Article by Sharon Hayut.
Properly managing one’s balance sheet can be a challenge, even for financially astute high net worth investors. A personal balance sheet lists all assets (left side) and liabilities (right side), but often, high net worth individuals primarily focus on their assets, paying less attention to present and future liabilities.
The current interest-rate environment offers a compelling opportunity to review existing liabilities in the context of asset allocation and investment goals. As a financial advisor, my role involves researching and providing insight on various items that constitute the right side of the balance sheet and indirectly impact the left side:
• Unsecured loans, including credit cards and personal loans.
• Mortgages and home equity line of credit loans for residential and commercial real estate.
• Securities-based loans and advisory fees, encompassing hard and soft costs.
• Premium expenses for life, disability, long-term care, and homeowners insurance.
My goal as a financial advisor is to help clients achieve additional returns on their balance sheet without taking on additional equity risk premium in the markets.
When speaking with clients, one critical issue that often goes unnoticed even by vigilant investors is inflation. Inflation significantly affects long-term asset value, and high net worth investors face several key challenges in planning for it.
Have you heard of CLEWI—the Cost of Living Extremely Well Index, launched by Forbes in 1982? The index is based on the selection of 40 goods and services typically reserved for very wealthy customers.
The index reveals that high-net-worth individuals particularly prioritize sending their children to preparatory schools and prestigious universities, regularly attending operas, and purchasing designer handbags for themselves or their significant others.
Historically, the basket of goods tracked by the CLEWI has exceeded inflation by an average of 2.5 percentage points annually. This highlights the fact that the cost of luxury goods and services is outpacing general inflation.
A sound financial plan considers and forecasts inflation, along with these escalating costs. Therefore, it is crucial to work with a qualified financial advisor, not just someone who manages your money. Even the wealthiest can experience significant asset value erosion over time if their liabilities are not managed properly, and they fail to follow and update a comprehensive financial plan.
Aligning with the right financial advisor is key to keeping these often-overlooked items in check. They will not only examine things on a granular level but also analyze them holistically on a macro level.
In short, just because people make a lot of money does not mean they can afford to overlook the right side of the balance sheet. A prudent approach to managing liabilities is fundamental for the long-term financial well-being of high-net-worth individuals.