Exceptional Wealth

Clear Strategies to Protect and Grow Your Net Worth

Mark Tepper

• Publisher: Greenleaf Book Group Press
• Year: 2018
• ISBN:
  9781626344570
• Topic: Business
• Subtopic: Wealth Management
• Index: Business

Are you a high net worth individual? Then the wealth management rules are different for you. Mark Tepper rightly assures us that we should all consider ourselves wealthy if we have the resources to live the lives we want to live without compromise. However, if you fall into one of his higher-net-worth categories, you will find that Exceptional Wealth is speaking directly to you. Tepper, author of the acclaimed Walk Away Wealthy, stresses that if you are someone with a high net worth, you have to realize that managing your wealth is complex. He clearly outlines key steps and sophisticated strategies that experienced professional financial advisors should be implementing for you. Each high net worth individual has unique and different forms of wealth, investments, and objectives. Consequently, individual and special family needs demand specifically tailored financial plans and approaches. Good investment management might have made you wealthy, but Tepper solidly brings home the point that only proper wealth management will keep you wealthy. Those whose wealth exceeds $1, 000, 000 will likely benefit most from the keys and myths that Tepper outlines, but this book is relevant for anyone looking to take the next step in wealth accumulation and preservation. The bottom line, as Tepper advises, is the following: Prosperous individuals require a higher level of sophistication when it comes to optimizing their financial affairs.

KEY #1:

YOU’VE OUTGROWN COOKIE-CUTTER STRATEGIES

It’s easy to allow yourself to slip into automatic mode when it comes to your wealth. You might buy a hot stock or pick a high-performing mutual fund here and there, but you’re probably a bit hesitant to mess with your portfolio too much. After all, if it’s not broken, why fix it? Even experienced amateur investors worry that the wrong move could hinder portfolio growth or generate a surprise tax bill.

The trouble is, apprehension leads to complacency, and a smart investor is never complacent. While it may be tempting to follow the same strategies that got you to the point of having investable assets worth a few million dollars or more, being comfortable with those strategies doesn’t mean they represent the best path forward for you. After all, one of the reasons you’re comfortable with your current selection of investments is probably that you’re hearing and reading about them all the time in the mainstream media.

Mainstream media outlets like Fox Business, Fortune, and the like provide an abundance of financial information to receptive consumers. Unfortunately, this profusion of information has two drawbacks. First, much of it is conflicting. For example, a TV program might go on for 30 minutes about how you must own municipal bonds. But as soon as that program ends and you surf over to The Motley Fool, an article on that website insists that bonds are a terrible idea and you should really own dividend-paying stocks. One magazine tells you you’re foolish not to buy a house now that interest rates are so low, while another warns you never to take on a mortgage again because bubbles are so common. It’s enough to make even an experienced investor’s head spin.

The second drawback of all this information is that it does not necessarily apply to you. The major financial media properties like Kiplinger’s say in their own media kits that they target consumers with less than $1 million in investments. The reason is easy to understand: That’s a broader audience, and they want to sell lots of advertising. As a result, the content they publish is written for a demographic with a different set of financial issues. Furthermore, the content of their articles is often diluted to appeal to the widest possible readership, so how can it really help you in your individual situation? If you have $2 million in assets, an article about whether to put your $5,000 in a traditional or a Roth IRA isn’t going to be of much interest to you. At the same time, subjects of genuine interest to wealthy individuals, such as tax loss harvesting, receive no coverage at all.

As you approach and reach the high-net-worth stratosphere, you should be getting your financial insights from a better source: a high-caliber, professional team that specializes in the needs of people like you. Because what got you to $1 million is not going to get you to $5 million. And what got you to $5 million certainly isn’t going to get you to $25 million.

BEWARE OF GENERIC EXPERTS

There are many dangers in paying too much attention to the so-called financial experts of popular culture. First, because they are primarily media brands, they don’t always have the strong professional credentials you need from a financial advisor. Second, their main interest is usually their radio show or speaking tour, so they may not be current on financial news, trends, and research. Third, because they’re mass market entertainers, their advice tends to be for the masses, not for the small minority of people building real wealth.

Consider the popular financial radio host, author, and speaker Dave Ramsey. In his book Financial Peace Revisited, Ramsey shares that while his career was booming and he was earning $250,000 a year, he was burying himself and his wife in debt in order to build his real estate portfolio. On his website he writes, “The short version of the story is that debt caused us, over the course of two and a half years of fighting it, to lose everything. We didn’t tell anyone what was going on, but if we had to do it again, we would learn from the wisdom of others who have been through it.”

