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October 03, 2024 at 03:23 PM
What You Need to Know
- Only 10% of families with over $50 million in liquid assets know how much they're spending each year.
- Understanding client spending is essential in long-term tax and estate planning.
- It is crucial for the cash flow management plan to include insights into assets held away from the advisor.
For financial advisors working with ultra-high-net-worth (UHNW) clients, understanding spending patterns is vital to crafting a well-rounded financial strategy. However, accurately assessing spending rates is often overlooked in financial planning, regardless of whether the focus is on long-term investments, estate planning or liquidity management. Yet, it plays a central role in ensuring financial security and aligning your clients’ wealth management goals.
Our research has shown that only 10% of families with over $50 million in liquid assets know their annual spending rate. Understanding complex wealth can be difficult, but this lack of insight can result in missed opportunities, poorly managed liquidity, and decisions that aren’t aligned with clients’ financial reality. By improving how advisors understand their clients’ spending patterns, they can provide tailored, strategic advice that ensures both long-term growth and financial stability.
Here are some actionable steps for helping UHNW clients better understand how much they are actually spending, and how to better integrate your wealth planning strategies.
Encourage Regular Cash Flow and Expense Reviews
The foundation of understanding a client’s spending is transparency and regular reviews of accurate, comprehensive financial reporting. This includes compiling detailed personal financial statements, outlining fixed and discretionary expenses, and identifying upcoming major expenditures like property purchases or investments.
Reviewing these reports regularly will give the advisor a clear picture of the client’s cash flow and also help them anticipate future liquidity needs for significant life events. This regular review allows clients to make informed decisions on estate planning and investing opportunities with confidence.
Facilitate Estate and Tax Planning
Understanding client spending is essential in long-term tax and estate planning. Expenses related to estate taxes, property management or the establishment of family trusts require careful financial management.
By closely monitoring and understanding spending, advisors can prepare for these financial events with appropriate liquidity, reducing the risk of financial strain when tax liabilities or estate issues arise. Depending on the stage of a client’s investment journey, tax obligations and tax burdens surrounding wealth transfer severely affect cash flow.
Integrate Liquidity Planning With Investment Strategy
UHNW clients need operational liquidity to cover lifestyle expenses. Advisors must incorporate liquidity planning as part of the overall investment strategy to ensure clients have access to cash when needed without disrupting long-term growth objectives.
By understanding spending patterns, advisors can work with clients on maintaining an optimal balance between liquid and illiquid assets. For instance, managing how much cash should be kept in low-risk, liquid investments versus higher-risk, long-term investments is crucial for sustaining operational cash flow. This approach minimizes the risk of needing to sell investments at a loss to cover unexpected expenses.
