When it comes to advising high-net-worth clients, financial advisors have a lot at stake. That’s especially true when it comes to 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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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).
“Advisors can be in communication with their clients’ (certified public accounts) prior to year-end to determine if they might fall into this tax category,” says Crystal Cox, certified financial planner 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.
Not Considering Roth Conversions Between Retirement and RMD Age
Another common mistake Cox notices high-net-worth clients making is not considering Roth conversions between retirement and initiating required minimum distributions (RMDs).
“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.”
Skipping the Gift Tax Return
High-net-worth clients and their advisors shouldn’t neglect the essential step of filing gift tax returns when required.
That’s particularly relevant if they hold life insurance in an insurance trust, says Kevin Brady, certified financial planner 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.
Not Maintaining Enough Insurance Coverage
High-net-worth clients should always maintain 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.
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.
Bottom Line
When it comes to growing and maintaining their wealth, high-net-clients may run into a series of common mistakes. Financial advisors should keep an eye on these common pitfalls.
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