Troubled waters require steady hand on the tiller

When ultra high net worth individuals are faced with a liquidity event, such as a divorce, inheritance, business sale, initial public offering, or even a lottery win, they require a greater range of services to fulfill their wealth needs. These can range from investments and credit to trust and tax advice.

As such events leave clients in a highly emotional state, depending on the individual’s profile and ambitions, the wealth manager is expected not to act in haste and to undertake a thorough assessment process regarding the client’s investments, trusts and taxes.

The current market environment has added an “extra layer of complexity” to planning post a liquidity event, says George King, head of portfolio strategy at RBC Wealth Management (WM). “Excess wealth creates a broader array of choices for investors. Some investors will prefer to minimize risk exposure by as much as possible by sitting on cash,” he says.

“More adventurous investors may wish to seek out opportunities that the uncertain market conditions provide by increasing exposure to higher risk investments, including assets such as equities or regions like emerging markets.”

However, during liquidity events, for most individuals wealth management remains the number one priority, while for others, inter-generational transfer, philanthropy and investing is imperative, says Mr King. “In these cases, trust and tax advice comes to the fore.”

Often discussing, or even contemplating one’s death is a touchy topic, feels Julian Washington, a private client director at RBC WM. This can be due to cultural reasons, with Chinese clients the most reluctant to talk about death while planning for the future. “Businesses need to be aware of cultural differences from client to client,” he says. “Each client also needs to be treated differently.”

Even the most sophisticated of clients can neglect their own estate planning, states Mr Washington. He has seen a liquidity event often act as a catalyst for individuals to consider the transfer of their wealth, along with a need to understand the tax implications of the event itself. “Trusts can often provide a suitable mechanism for the controlled transfer of wealth to future generations.”

Creating a trust includes several benefits. Not only do they act as a provision for heirs, they can avoid forced heirships, protect vulnerable beneficiaries and avoid probate formalities. They also enhance the family’s privacy, protecting its businesses and shielding it from creditors, while at the same time avoiding political and economic instability and providing a mechanism to engage in tax planning and philanthropy.

Whether or not a liquidity event is planned, it can be emotionally testing for the client, and challenging for the advisor, says Philip Harris, head of UK clients at RBC WM.

“The challenge for us as advisers is to understand their mindset, accurately assess their needs and ambitions for the near and distant future, and then formulate a considered plan of action for meeting these objectives.”