May 23, 2013

Wealthy Families Not Addressing Major Risks in Financial Plans

Health, support for other family members not taken into account

Most survey respondents grew up middle class and don't understand the complexities wealth creates. Most survey respondents grew up middle class and don't understand the complexities wealth creates.

A study released Tuesday by U.S. Trust identified wealthy families’ collective health as a risk to wealth. Long-term care, out-of-pocket health care costs and financial support for other family members take their toll on families.

Furthermore, these risks aren’t well-addressed in financial plans, the report noted.

U.S. Trust surveyed more than 700 families with at least $3 million in investible assets for the report and found some issues advisors need to address with their wealthy clients.

For example, while 47% of respondents said they had a financial plan to provide long-term care for themselves and their spouses, just 18% have planned for having to support their parents as well. If their parents need it, wealthy families are likely to provide it, too: 63% of respondents said they would feel obligated to support their parents and in-laws.

That obligation extends to other family members as well. The survey found 55% of respondents would feel responsible for supporting less fortunate siblings, and 56% would provide for their adult children.

“The majority of people we surveyed grew up in middle-class families and created their own wealth,” Keith Banks, president of U.S. Trust, said in a statement. “They don’t see themselves as wealthy, and many are unaware of risks and circumstances that grow increasingly complex as wealth accumulates.”

While 88% of respondents said they felt financially secure, households on the highest tier of the high-net-worth segment were likely to say they didn’t feel secure.

High-net-worth investors are focusing on growth rather than preservation, but they’re doing so with low-risk investments, even if they have a lower rate of return. For the most part, they’re keeping their money in cash. More than half said they had large amounts in cash accounts, and 35% have no plans to invest it.

With those passive attitudes, it should be no surprise that the majority of respondents said they preferred a buy-and-hold strategy as the best way to grow assets.

“The wealthy have been disciplined about protecting their assets from market loss, but may have a false sense of financial security,” Banks added. “They are not adequately planning for family health concerns or for the retirement that they want. We need to shift the conversation about wealth management to these important topics and expand their understanding of risk.”

Regarding retirement, 62% of respondents were confident about their income, and many of them have reviewed expected distributions from retirement accounts to determine their income level. However, they haven’t taken into account inflation, taxes, their life expectancy and the cost of long-term care.

U.S. Trust found that wealthy families’ estate plans are similarly underdeveloped. Almost three-quarters don’t have a comprehensive plan and half have never established a trust, thinking that if they have a will, it won’t be necessary.

Respondents said their top three goals for an estate plan were to meet their spouses’ needs, minimize estate taxes and minimize the administrative burden of settling the estate.

Read Andy Friedman: Which Wealth Transfer Tactics Will Survive Congress? on AdvisorOne.

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