In our work with wealthy families, we encounter certain fundamental planning mistakes again and again. These mistakes can be costly. First of all, bad planning today can lead to all kinds of bad results down the road. Moreover, the consequences of bad planning might not be easily reversible after the fact.
Here are the most important mistakes that I have encountered routinely over the years of working at BFI Consulting:
1. Ignoring the necessity to protect your wealth
The biggest destroyers of wealth are litigation and taxes. As you come to wealth and build your business, you need to consider strategies to protect yourself from these risks. Asset protection and tax planning is critical for the longevity of your wealth.
Entrepreneurial types tend to be fast-moving “men of action” that are busy implementing ideas and multi-tasking. They don’t have much interest or time for “boring stuff”, like tax and estate planning. However, setting up a trust structure, planning for long-term tax optimization, or investing time in smart long-term inheritance strategies are things your family will be grateful for, if done adequately, for generations to come.
Tax rules and asset protection planning may not be the most exciting thing and may be an unfamiliar area for entrepreneurs. Few people enjoy meeting with attorneys; they are not sure who to trust and are generally more interested in the generation of income, rather than the defense of it.
However, there are highly effective plans that don’t need to be costly nor complex. In fact, if a plan gets too convoluted and complicated, you should take a closer look at it. You should understand what you’re doing. The more complex a structure, the more costly it will be. In my experience, keeping things as clear and simple as possible is the right way to go.
2. Spending new liquidity too quickly and without a plan
Building a business takes a lot of hard work and a long time. It’s not a quick process. Similarly, after you achieve liquidity and set off on the path of building a wealth management plan for the future of your family, you should not expect to do that within only a few months or years. Take your time! Most importantly, take your time to learn about the options and strategies that exist out there.
What I have seen instead, and possibly related to the prior point, is rapid over-spending and rash investment decisions right after a liquidity event. Some families purchase multiple family homes, which may take several years to sell. Or they buy other expensive “toys”, like that yacht they always dreamed of. There’s nothing wrong with fulfilling your dreams or enjoying your wealth. However, you should not rush to spend at once the money that took you years to earn.
A pertinent example and a cautionary tale can be found in the case of one of our clients, who spent roughly 25% of his net worth within the first 2 years of selling his company, after spending a lifetime building it. Unwinding acquisitions like that and stepping away to get liquidity can often be difficult, time-consuming and eventually lead to a haircut.
3. Managing wealth without vision
Some families spend a generation or more building their business, their real estate portfolio and their network. However, when they come into cash, they spend much less time and energy on defining their investment goals and developing appropriate strategies. Instead, they tend to approach the task with a lack of planned steps and systematic structure.
They might delegate large amounts to investment advisors who have been recommended by a friend after working out together at the health club. Or they’ll decide to allocate assets to a startup across the street, or a seed deal, or a friend's real estate development project, just because it sounded like a great idea at the time.
However, just like in any other aspect of business life, these things should be planned, structured and implemented with similar consideration, strategic thinking and focus.
Remember that after you’ve earned your wealth through your hard work, keeping and growing your investments is the critical task. Your hands-on involvement should not stop after that wonderful exit you were able to accomplish from selling a business. Thus, before heading into the task of wealth management, sit down, define a high conviction vision and develop a game plan for each part of your portfolio.