Setting goals for high-net-worth investing

With substantial wealth at their disposal, high-net-worth individuals have the potential to explore a wide range of investment options and potentially achieve growth. However, they also face increased financial complexities that can’t be ignored, from greater tax liability to distribution and inheritance laws. So, how can HNWIs set investment goals and develop an effective strategy to pursue them?

In this guide, we’ll walk you through what you need to know about establishing well-defined investment objectives and navigating HNW investor challenges. We’ll also offer tips for monitoring your goals, as well as a few thoughts on assets that may help you preserve and grow your wealth.

GOALS FOR HIGH-NET-WORTH INVESTORS

Before we dive into developing a high-net-worth investment plan, it’s important to understand what you’re investing toward or, in other words, the purpose of each financial goal.

The first objective of any new investor should always be to create an emergency or rainy-day fund; while often thought of as important for lower net-worth individuals, it is also true for HNWIs. Despite having more wealth to deal with unexpected expenses, it may not always be immediately available, whether it’s going toward paying down debts or tied up in illiquid assets like real estate investments.

Regardless, it’s best to have an adequate emergency fund to support your lifestyle when cash flow cannot. We generally recommend that an emergency fund should be six to 24 months of spending needs, depending upon the stability of your income.

Outside of establishing personal finance safeguards, investment objectives for the average person are often geared more toward day-to-day life or significant milestones. For instance, common goals include:

• Purchasing a new car
• Buying a home
• Supporting a family
• Saving/paying for college
• Preparing for retirement
• Leaving behind an inheritance

Of course, a short-term goal like buying a new car might not carry as much weight with every HNWI, but long-term considerations, such as paying off a mortgage on real estate property or creating a retirement plan, are universally critical. After all, you’ll likely want to plan for your investment portfolio to help keep you afloat and living comfortably long after retirement age. And when it’s your time, you’ll want to make sure your family receives as much of your wealth as possible. That’s why retirement and estate planning are essential, no matter what your net worth is.

However, HNWIs tend to have other, more unique investment goals, whether it’s starting a business or investing in commercial real estate, such as apartment buildings, industrial facilities or shopping centers. In addition to these ventures, they also must deal with the added complexities of an expansive investment portfolio.

HIGH-NET-WORTH INVESTING: NAVIGATING THE CHALLENGES AND CONSIDERATIONS 

The last few years of economic uncertainty have impacted people from all socioeconomic classes, even those at the top. In fact, in 2022, the global HNW population saw a drop in both its size and the value of its accumulated wealth, dropping by 3.3% and 3.6%, respectively.¹ In 2023, the total population of ultra-high-net-worth individuals grew by more than 7%, while their total wealth increased by 7%.²

This might indicate some HNWIs may have graduated to become UHNWIs, but it doesn’t mean these investors are immune from market challenges. So, what are the obstacles facing these investors in the first place?

ORGANIZING YOUR INVESTMENTS

DIY investing can be difficult for anyone, but especially for HNWIs. Why? The more assets you have, the more complicated it can become to manage your strategy and your portfolio. Whether it’s juggling multiple investments in each asset class, making payments on properties, minimizing capital gains tax or managing stakes in different businesses, organizing an HNWI's investment portfolio can be a challenging task.

ASSET ALLOCATION

In addition to keeping track of each asset, HNWIs will also need to properly weigh and allocate them across their portfolio. Without this balance, a HNW investor could open themselves up to greater investment risk by overbuying in a specific asset class such as stocks. If the market declines, this lack of diversification could lead to significant decline in your portfolio value. That’s why it’s crucial to maintain a well-diversified mix of asset classes in accordance with your risk tolerance and investment horizon.

REDUCING TAX LIABILITY

Perhaps the most common challenge for HNWIs is the increased tax liability that often accompanies higher wealth. Being smart about investment management, capital gains efficiency, tax-aware reallocations and tax-loss harvesting can help. While there are legal strategies and tax-advantaged investments that can help reduce your tax burden, it’s always best to seek professional advice from your estate planning attorney, tax professional and financial advisor before making an investment decision.

EFFICIENTLY DISTRIBUTING WEALTH

Whether they’re implementing a charitable giving strategy or estate planning, HNWIs want to make sure they can distribute their wealth in the most tax-efficient way possible. However, to help avoid bestowing a headache or worse – legal or financial burdens – to their beneficiaries, HNWIs need to carefully strategize their charitable giving and estate plans. This also often requires reaching out for advice from your estate planning attorney, tax professional and financial advisor.