Ramsey has said that when things began to fall apart, he took out $1.2 million in short-term loans to buy property. But when one of his major creditors sold to a larger bank, bank officials began scrutinizing his borrowing and wound up demanding that he repay his notes within 90 days. That left bankruptcy as the only option.¹

To his credit, Ramsey has been transparent about his bankruptcy and has used his own horror story to educate others on the perils of debt and getting in over your head. His life experiences are probably valuable to people who might be buried in debt and on the precipice of bankruptcy. If you’re not in that situation, however, you’re probably better off learning and taking guidance from professionals who have experiences working with people like you—whether you classify yourself as a business owner, an executive, a professional, or a higher-net-worth investor.

A NEW ATTITUDE TOWARD WEALTH

Believing yourself to be wealthy, by the way, is not elitism. It’s realism. But some Americans shy away from thinking of themselves as wealthy, because they believe including themselves in that category will make them seem arrogant or elitist. In his book Coming Apart, Charles Murray observes that since the founding of the country, Americans have stubbornly refused to talk about themselves in terms of class distinctions like rich and poor. That refusal persists today.

To many people, calling someone “wealthy” is an insult. We live in an era of Occupy protests and anger at the “1 percent.” Even though a 2005 paper published by the National Bureau of Economic Research² found that higher-educated, higher-earning Americans work more hours than people in lower-income groups, there persists this idea that being working class is inherently virtuous while there’s something unseemly or immoral about being wealthy.

Not true. As best-selling author Rory Vaden writes on his website, “We can have money without having it be the place [from which] we derive our self-worth. We can make money without making it what defines us.” He continues:

There are plenty of rich people who are good people, and there are plenty of rich people who are jerks. Just like there are plenty of poor people who are good people and there are plenty of poor people who are jerks. Having money doesn’t make you good or bad, right or wrong, successful or unsuccessful. Having money just means that you have money. Not having money just means that you don’t have money. And losing our emotional attachment to money frees us up to have power over it, to use it and earn it more effectively.

The fact is, the wealthy contribute a great deal to society. According to the Almanac of American Philanthropy, the top 1 percent in net worth make one-third of the country’s total charitable donations.³ Wealthy individuals also give back by starting nonprofit foundations, some of which—like the Bill & Melinda Gates Foundation and the Ford Foundation—make major contributions in everything from medical research and early childhood education to the fine arts. Companies started by wealthy people create jobs and encourage innovations that keep America’s economy growing. Bottom line: Accumulating substantial wealth (and using it responsibly) is nothing to be ashamed of. It’s something to be proud of.

Despite this, unhealthy thinking about money may have crept into your mind and kept you from acknowledging where you reside on the wealth ladder. If it has, it’s in your best interest to acknowledge your reservations and then let them go, because they’re holding you back from taking steps that will ensure your financial well-being—and that of your children.

Most of the people who fall into the higher-net-worth groups did not inherit their money; they earned their wealth through years and years of hard work and sacrifice. If you belong to the higher-net-worth groups, there is a strong possibility that you accumulated your wealth by starting a business. According to the Internal Revenue Service, more than 72 percent of Americans who earn more than $1 million per year own part or all of a partnership or S corporation.⁴ If you look at Americans who earn $10 million a year or more, that number rises to 90 percent.

There are other paths to prosperity, of course. Most of the wealthy who didn’t start businesses accumulated their wealth by working as corporate executives or by becoming professionals in such fields as law and medicine. But what matters is that after you started your business or began in your profession, you put in years of relentless hard work. Whether you started a small manufacturing company or launched your own law firm, you put in long hours and invested blood, sweat, and tears to make your business successful. If you had to climb the corporate ladder, the same rule applies: Work equals wealth. You’ve sacrificed in other areas of life to get to where you are now. You’ve earned everything you have today. This is your victory lap, and implementing a wealth management strategy that’s appropriate for the complexity of your situation will make that lap long and satisfying.

YOUR NEEDS ARE DIFFERENT

The investment and financial planning concerns of the Affluent and the Middle-Class Millionaire are not the same as those of people with a higher net worth. Therefore, the financial planning and investments strategies that are most beneficial to each group are quite different. Let’s take a look at some of the features and needs that are common among individuals who are High Net Worth and Ultra-High Net Worth.

