by John Carey, on ThinkAdvisor on October 3, 2024
in: Financial Planning > UHNW Client Services > UHNW Client Advice
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.
Implement Holistic Cash Flow Planning
Cash flow planning is an essential component of wealth management, particularly for UHNW clients.
Although most advisors break down cash flow into spending categories (e.g., essential, discretionary, future planned expenses, etc.), it is crucial to include insights into assets held away from the advisor.
For example, clients who have large balance sheets and lots of free cash flow from various sources of income often struggle with managing capital calls from various limited partnership investments.
We’ve seen situations where advisors were unaware that specific private investments were actively calling capital and had not incorporated the client’s liquidity needs into the client’s investment plan.
When clients do not have a clear view of their cash flow and annual spending, it’s extremely difficult to create a personal financial statement that is comprehensive for their needs.
In these cases, advisors should create a consolidated balance sheet and a statement of capital call commitments, so that their portfolio can be adjusted to effectively accommodate liquidity needs. Additionally, regular communication about these held-away assets allows advisors to integrate these resources into the broader financial plan.
All of this has become more important as advisors are experiencing increased pressure to effectively counsel their clients on more than just investments.
Research from the Investments In Wealth Institute articulated this well. They found a major disconnect between what advisors claim to offer, what they actually offer, and what investors expect from them.
For example, 87% of wealthy clients want charitable planning services from their advisors and 81% of advisors claim to offer it. But only 6% of clients claim they actually receive it.
Without a holistic view into clients’ cash flow and spending habits, advisors will have limited success in growing their practices and being an effective resource for their clients.
Advisors who are utilizing technology in the right ways, using complete and comprehensive information, looking at all of the assets, facilitating communication between family members, and reviewing accurate information are the ones coming out on top.
As complexity increases with UHNW financial management, understanding spending rates and cash flow is crucial to improving outcomes and building stronger, more long-lasting relationships.
To learn more about Aquilance or make an appointment to speak with us personally, please contact us.
John Carey is CEO of Aquilance, a provider of personal financial management for hundreds of HNW families and family offices.