INVESTMENT APPROACHES TO HELP GROW, PROTECT AND PRESERVE YOUR WEALTH

While every investor will have their own goals, risk appetite, time horizon and liquidity needs, they almost always share the same three objectives:

1. Protect and grow their investments

2. Minimize tax liabilities

3. Pass on their wealth to the next generations

Fortunately, there are a wide variety of assets that HNWIs can invest in and use to create well-diversified portfolios. Here are a few investment opportunities an HNWI might want to consider:

COMMERCIAL REAL ESTATE

From apartment and office buildings to brick-and-mortar stores and industrial facilities, the world of commercial real estate can provide opportunities. While owning and renting buildings can come with additional expenses, such as property management and maintenance, HNWIs can also gain exposure to this market through liquid real estate investment trusts and exchange-traded funds. That way, they can potentially receive the diversification benefits from this asset class without incurring the responsibilities of a landlord.

Of course, these investment options come with risks, including potentially high upfront costs, fluctuations in property value, leasing occupancy and illiquidity – meaning you may not be able to easily and quickly sell your investment for cash without a potentially substantial loss in value.

MUNICIPAL BONDS

Municipal bonds are a common tax-advantaged security HNWIs can adopt to diversify their portfolios and work toward their investment goals. Not only are they tax-free at the federal level, but buying a bond issued in your state often allows you to avoid state and local income taxes on it as well. They’re also considered lower risk relative to taxable corporate bonds, but this relative safety can also mean more modest returns. As with any investment, municipal bonds entail risk related to credit, interest and inflation.³

And although it can be uncommon, some municipal bonds are federally taxed if the holder is subject to alternative minimum tax.

PRIVATE DEBT

Private debt refers to the debt financing market served by “nonbanks.” In contrast to publicly traded debt, such as government bonds, corporate bonds and mortgage bonds, private debt obligations are not bought and sold on public market exchanges.

The private debt market is comprised largely of floating rate loans, which means they don’t automatically lose value when market interest rates rise as traditional fixed-rate bonds do. Thus, private debt may suffer less interest rate risk than traditional public debt. Private debt can have an attractive return-risk profile: Portfolios of private debt typically experience low month-to-month volatility but can produce high cash yields.

ROTH IRA

Retirement investing is another crucial area for HNW investors. These individuals can leverage Roth IRAs in particular as part of a long-term investment strategy because they offer tax-free growth with no required minimum distributions.

For higher-income investors who don’t qualify for regular Roth IRA contributions, the backdoor Roth IRA strategy can allow them to convert traditional IRA funds into a Roth account. But since Roth IRAs require paying taxes up front, this opportunistic tactic should only be employed at the right time. Due to the potential tax consequences, it is important to first reach out to your tax professional for advice before proceeding.

CHECKING IN ON YOUR INVESTMENT GOALS

As HNWIs advance in their careers, financial aspirations and life experiences, they often work with trusted advisors and wealth managers to help them further their goals. In fact, finding a professional financial planner is typically the first step a newly HNW investor will take after moving on from a DIY strategy.

Regardless of whether you’re finding your first advisor, partnering with a new planner or continuing with someone you trust, it’s crucial to regularly check in with your wealth manager. They will work with you to monitor your financial strategy to make sure it continues to align with your goals as your life changes and make any appropriate adjustments. For example, you may have set initial investment goals when you started in the workforce but haven’t changed them in decades. If you’re getting closer to retirement, your original goals and risk tolerance may no longer be appropriate. In short, your financial planning needs to evolve with your goals and other changes in your life.

We recommend meeting with your advisor at least annually and anytime you experience a life-changing event to monitor your financial progress and revisit your investment plan and goals.

PERSONALIZED FINANCIAL PLANNING FROM EDELMAN FINANCIAL ENGINES

At Edelman Financial Engines, we understand that high-net-worth investors require a specialized approach that accounts for their unique aspirations and financial complications. When you partner with our team of expert financial advisors, we can work with you to develop a personalized investment plan that helps you overcome your challenges and pursue your financial goals.

Reach out to a financial advisor today to get started.

¹ Capgemini. (2023, June 1). Global High-Net-Worth Population Sees Biggest Decline in Size and Wealth For Over a Decade. Retrieved August 22, 2024, from https://www.capgemini.com/news/press-releases/global-high-net-worth-population-sees-biggest-decline-in-size-and-wealth-for-over-a-decade/

² CNBC (2024, July 19). The ultra-wealthy just gained $49 trillion in wealth thanks to stocks. Retrieved August 22, 2024, from https://www.cnbc.com/2024/07/19/population-ultra-high-net-worth-wealth.html

³ U.S. Securities and Exchange Commission. Municipal Bonds: What are municipal bonds? Retrieved August 22, 2024, from https://www.investor.gov/introduction-investing/investing-basics/investment-products/bonds-or-fixed-income-products-0