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Financial Planning > UHNW Client Services

A Game Plan for 'Overnight Millionaires'

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What You Need to Know

  • Many newly wealthy clients have similar needs that advisors can anticipate when creating a comprehensive financial plan.
  • Included in that list are the creation of a family office, a plan for charitable giving and outlining the objectives of the family’s investment portfolio.
  • Maintaining ongoing, open communication among all family members can help alleviate stress and potential conflicts during the decision-making process.

The number of “overnight millionaires” is on the rise, according to a new report from NEPC Private Wealth. Many newly wealthy families can credit their expanded fortunes to a major liquidity event, most frequently the sale of a business, especially in the technology sector.

In 2020, the wealthiest multimillionaires — those with a net worth of $100 million or more — included 64,000 families around the world holding a total of nearly $24 trillion in wealth, NEPC said, citing the Wealth-X’s “World Ultra Wealth Report 2021.”

For many newly rich families, wealth creates new and sometimes unexpected challenges. These will vary from family to family, requiring their team of financial and legal professionals to come up with creative and personalized solutions.

NEPC’s report looks at the five needs that members of this group have in common and how they might be addressed by the family and their advisors when creating a comprehensive financial plan.

1. Pre-Wealth Planning

According to NEPC, families usually benefit most when they start planning for the liquidity event well before it happens. This helps them make sound decisions during the event itself and also enables them to start thinking about controlling, preserving and passing wealth to future generations.

Through planning, families can address a panoply of considerations and potentially competing interests. They can reduce their tax liability and establish the appropriate structures to steward multigenerational wealth. They can also potentially bolster their level of philanthropic giving, which can further affect taxes and legacy planning.

2. Setting Up a Family Office

Many families with a net worth of $100 million or more create a family office designed to oversee the tasks and decisions related to investments, insurance, tax, estate, liability and property and staff management.

NEPC notes that each family office’s structure is unique. Some are fully staffed with professionals designated to manage those different functions. Others consist of one person who oversees all aspects of the family’s needs, and still others set up virtually with all tasks outsourced.

Whatever its structure, the family office works with the family’s professional advisors to make financial decisions, including those regarding other family-owned business ventures and philanthropic activities. The office also oversees how the money is distributed within the family to ensure all members receive the amount needed to maintain their desired lifestyles.

3. Philanthropic Endeavors & Objectives

Most ultra-high-net-worth families want to give back, help those in need and make a positive impact on the world around them, according to NEPC. One strategy is to set up a family foundation, which can serve as the vehicle to make grants and gifts to organizations that align with the family’s mission and philanthropic objectives.

Some families may choose to use a donor-advised fund, which allows them to give to charities in a tax-efficient, streamlined way. A family can also directly support businesses or organizations with positive environmental, social or governance profiles by exploring impact investing options in their portfolio.

However they choose to manage their philanthropic endeavors, many families will seek input and collaboration from multiple generations when deciding which causes and organizations to support.

NEPC notes that working together as a unit can solidify the family’s bond, help teach younger members about the importance of charitable giving and ensure the family’s values remain intact as they are passed down through generations.

4. Investing Strategies

After the newly wealthy family decides how it will structure the family office and charitable giving, it must address the goals and objectives of the family’s investment portfolio. The first step is to develop an investment policy, which serves as both a blueprint for how the family invests and a roadmap for how their portfolio assets will be managed.

NEPC says the family should also conduct an asset allocation study to analyze the risk and return goals appropriate for its current assets, liquidity needs and tolerance for potential drawdown. Many families will need multiple asset allocation studies, particularly if different generations or branches of the family have distinct cashflow or risk management requirements.

The investment policy and asset allocation study can guide portfolio construction, which typically takes anywhere from six to 18 months to conclude. At the same time, the family might also build out a private markets portfolio, which can take several years to complete.

Following portfolio construction, the family and its advisors will provide ongoing surveillance, ensuring the portfolio is being consistently and continuously managed. To do so, NEPC says, they will rely heavily on performance reporting, which will highlight how the portfolio is performing relative to the needs and risk tolerance of each family member or branch.

5. Situational Variables

All of the above decisions can be influenced by other factors. NEPC cites the creation of wealth by a sale of a business as an example. Did the family exit that business entirely, or will they still have a role in running it going forward?

If the family exited entirely, where will they put their focus and energy now? Selling a business can create an unexpected sense of loss for many families, particularly for those members who were directly involved in its business operations.

Another potential point of contention is the governance and stewardship of the family wealth. Choosing the right person or persons to make financial decisions on their behalf can directly affect investment strategy, trust and estate planning, and charitable and philanthropic activities.

NEPC says maintaining ongoing, open communication among all family members can help alleviate stress and potential conflicts during the decision-making process.

(Image: Adobe Stock)