From my experience, each client and every investment account is unique in some way. While the core principles of investing (e.g., risk tolerance, diversification, goals) remain the same regardless of the amount you are investing, there are important differences to consider depending on the size of the investment portfolio. This is especially true when there is a vast difference in size: like $50M compared to $5M. Or, in other words, there is a big difference between investing to ensure a comfortable retirement ($5M) and investing generational wealth ($50M).
Let’s take a look at the top considerations and my suggested approaches.
Accepting the Illiquidity Premium
With a $50M investment account, the client no longer needs to worry about having enough money for retirement. The goals are different as you are investing generational wealth for a purpose other than to just make the money last through retirement while providing cash flow. Instead, you commonly can allow for longer-term investments in public and private markets that can be illiquid. One of the considerations of illiquid investments is that, for the duration of the investment, the investor loses access to the money they invested.
However, since the client with a $50M investment account does not have to worry about having enough money for retirement, illiquid investments can be a good choice as the client’s investment timeline typically spans decades as opposed to years. This allows the client with $50M to have an expanded horizon which the client with $5M is unable to have as they will need those funds available for cash flow or other expenses into retirement.
One of the benefits of an illiquid investment is that, in general, it can lead to greater growth over time as the compounding of the investment can remain uninterrupted for a longer period. This longevity advantage is especially true if the money will be passed on to future generations and is invested accordingly.
Access to Opportunities and Greater Ability to Accept Risk
Let’s explore another way investment strategies for clients with $50 million in investable assets differ from strategies for less wealthy investors.
First, there’s a particular class of investors that includes people with investable assets of at least $5 million. Considered a Qualified Purchaser, this opens other avenues of investment that are typically illiquid and allow for greater growth or cash flow potential. For example, real estate, hedge funds, private equity, and venture capital investments are all illiquid investment types.
These types of investments are also available to individuals with less than $5 million to invest. However, the difference is that a person with a larger amount of investable assets is usually better able to accept the trade-off of having their money illiquid for seven to 12 years.
Tax Considerations
The individual with $50M to invest often has generational wealth that, except in cases of unchecked spending, will last well beyond their death. As a result, that person can typically benefit from professional tax mitigation strategies to ease estate and gift tax burdens.
The pillar of effective tax planning for successful individuals is to place more focus on where their growth takes place (inside or outside their estate or trust), and not just on how to grow their wealth.
Let’s look at an example of a tax-planning strategy for a fictional client (we’ll call him Steve) who has $50 million to invest. Steve’s lifelong generational wealth has enabled him to enjoy a generous lifestyle and significant gifting to his children. Because of this, I would allocate his cash-flow investments to remain in his name (instead of moving them outside his taxable estate), so he has immediate access to his funds. In addition, I’d place a certain portion of Steve’s growth investments outside his taxable estate via a trust for his spouse and/or children to lessen his exposure to estate tax liability.
Philanthropic Interests
Driven by their unique interests and values, our clients with $50 million or more to invest typically have charitable ambitions that align with what they value on a personal level.
We often see clients give land or money to religious organizations or their favorite university. Or they’ll pay education expenses for underprivileged students. I have even seen clients give a significant portion of their estate to care for their cherished pet after they’re gone. (I personally drafted the related trust agreement in my prior life as an estate planning attorney.)
The common thread is that, in general, our clients with philanthropic interests take a different approach to investing than they would if it were a personal investment. A key feature that exemplifies their uncommon mindset is that philanthropic investments are often more risk-tolerant because the primary focus of the investment is on social impact instead of individual goals.
Another feature that sets philanthropic investing apart from personal investing is that donations to charities often offer more tax advantages than personal investments. By structuring their charitable donations to a donor-advised fund or a private foundation, there may be some unique ways to maximize the tax advantages inherent in those charitable entities that better fit different investment strategies.
Make Your Wealth Work for You
At Solidarity Wealth, we work with our clients to discover what wealth means to them. Then together, we navigate the richness of options available to them and make sure the investment strategies we suggest align with their personal values. That level of care isn’t often found in our industry—but we know our clients deserve it.
If you’re ready to see what skilled wealth management can do for you, reach out to us at info@solidaritywealth.com or call 385-374-1665 to schedule a discovery call. We look forward to hearing from you!
About Jeff
For over a dozen years, Jeff McClean has advised some of the country’s most successful families on all aspects of their wealth. With his background as a former tax and estate planning attorney at a prominent Houston, Texas, law firm, Jeff has advised clients through business sales, funding rounds, IPOs, complex tax and wealth planning transactions, private and public market investments, executive compensation packages, succession planning, and much more. In short, Jeff helps clients navigate the unique challenges that come with building wealth and helps them better predict their financial future.
In addition to co-founding Solidarity Wealth, Jeff advises single-family offices on a broad array of challenges. He also serves as the Managing Partner of Solidarity Capital, an income fund managed separately by the Solidarity partners.
Jeff is a sought-after thought leader on a wide range of tax, finance, and estate planning topics. Jeff has been quoted in Yahoo! Finance and Kiplinger’s, has published in diverse publications from Silicon Slopes magazine to the Taxation of Exempts journal by Thomson Reuters, and has spoken to audiences ranging from the Estate Planning Section of the Utah State Bar to the Nonprofit Organizations Institute to large company conferences.
Jeff holds a bachelor’s degree in accounting from Brigham Young University – Idaho and a Juris Doctor, with honors, from the University of Texas School of Law. Outside of work, Jeff is married and the father of three amazing children. He has also served as past president of the Salt Lake Estate Planning Council.
Solidarity Wealth is a registered investment adviser. This material is solely for informational purposes. Advisory services are only offered to clients or prospective clients where Solidarity Wealth and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Solidarity Wealth unless a client service agreement is in place.