Rich investors also face risk
1
Managers need to manage these risks to ensure their clients' net worth lasts for generations.
Managing wealthy peoples’ money isn’t a worry-free occupation. Even when conditions are good, as they are now in the U.S. with stocks at record highs and business expansion in a record 10th year, wealthy investors face risks.
[More: Rich families pour wealth into ESG investments]
Wealth managers need to manage these risks to ensure their clients’ net worth lasts for generations.
Mary Deatherage, managing director at Morgan Stanley Wealth Management, said a common worry her wealthy clients share with her is: Will I outlive my money?
“You wouldn’t think that would be an issue, but it is,” Ms. Deatherage said.
Here are the risks keeping those investment advisers who manage money for clients with $8 million or more in assets up at night.
Financial market exposure
This is the longest bull market in history, but no rally lasts forever. Advisers must ensure their wealthy clients’ exposure to stocks hasn’t grown too large, that they aren’t taking more risk than they can handle if market conditions deteriorate due to a breakdown in trade talks or a global economic swoon.
The time to find out is now, when markets are buoyant, Ms. Deatherage said. The S&P 500 stock index is up nearly 25% this year.
“In a moment of sanity, we spend a lot of time figuring out how much risk someone can deal with, and we make sure the portfolio reflects that,” she said. “We do a lot of what ifs. What if 2008 happened again? What if a market downturn lasts for two years? What if the stock market drops 20%? Can you handle this amount of risk?”
Danger of shrinking income
We’re in a low-rate world. A 10-year Treasury yields less than 2% and roughly $15 trillion of government bonds outside the U.S. have negative yields, according to a Deutsche Bank report in August.
Negative rates overseas will continue to place downward pressure on yields of Treasuries and other types of U.S. bonds as foreigners migrate to our market. Lower rates of return on fixed-income investments like bonds will make it harder for wealthy people, especially ones in retirement, to generate enough income without eating into capital and taking too much risk, said Richard Saperstein, chief investment officer at HighTower’s Treasury Partners.
[More: Rich families pour wealth into ESG investments]
The negative yield environment “is a structural issue that has a real long-lasting and meaningful impact on clients,” Mr. Saperstein said. “It’s a real present and future danger.”
Wealthy clients face a choice: Do they want to take more risk to potentially receive a higher return or maintain their current level of safety but accept a lower return? Mr. Saperstein said.
Allen Schreiber, an adviser at Wells Fargo Advisors, faces a similar dilemma. He advises wealthy clients who want to boost income to invest in stocks that not only pay a dividend, but also have a long history of regularly increasing their dividend payouts.
A perfect example is McDonald’s Corp., he said, which has boosted the size of its cash dividend it pays to shareholders for 43 straight years. The benefit of investing in stable large-cap U.S. companies that grow their dividends annually is that it’s a way to generate income with the potential for capital appreciation in a defensive-type stock.
Political turmoil
The uncertainty around the 2020 elections and who will win the White House is also on the radar of advisers. Democratic presidential candidate Elizabeth Warren, for example, has proposed a “wealth tax” on Americans with a net worth of $50 million or more. The proposal is viewed by Wall Street as anti-business.
And while many of President Donald J. Trump’s economic policies have boosted the stock market and underpinned the economy, his ongoing trade fight with China remains a wildcard for markets and growth.
As a result, fears of higher taxes, lower stock prices and an economic slowdown are increasingly weighing on the wealthy.
[Recommended video: Ed Slott: Why you may not want to convert all your IRAs to Roths]
“People tend to focus on the negative possible outcomes that could happen, depending on who wins” next year, said Spuds Powell, managing director at Kayne Anderson Rudnick Wealth Management.
Fortunately, Mr. Powell said it’s way too early to make investment decisions based on who will be the next president. He also said that the American political system’s checks and balances makes it difficult for politicians to push through all their campaign promises if elected.
Cybertheft
Another trend adding to the risk level faced by the rich: cybertheft.
“It’s a hot topic,” said Mr. Schreiber.
His firm recommends clients put a “hard freeze” on their credit report, be careful when using passwords with online accounts, and be mindful of suspicious emails. They’ve also brought in an FBI agent to conduct client seminars on cybercrime.
Mr. Schreiber said advisers also are at risk.
A few months back when one of his clients was buying a home, Mr. Schreiber received an email requesting that he wire $562,000 to close the loan. He became suspicious, however, when he noticed that the sender’s email was slightly different than his client’s and called his client and confirmed it was fraud. “That’s the type of threat” we see regularly, Mr. Schreiber said.
Legacy pitfall
Making sure the kids, grandkids and the grandkids’ kids are responsible with money and growing up to be good people is another worry-point for wealthy people, Ms. Deatherage said.
[More: Investing tips from the wealthiest family on earth]
“A big thing my clients worry about is: Am I raising responsible adults? Have I screwed my kids up with money?” Ms. Deatherage said. “They ask, ‘How do you teach them the process of respecting money.’ It’s such a huge topic.”
Adam Shell is a freelance writer.
Learn more about reprints and licensing for this article.
