out on an opportunity. You pick up the phone and call your wealth manager, asking them to get you into either the Nasdaq 100 index, or an individual tech stock, like Nvidia.
Your wealth manager will tell you the risk and outline the potential gains you could get, but they focus mostly on the risk management aspect of making investments. The wealth manager may advise you not to get into $NVDA stock right now because they think it looks prime for a pullback or a potential crash, protecting you from a risky investment decision.
The wealth manager also handles your financial affairs like filing tax, doing your accounting, and reporting their quarterly results to you to show you how they’re making a difference to your asset holdings and growing your wealth.
Estate Planning
There’s no sense working for decades to build wealth, only to have the government take it from you via estate taxes on your passing. The wealth manager will design estate planning that keeps the wealth in your family for generations.
They ensure that you pay as little tax as possible upon your passing, and the assets you have stayed within your family. Wealth managers use vehicles like living trusts to protect your assets. These professionals often work out of small “family offices,” handling a range of financial affairs for the family.
Tax Accounting
Now for the big one; tax planning. There’s no way to get around paying tax, or you’ll eventually have the IRS knocking on your door for tax evasion. Hower, there’s a big difference between tax evasion and tax avoidance. The avoidance strategy utilizes legal loopholes to stop you from overpaying taxes on your investments and assets that you should have to pay.
For instance, if you have a residency in New York, you’re paying one of the highest tax rates in the country. A wealth manager can structure it so that your primary residency is in a state like Florida, or a territory like Puerto Rico, where tax obligations are much lower. That doesn’t mean you need to live there, but it does create a tax-efficient strategy that capitalizes on tax deductions.
Wealth Management for Digital Commerce Growth
For ecommerce entrepreneurs, wealth management takes on special significance given the unique challenges of digital retail. A wealth manager can help develop strategies for reinvesting profits between inventory, marketing, and personal wealth building. They can advise on when to take distributions versus reinvesting in growth, helping maintain optimal cash flow while building personal financial security. The key is finding a balance between business expansion and personal wealth accumulation that aligns with both short-term operational needs and long-term financial goals.
Tax Strategy for Online Sellers
Digital commerce creates complex tax scenarios that require careful planning and expertise. A wealth manager with ecommerce experience can help navigate multi-state tax obligations, international sales tax requirements, and inventory accounting methods. They can advise on tax-efficient strategies for taking owner distributions, structuring business entities, and timing major purchases or investments. This specialized tax guidance helps maximize after-tax profits while ensuring compliance across all jurisdictions.
Exit Planning for Digital Brands
Many ecommerce founders aim to eventually sell their business or transition to new ventures. A wealth manager plays a crucial role in exit planning by helping optimize business valuation, structure deals tax-efficiently, and manage the windfall from a sale. They can advise on timing the exit, negotiating terms, and investing proceeds to generate ongoing income. This preparation helps ensure founders capture maximum value from their exit while maintaining long-term financial security.
Risk Management in Digital Retail
The volatile nature of ecommerce requires robust risk management strategies. A wealth manager can help identify and mitigate risks through appropriate insurance coverage, diversification of personal investments, and contingency planning. They can advise on protecting intellectual property, managing cybersecurity risks, and preparing for market disruptions. This comprehensive approach helps safeguard both business and personal assets.
Succession Planning for Online Businesses
Digital commerce businesses present unique succession planning challenges. A wealth manager can help develop strategies for transitioning ownership, whether to family members or outside buyers. They can advise on structuring the transition to minimize tax impact while ensuring business continuity. This planning helps protect the founder’s legacy while providing for future generations through proper estate planning and wealth transfer strategies.
In Closing – What Do Wealth Managers Charge for Managing Your Money?
Wealth management can save you millions in taxes and grow your asset holdings far better than you could, especially if you don’t have a clue about investing. So, you can expect to pay a fee for their services.
The fee’s wealth managers charge vary from firm to firm, depending on the success of their track record and the services they offer clients. Wealth managers charge an annual fee based on the assets their client has under management.
The industry average is 2% on asset holdings, with a further 20% on the money they make for you over the financial year. For example, if you have $10 million in assets, and the wealth manager makes a 10% return ($1 million in profit), they would charge you a 2% fee on your asset holdings ($200,000), and $200,000 on the $1 million they made you in profit. Some firms can charge more, but it’s industry best practice not to charge more than 3%.
Frequently Asked Questions
What exactly does a wealth manager do?
A wealth manager provides comprehensive financial services, including investment management, estate planning, and tax optimization. They actively manage investment portfolios across various assets like stocks, bonds, and mutual funds while tailoring strategies to each client’s specific risk tolerance and financial goals.
How much do wealth managers typically charge?
Wealth managers generally charge a 2% annual fee based on assets under management, plus 20% of the profits they generate. For example, on $10 million in assets with a 10% return, they would charge $200,000 for management and an additional $200,000 on the profits.
What qualifications should I look for in a wealth manager?
Look for wealth managers with strong educational backgrounds and experience, particularly those who have worked at investment banks or financial firms. Their expertise should include comprehensive knowledge of investment strategies, tax planning, and estate management.
When is the right time to hire a wealth manager?
Consider hiring a wealth manager when you’ve accumulated significant assets and need professional help to manage and grow your wealth. This is especially relevant for high-net-worth individuals who want to protect and optimize their financial portfolio.
How do wealth managers protect their clients from risky investments?
They analyze market conditions and provide expert guidance on investment decisions. For example, they might advise against investing in overvalued stocks or markets showing signs of potential downturns, helping clients avoid costly mistakes.
What role do wealth managers play in estate planning?
Wealth managers help structure estate plans to minimize tax implications and ensure wealth preservation across generations. They often use vehicles like living trusts to protect assets and keep wealth within the family.
How do wealth managers help with tax optimization?
They develop legal tax avoidance strategies, such as structuring residency in lower-tax states or territories, and utilize various tax deductions to minimize clients’ tax obligations while staying compliant with tax laws.
How often should I expect to meet with my wealth manager?
While not explicitly stated in the source, wealth managers typically provide quarterly reports on portfolio performance and meet regularly to discuss strategy adjustments and financial goals.
What’s the difference between tax evasion and tax avoidance?
Tax avoidance involves legal strategies to minimize tax obligations through legitimate deductions and structuring, while tax evasion is illegal and involves deliberately avoiding tax payments.
How do wealth managers determine investment risk tolerance?
They assess factors like age, financial goals, and personal comfort with risk. For example, they might recommend more conservative investments for older clients near retirement and more aggressive strategies for younger investors with longer time horizons.
