Wealth Preservation for Wealth Creators

As a financial consultant, many of my clients are business owners, entrepreneurs, accredited investors.  They are in the business of wealth creation.  They take calculated risks, they have a high risk tolerance, and they are prepared for major losses in the course of their business.  But when in comes to their own personal portfolios, the opposite should be true.  I recommend they buy a lot of insurance to mitigate their risk exposure, and the emphasise long-term investments, with balanced risk profiles.  There is a reason for this. 

In the course of their work, running their companies, the market can change, and they could lose it all.  The company could fail.  There could be problems with the supply chains.  Perhaps some leverage did not pay off.  The failures of the business should not mean they are themselves wiped out.  Because of this, when it comes to their personal portfolios, the emphasis is on stability.  This is the balance between wealth creation and wealth preservation. 

In general, creating wealth requires owning a business.  A professional could earn comfortably, but unless he owns the business, there is a ceiling to how much he can earn.  No matter how much he earns, he eventually realises that they will pay him enough to stay, but he will never earn enough to leave.  He is rich because of his professional skills, but the owner of the business, who pays his salary – he is wealthy. 

Being wealthy requires owning that business, and part of that is managing risks.  Because these people are business owners, it means that much of their assets and earning capacity is concentrated in one single entity.  This focuses their assets and concentrates it in a manner that allows him to leverage it to generate revenue.  However, just as it increases his chances of success, it also concentrates the risk.  They either win big, or lose their home.  This requires a high tolerance for risk in this capacity.  This also means they are fully concentrated on the business; it is their life. 

To balance this out, they need accountants, lawyers, auditors, tax consultants, and most important of all, financial consultants to manage their personal assets, so they can keep most of their wealth.  A financial consultant, in this capacity, creates a strategy that is the opposite of what the entrepreneur uses to create wealth, since the mandate is not wealth creation, but wealth preservation. 

The first thing we do is acquire an intimate understanding of assets and wealth to be preserved, and the risk exposure.  The most obvious is the concentration of it in one vehicle – the company.  That means the client’s personal investments need to be diversified.  Diversification is the most basic strategy to mitigate currency exposure, political risk, and the market cycle. 

The next step is to lower personal leverage, and mitigate tax exposure through investment vehicles, such as trusts.  This also affects asset allocation.  In some cases, as much as 40% is put into debt instruments such as Treasury bonds, and rated bonds.  Much of the remainder is allocated to mutual funds and indices.  This keeps it relatively liquid, while also providing a return that exceeds long-term inflation.  The market is volatile in the short-term.  Over an extended investment horizon, however, it is predictable, and trends upwards.  A lower, safer return, over an extended period, makes use of the power of compounding to provide an impressive return.  Done properly, the returns will more than double in a decade. 

Eventually, every business owner will seek an exit.  They might sell the business, they might hand it over to their successors, they may take it public.  If and when it comes to that, then the strategy adjusts again.  Because now, they need wealth creation as well as wealth preservation, unless they decide they have enough, or choose to retire.  Wealth management, whether for preservation or creation, is a science, not a lottery.  It is meant to be disciplined because we need to mitigate the chaos of fortune.  Fortune falls both ways.