Archive for December, 2018

How The Wealthy Stay Wealthy: A High Net Worth Investing Primer

Posted by Joseph W. Chase, CFA®

5 Important Considerations for Preserving and Growing Your Wealth

How high net worth individuals come into their wealth is one thing; how they maintain and grow that wealth is entirely another.

For high net worth investors, wealth preservation and growth is important for several reasons:

There are several tactics for preserving and growing your wealth–whatever your financial and life goals may be.

Consider Your Level of Investment Risk: Diversified Vs. Concentrated Portfolios

A significant factor in successful wealth preservation and growth is the level of investment risk you decide to take on.

A diversified investment portfolio strategy has long been pointed to as reducing risk and volatility in your portfolio, while a concentrated investment position is largely viewed as more high risk.

It can be argued that with higher risk potential, a concentrated portfolio focused strategically on a handful of market sectors, industries or asset classes could outperform the market, resulting in better-than-market average investment returns. However, when it comes to wealth preservation and growth, which of course requires a long-term view, it is not recommended to take on the higher-risk potential of a concentrated investment strategy.

High net worth investors who generated their wealth through higher-risk, concentrated investments, such as starting a business, for example, should avoid investing a large portion of their wealth into another high-risk area, such as a single start-up company. Even if a large amount of that wealth remains in the business, it is recommended to be more conservative with the wealth outside the business.

Diversifying your wealth in a balanced portfolio offers a more consistent return stream, and there are multiple alternative investments, such as hedge funds and private equity funds, that can improve expected returns and reduce risk. A diversified investment strategy offers several key benefits:

Consider Your Asset Allocation Strategy: Risk Vs. Return

While there are risk considerations with a consolidated versus diversified portfolio strategy, the next part of the discussion concerns managing that risk.

Your asset allocation strategy should be based on how much risk you can afford and are willing to take on, and how much return on your investment you desire. Like a simple math problem, higher risk tends to equal higher return.

Every high net worth investor’s asset allocation strategy looks different based on their lifestyle, priorities, goals, and other individual circumstances. Working with a professional wealth advisor is the best way to ensure your asset allocation strategy is right for you.

When it comes to an asset allocation strategy designed for wealth preservation and growth, your wealth advisor should consider your annual spending habits.

You can afford to take on more risk if your annual spending as a percentage of your net worth is on the lower side.

You should take on less risk if you’re relying on your portfolio for spending needs. With less risk, your asset allocation would keep the value of your portfolio more stable, especially during down markets.

In general, it’s recommended to choose some riskier investments for your asset allocation in order to generate growth, such as stocks and private equity investments, but also add in other asset classes like municipal bonds and hedge funds that can reduce your risk.

Consider Your Portfolio Strategy: Active Vs. Passive Management

When you’re a high net worth investor, your strategy must also take into serious consideration the taxes and fees your amount of wealth will generate.

The goal is to get the best post-fee, post-tax, risk and return profile, but this decision can’t happen in a vacuum. It plays heavily into your asset allocation strategy and how much risk you’re willing to take on. You need to be thoughtful about when to use an active management strategy versus a passive management strategy in a way that optimizes your risk and return.

So, how does this scenario work? It’s all about choosing the right markets in which to be active and passive.

Active Strategy: If you use an active portfolio management strategy, you’ll pay more fees, and only sometime will you end up with an attractive post-fee, post-tax return profile. Active funds, like hedge funds or actively-managed mutual funds, should be used only when they can make up for fees and taxes.

Active strategies work well in less efficient or more complex markets, which typically have less investor or analyst interest and therefore present opportunities to earn true alpha for the level of risk you take on. When you work with a professional wealth advisor, they will be able to identify a good manager in these markets, allowing you to take advantage of those inefficiencies.

Passive Strategy: Passive funds, like Exchange Traded Funds (ETFs), tend to have lower fees and taxes compared to active funds. A passive strategy works well for more efficient markets because there’s little evidence that there is excess return to be made, especially when considering taxes and fees.

Consider Your Long-Term Performance

Another benefit of working with a professional wealth advisor is the ability to continuously improve your investment process with unique opportunities to choose managers with an edge.

Markets are constantly getting more efficient and managers must continue to improve their processes to keep up with changing market conditions. Preserving and growing your wealth is highly reliant on seeking out these managers who have a definable “edge” over the competition.

Consider Your Overall Livelihood

The most important consideration for effectively preserving and growing your wealth is to simply enjoy your life. Don’t obsess over how your investments are performing on a daily basis–instead, hire someone you trust to be a good steward of your wealth so you don’t have to spend your time looking at and thinking about your wealth.

It’s easy to let investment worry creep into your life. We often see these common concerns among our clients:

Here are three ways to relieve yourself of these concerns and get the peace of mind you need to relax and enjoy your life:

Work With an Estate Attorney. All investment decisions for an individual at your level of wealth tie into your estate. Your estate plan and investment strategy should work together and live under one roof, so be sure to work with wealth and estate professionals who can work effectively together on your behalf.

Keep Calm and Rebalance. When you have a diversified portfolio, which we recommended earlier in this post, you have more than just stocks and bonds impacting your investments. When the stock market is down, you have other investments that are going up or remaining stable to provide a cushion for your wealth and peace of mind–even in down markets.

Work With Other Wealth Professionals. Everything from your estate plan to your insurance to your charitable intentions should align with your long-term financial goals. Hire a wealth advisor who can oversee your wealth, and also works with other professionals on the different aspects of your wealth planning strategy.

While there are several important considerations for preserving and growing your wealth, it all comes down to working with a wealth advisor who not only has the capability of implementing the most appropriate investment strategies for your unique situation, but can work with other wealth professionals to help you achieve your goals.

Learn more about why working with an independent, fee-only Registered Investment Advisor like Lake Street Advisors can benefit the preservation and growth of your wealth at

Illustrating the Power of a Grantor Retained Annuity Trust

Posted by Joseph W. Chase, CFA®

Transfer Wealth to Future Generations While Minimizing Tax Impact

When used appropriately, a Grantor Retained Annuity Trust, or GRAT, is a powerful tool by which to transfer wealth to future generations.  

A GRAT is a trust in which the principal is repaid as an annuity to the grantor (the maker of the trust), with interest, typically over multiple years. If the principal grows at a rate higher than the interest rate applied to the annuity payment, the remaining value is transferred to the heirs without triggering a gift tax.  

To illustrate the mechanics of how a GRAT works, the image below outlines what a one-year GRAT would look like, but in reality, these are typically structured to be in place for two or more years.

GRAT Chart

In this example, a husband and wife with $35 million of personal assets transfer $5 million into a GRAT.  The interest rate, based on the 7520 rate, is assumed to be 2% in this case, which means the husband and wife will receive their $5 million, plus 2% interest, back from the GRAT after the end of the GRAT term. 

The investment assets in the GRAT have appreciated by 8% after one year, bringing the total value of the GRAT to $5.4 million. The annuity payment to the husband and wife is $5.1 million ($5 million of principal plus 2% interest), and the remaining $300,000 is transferred to a “Remainder Trust” for the benefit of their heirs.  

The remainder trust is not subject to estate tax, resulting in a potential estate tax savings of $150,000 based on our example above (assuming a 50% combined federal and state estate tax rate).

GRATs are a very effective tool to help you fulfil your goals of creating an enduring family legacy. There are several considerations when choosing to use a GRAT–contact us to learn more about a GRAT and whether this type of trust is right for your personal situation.