If you have accumulated assets of $5 million or more, you’re probably financially independent or well on your way to being so. You might already be retired, but if you’re not, retirement is not an issue. Your number one goal is protecting capital against taxes, litigation, and volatility.

Is that about right? Let’s consider some other things that differentiate you.

»You need investment planning. Most of the people in the $100,000–to–$1 million group will have most of their money in tax-deferred vehicles. But somebody who has $7.5 million in assets will hold much of it in a taxable environment by default. If that’s you, your strategy has to be different. Your objectives are not absolute returns, but after-tax wealth creation and volatility reduction. This requires a more complex set of investment choices, from individual securities to alternative asset strategies. Building and balancing your portfolio is an art form that requires skill and extensive knowledge.

»You need tax planning. An Affluent family with $250,000 in assets that’s in the 28 percent federal tax bracket doesn’t need elaborate tax planning; they need H&R Block. But if your family is in the 39.6 percent federal bracket, you need strategies that will minimize your tax obligation. Say you’re bringing home a $500,000 annual income, which doesn’t have to be salary—if you own a business, some of that income could be from profits. Between state, federal, and local taxes, you could be giving 50 percent of your income to the government. Tax planning is a critical facet of your wealth management picture. The more you make, the more important tax planning becomes.

»You need estate planning. Despite political rhetoric, the so-called death tax isn’t going anywhere. But it doesn’t affect Affluent or MCM investors, so they don’t have to think about it. The way the estate tax is currently structured, a married couple gets a free pass on roughly the first $11 million of their estate. They can pass that much to their beneficiaries tax-free. Above that, they are taxed at 40 percent, plus (possibly) state tax. That’s not an issue for people with fewer assets; they don’t have $11 million to pass on. But if you have a great deal of wealth, especially in the form of a business, now is the time to start implementing aggressive strategies to keep that wealth in the family without passing on an undue burden to your heirs. After all, Uncle Sam isn’t your real uncle.

»You’re not into the hot stock of the day. You hold a lot of low-turnover investments such as index funds, exchange-traded funds (ETFs), or individual stocks and bonds. You know that turnover inside a mutual fund can trigger a taxable event, so you avoid it. When it comes to stocks, you steer toward the kinds of stable companies that Warren Buffett owns: well-known companies that will continue to run profitable businesses for decades. None of your holdings are glamorous; the only glamorous thing is the consistent growth of your wealth over time.

»Retirement is the last thing on your mind (and rightfully so). Lower-income investors tend to have retirement tunnel vision, so they need a financial plan that’s all about retirement. You have bigger goals and objectives and can afford to see the bigger picture. You know that as you increase in wealth, financial planning increases in complexity. Your goals have to do with your lifestyle and legacy. You want to protect your wealth from taxes, losses, and lawsuits, and also support the causes you care about. You don’t want to monitor your portfolio personally, but nor do you want to be blindsided by a market correction. You are interested in ongoing strategic financial planning, not a one-time plan that gives you the green light to retire.

»You’re interested in options not available to lower-net-worth groups. Affluents and Middle-Class Millionaires might use alternative assets such as real estate, but otherwise they’re probably going to have most of their assets in a mix of traditional funds that own stocks and bonds. Because you have more assets to invest, you have a world of other instruments available to you. Many of these strategies are historically accessed via private investment (although we are seeing the evolution of public options) and carry their own risks. However, the general purpose of these strategies is to either enhance overall returns or, more important, reduce your overall portfolio risk.

»Risk reduction is achieved by adding strategies that offer a return stream not correlated to traditional stocks and bonds. You might invest in private equity, making capital available to private companies that want to develop new products, expand, or acquire other businesses. You might buy commercial real estate, taking advantage of strong economic growth and long lease terms to create cash flow while acquiring assets that increase in value. You might get into hedge funds or private limited partnerships that use the collective funds from multiple investors to generate returns using a variety of strategies. You could get into venture capital, providing funds for startup businesses that offer substantial growth potential. As someone in a high-net-worth group, you can consider a combination of these investment strategies to lower the risk to your portfolio.

»You’d like to direct the timing of capital gains and losses. If you’re in one of the lower-net-worth groups, you might deal with capital gains tax issues when you sell a piece of real estate, but otherwise their impact is minimal. However, in the higher-net-worth world, capital gains can potentially generate significant tax bills. Strategic tools are available to reduce your tax obligation, but it’s not quite that simple; depending on your b...