Integrated Financial Planning – What Does it Mean for our Clients?

The effective management of family wealth requires a comprehensive integrated approach. At Clearwater Capital Partners, we strive to offer the right services, to the right clients, at the right time. For all clients, some level of integrated financial planning is necessary. In this piece, we will explore how the different attributes of each client drive our decision making as to what the right services and times are for those individuals. Subsequent thought leadership will expand on what integrated financial planning & wealth strategy look like for each type of client.

The three types of clients we serve at CCP are:

·         High Net Worth Individuals & Families

·         First Generation Ultra High Net Worth Individuals & Families

·         Succeeding Generations of Ultra High Net Worth Individuals & Families

High Net Worth Individuals & Families

High Net Worth (HNW) is loosely defined as individuals with $1 million or more in liquid financial assets.

Accumulation

These clients spend their working years contributing significantly to retirement accounts and taxable accounts focusing primarily on exchange traded assets, with minimal exposure to alternative assets. Frequently these are individuals who have had high paying careers and accumulated their wealth over decades of savings through their 401(k) and other company benefits.

Consumption

In retirement, HNW clients begin to draw on their retirement assets saved up throughout their careers. The primary goal of retirement for these individuals is to ensure they can continue to afford their current lifestyle, and potentially leave an estate to their heirs or charities. The focus of integrated financial planning for these individuals in retirement is cash flow management. If you have $10 million dollars in invested portfolio assets as you approach retirement, how much can you spend per year while still leaving a substantial estate to your heirs and being prepared for unexpected expenses? At CCP we use advanced modeling techniques and a holistic approach to answer questions like this and guide HNW clients through retirement.

Distribution

Upon the HNW client’s passing, the remaining estate would usually be distributed in kind to the designated beneficiaries. Creating an integrated financial plan will ensure a smooth transition of assets to the appropriate beneficiaries. Complex estate planning is not needed as the overall estate is likely below the federal estate tax exemption amount, which sits at $24 million for a married couple for the 2022 tax year.

First Generation Ultra High Net Worth Individuals & Families

Ultra High Net Worth (UHNW) is generally considered individuals with a net worth of $30 million or more. Often this is an entrepreneurial business owner who has started their own company and found massive success.

Accumulation

The earning years for an UHNW individual are usually more complex than their HNW counterparts. Income is frequently tied to a business they own, and many times there is a liquidation event relating to that interest. Savings and investment strategies need to be more tailored to the individual’s situation to ensure a successful and efficient financial plan.

Consumption

At the UHNW level, the overall estate can provide intergenerational wealth. Instead of taking a “consumption” approach in retirement, we look at it more as a continual estate administration, as the estate is so large that it will hopefully continue in perpetuity. Prior to determining the estate structure, future consumption needs need to be considered, as that will be instructive to the overall estate picture. Similar to the HNW level, a capital sufficiency analysis needs to be performed. This analysis will reverse engineer the capital needs for the UHNW family’s life goals and apportion out assets accordingly to meet those goals.

Once capital sufficiency needs are determined, and lifetime cash flow considerations have been addressed, estate planning can begin. Complex estate structures can be adopted to take advantage of tax avoidance strategies, as well as to protect from liability. The assets not needed to meet the baseline capital sufficiency can be moved out of the taxable estate and into vehicles which will ensure the estate survives in perpetuity. As you may expect, these types of plans are highly customized and tailored to each individual in order to provide the best outcomes.

Distribution

As discussed in the consumption section previously, the goal of the UHNW estate is to continue indefinitely, but that does not mean that there are not distributions from the estate. During the UHNW individual’s lifetime there will likely be distributions to charities, children, and other individuals. With proper front end planning for capital sufficiency, as well as an optimized estate structure, these distributions can be made in tax advantaged ways, providing the most benefit possible to the beneficiaries.

Distribution of the residual estate upon the UHNW individual’s passing also requires significant planning. The basis of the planning ties back to the capital sufficiency planning at the consumption phase. If the appropriate planning and estate structuring was performed in response to the analysis, most of the distributed estate will be exempt from estate taxes. Beyond designing the estate to be tax efficient, planning can also assist in a seamless transition to the desired heirs for continuation of the family business and mission.

Succeeding Generations of Ultra High Net Worth Individuals & Families

Accumulation

While subsequent UHNW generations inherit substantial wealth and may not see the need for the “accumulation” phase, we have found that the most successful individuals still think and act as if they are the first generation of wealth. In general, the accumulation phase will be similar to the first generation, except there is better access to capital earlier on in the process.

Consumption

The primary difference between the consumption phase for the first and subsequent generations of UHNW estates is that often a rigid estate structure is inherited by the succeeding generation, and they are not easily able to adjust it. When this is the case, the structure may play a role in dictating what the maximum amount is for capital sufficiency, as compared to the first generation, where capital sufficiency determination precedes the estate structure. In this case, when personal asset creation is “trust funded”, the distribution amounts will need to be factored into decisions regarding capital sufficiency and philanthropic deployment. Beyond this difference in perspective, the consumption concerns remain unchanged from the first generation.

Distribution

The distribution of the UHNW estate has the same concerns generation to generation. Continuous planning will need to be done to ensure both capital sufficiency and optimized distributions. As mentioned in the consumption section, the inherited fund distribution mechanics may limit distributions during the lifetime of the individual, and will need to be planned around. Upon the eventual passing of the individual, the planning required is logistically the same as it would have been for the initial generation, aside from considerations relating to legacy estate structures that were inherited from previous generations.

Looking Forward

Proper wealth management is built on a foundation of sound financial planning. The insights derived from advanced financial modeling and forecasting inform all other aspects of one’s financial life, from investment strategies to wealth transfer plans. While all aspects of our services are impactful, planning provides some of the most meaningful interactions we have with our clients. From the sale of a business you’ve spent your life building, to understanding the impact of proper estate and wealth transfer strategies, to answering the simple question of “what if…”, our planning services add valuable perspective to open-ended scenarios that may exist.

In the coming months we will explore in more detail what integrated financial planning and wealth management look like for these three types of clients. If you have any questions regarding any of these subjects, please do not hesitate to reach out.