How the Ultra-Rich Ensure They’re Staying Ultra-Rich

While affluent clients are worried about paying the bills, the ultrawealthy are protecting their assets from global catastrophes.

It’s no secret that financial advisors are looking to move up market toward wealthier clients, and more specifically, toward larger investment accounts that are often more beneficial to their bottom lines. But those advisors will need to look beyond just investment performance and building client relationships, and embrace a more comprehensive approach that includes tax management strategies and the latest alternative investments, according to experts. That’s especially true when it comes to wealth preservation and protection.

“Financial risk is different for the ultrawealthy,” said Rick Nott, managing director at Angeles Wealth Management. “For most families, the primary concern is preservation of lifestyle and not running out of money.” For the ultrawealthy, however, their lifestyle is largely secure. Instead, the upper crust are more concerned about financial system risk, legal risks and generational transfer taxes.

The balance sheets of the ultrawealthy often have an increased appetite for diversification and protection against catastrophe, Nott added. “We see similar dynamics with institutional investors, foundations and endowments, but unlike institutions, when ultrawealthy families diversify broadly, it tends to align with their personal tastes and preferences,” he said. That’s where advisors can take advantage of rare collectibles, classic cars, watches, art and increasingly, digital assets.

Down to Brass Tax

A new report from Cerulli Associates addresses the issue of catering to wealthier clients with a concentrated focus on helping families and comprehensive portfolios become as tax efficient as possible.

“Creating investment alpha is about tax management alongside investment management,” said Scott Smith, senior director of advice relationships at Cerulli. Tax optimization hasn’t been front and center in the past largely because of a primary focus on total returns. “We’re talking about a lifetime of taxes, and most advisory firms have yet to put in systems to make it easier for advisors to take advantage of tax optimization,” he added. The Cerulli report found “comprehensive tax-aware portfolio customization” may even be “crucial to the future of wealth management.”

David Askew, managing director at Mercer Advisors, said new clients often seek help managing the potential tax consequences of a single major asset in their portfolio. “Because they’ve been focused on building these assets, they’ve often overlooked the realization of any capital gains,” he said. “Now they’re looking at what they’ve built, and they don’t want to lose it to unnecessary taxes.”

Citing examples of business assets or investments that might have been held for decades, Askew listed two tax management strategies that are gaining popularity. The first, tax-aware long-short strategies, are designed to produce both investment gains and tax losses, which reduces the tax bill from selling the asset. Another strategy that works for concentrated holdings is an exchange fund, according to Askew.

The client, and other investors in a similar situation, pool assets together in a fund and each receive a share of the new fund. In essence, swapping a concentrated position for a position of equal value in the exchange fund avoids a taxable event. “Instead of one asset, you now own a pool of more diversified assets,” he said. 

Heyo, Dalio!

If the uber rich weren’t already developing an enhanced focus on asset protection and preservation in its various forms, that point was driven home recently by legendary hedge fund manager Ray Dalio. Speaking on a podcast in September, the founder of Bridgewater Associates sent out a call to action by citing a Chinese saying: a smart rabbit has three holes. The reference, which was presented against the backdrop of a forecast of dark days ahead for major parts of the global economy, was that sophisticated investors need multiple strategies for protecting investments.

Homer Smith, executive director and private wealth advisor at Konvergent Wealth Partners, said the outlook among ultra-high-net-worth clients, in general, is becoming more defensive. “We are definitely seeing clients concerned about protecting their wealth on multiple levels” he said. Firstly, they’re concerned about their privacy, online security and the physical security of their assets. “We are working with them on how they structure and own their assets, as well as implementing proactive measures to reduce the risk of identity theft, increase their level of anonymity and make them a less attractive target overall.”

Let’s Get Diversified. On top of growing geopolitical risks, investors and financial advisors are riding on two straight years of gains in the 25% range for the S&P 500 Index, which is up another 15% this year. As Smith explained, with the equity markets looking “a little overheated,” investors want to protect their investments from “the potential of a meaningful decline.” The ultra-high-net-worth, he added, “are becoming more interested in investments that have a low or negative correlation to the stock market and interest rates; investments that have tended to perform better during periods of higher market, interest rate and inflation volatility.”

Along those lines, Smith listed long volatility, commodity trend following, and global macro as popular strategies. His firm is also seeing a larger interest in gold, along with other precious metals, and cryptocurrencies.

Kevin Daley, president of EPIC Insurance Brokers & Consultants, said the wealthiest investors and families are often handcuffed because of how scaled, complex and geographically dispersed many of their assets are. “Many own extensive collections, ranging from fine art to rare collectibles, that are often located in catastrophe-prone or over-aggregated regions,” he added.

Daley said one strategy, from an insurance and safeguarding perspective, is “geographic diversification,” which includes distributing collections across multiple properties, secure storage facilities and even lending to museums or galleries to reduce the risk of a total loss. “They also invest in advanced protective measures, such as water-detection systems, upgraded alarm and surveillance technology and climate-controlled art storage,” he added. “These steps not only safeguard assets but also make them more insurable.”

Whole Life Insurance. While the scale may be different when it comes to the ultrawealthy, many wealth preservation strategies can apply more broadly to affluent and mass-affluent families as well. “The principles of risk diversification, proactive loss prevention and expert guidance are universally applicable,” Daley said. “Affluent families can benefit from strategies such as spreading high-value items across locations, investing in security upgrades, and maintaining up-to-date appraisals and inventories.”

In terms of emerging trends, Daley said the wealthiest clients are placing a growing emphasis on flexibility and customization in insurance. “Ultra-high-net-worth clients are increasingly open to higher deductibles and capped limits for specific perils like wildfire, wind or flood,” he said. “Meanwhile, insurers are responding with creative solutions, offering layered programs, bespoke coverage and incentives for clients who implement robust risk management protocols.”