5 Common Mistakes High-Net-Worth Clients Make

When it comes to working with high-net-worth clients, financial advisors have a lot at stake. That’s especially true when helping clients steer clear of common mistakes and pitfalls.

“Addressing common client mistakes looks different with high-net-worth clients because the impacts of mistakes are magnified,” says Craig Toberman, Certified Financial Planner ™ and founder of Toberman Wealth. “With a high-net-worth investor, seemingly small mistakes have the tendency to compound over time, resulting in large potential losses in realized wealth.”

To understand the common mistakes high-net-worth individuals make and how to address them, SmartAsset spoke to experts in the field. Read on for their insights.

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1. Overlooking the Alternative Minimum Tax

One common mistake high-net-worth and high-income clients make is not knowing when they are subject to the alternative minimum tax (AMT). The AMT is designed to ensure that those with higher incomes pay their fair share of taxes. Failing to factor the AMT into tax planning calculations could result in underpayment of taxes or lead wealthy clients to overlook critical tax credits that could reduce their liability.

“Advisors can be in communication with their clients’ (CPAs) prior to year-end to determine if they might fall into this tax category,” says Crystal Cox, CFP® and senior vice president at WealthSpire Advisors. “If so, they can take proactive steps to reduce a client’s taxable income.”

Those tax-planning steps may include establishing a donor-advised fund (DAF) for charitable giving, minimizing capital gains or contributing more to pre-tax retirement accounts. Wealthy clients who hold stock options may also choose to exercise them earlier in the year to reduce potential AMT exposure.

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2. Not Considering Roth Conversions or RMDs

SmartAsset: Common mistakes high-net-worth clients make

Another common mistake Cox notices high-net-worth clients making is not considering Roth conversions as a tool to minimize future tax and avoid required minimum distributions (RMDs).

A Roth conversion allows for the movement of traditional pre-tax retirement funds into a Roth account. Wealthy clients would need to pay taxes on the amount converted at the time the conversion occurs, but this strategy could allow them to make tax-free withdrawals in retirement and exempt them from future RMD requirements.

“During these years, they may be in a lower tax bracket than they were in their working years and when they are required to start taking RMDs,” Cox says. “Not thinking about doing Roth conversions during these years is another common mistake. Advisors can help by doing some financial projections to determine whether clients may be in a lower tax bracket during these years.”

3. Failing to File a Gift Tax Return

High-net-worth clients and their advisors shouldn’t neglect the essential step of filing gift tax returns when required. Filing a gift tax return is required when amounts given to someone else, other than a spouse, exceed the annual gift tax exclusion limits. The person making the gift, not the person who receives it, is responsible for filing this return when it’s required.

That’s particularly relevant if they hold life insurance in an insurance trust, says Kevin Brady, CFP® and vice president at WealthSpire Advisors. “Since the federal exemption is high, this is usually fixable with some coordination between the client and his or her attorney and/or tax preparer,” Brady says.

4. Overlooking Insurance Needs

High-net-worth clients can benefit from maintaining sufficient insurance coverage. That’s true whether “it is term life insurance for a spouse or children, disability coverage for higher-risk or skilled professions, or property- and casualty-related insurance like homeowners or umbrella liability coverage,” Brady says.

While some clients may prefer to self-insure by relying on their own assets, it can still be useful to discuss whether a life insurance policy could support their broader financial goals. At a minimum, life insurance is something you may need to discuss if your client has others who depend on them financially.

Long-term care insurance may also feature in the discussion if your clients are concerned about nursing home care costs eating into their wealth. A long-term care/life insurance hybrid policy could help wealthy clients ensure that they’re covering multiple contingencies, should they need nursing home care or pass away unexpectedly.

5. Neglecting to Update Estate Plans

High-net-worth clients need to stay on top of their estate plans and update them when necessary. Not doing so can cause confusion and stress for themselves and their families down the road.

High-net-worth clients may fail to update “out-of-date estate-planning documents that do not reflect where their family is now, what their wishes might be and any sense of an intentional family legacy planning strategy,” says Lisa Kirchenbauer, founder and president of Omega Wealth Management.

For example, a client who remarries after divorce or the loss of a spouse may face questions about whose children should inherit if the new relationship results in a blended family. Wealthier clients may also need a trust in addition to a will to preserve their financial legacy for future generations.

Bottom Line

When it comes to growing and maintaining their wealth, high-net-worth clients often have different needs. They may rely on you, their advisor, to help them catch potential mistakes before they develop into bigger problems. The more aware you are of your clients’ financial situation and needs, the easier it may be to head off major mistakes before they’re made.

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