Wealth planning tips for HNIs

Whether one is a self-made High Net Worth Individual (HNI) or has inherited wealth from a family, suitable wealth planning is extremely critical to protect and expand the wealth. The planning, which can be quite complex in nature and goes far beyond just the regular income projections. While each family have their own unique background and requirements and may entail specific wealth creation plan, few attributes like Investment Mandate (IM) and Investment Policy Statement (IPS) remain homogeneous and imperative.

These two form the bedrock of wealth creation plan and captures all the pertinent factors like how the assets are currently held and how it is invested, should they be consolidated or requires transferability from one asset class to multiple, strategic and tactical asset allocation bands, acceptable tolerance bands for deviations, raising red flags and actionable on deviations, monitoring portfolio drag, portfolio optimization and efficiency, frequency of review and rebalancing to name a few. Both serve as a critical tool in keeping the focus on the stated objectives and incorporates the accountability standards used for the investment process, policies, reporting requirements, monitoring, and evaluation of investment managers as agreed by the family.

When IM and IPS are followed judicially and consistently, it helps investors build traits similar to the families who have been successful in compounding their wealth for years now.

While it takes years of hard work to accumulate substantial wealth, all of it can be lost in a proverbial moment. There have been instances where wealth erosion happened by inappropriate wealth holding structure or financial irresponsibility of next-generation rather than market fluctuations.

In India, today one can hold assets in an individual name or through a holding company route (Pvt ltd, LLP) or private family trust. Each has its own merits and demerits along with tax and legal implications. It is important to evaluate all options keeping in mind one’s requirements and implications on inter-generational wealth transfer. For example, for a business family, it is important to segregate personal assets from business assets as claims on the business front can do damage especially where personal guarantees are involved.

However, an HNI who accumulated wealth through ESOP’s might not have business risk, and the children settled abroad may require a different holding structure. Please note that in a good wealth creation plan; tax and legal implications should never be an afterthought.

As the younger generation takes over the reins of business it’s crucial to teach the importance of financial responsibility. The focus should be on institutionalizing the process of managing family wealth. The investment process built by the family should not be static rather it evolves over time and is passed over to the next generation. Various strategies can be deployed depending on family structure and situation.

For instance, there is a family who has amassed substantial wealth from the sale of land 10 years ago. The beneficiary was an IT employee with two children who completed their higher studies in the USA. The father set up his own IT company and invested the balance across assets classes like FD, mutual funds, and real estate. Both have grown at a good rate. In today’s time, one of the children is helping his father to expand and manage the business. The second one has become an angel investor who is looking after the family’s private equity investments which are 25% of the investible surplus. The balance is still in bank FD, mutual funds, gold. Holding structure is carefully crafted for equal wealth distribution.

‘There is no one size fits all’ however, to sum up, a good wealth creation plan involves all possible family resources and skillset. A wealth creation plan is a journey with a disciplined process rather than an ad-hoc basis, where the process is evaluated rather than the outcome, to achieve the right balance between wealth preservation, income, and growth. It keeps everyone on the same page and achieves desired monetary objective in the most tax-efficient manner without any legal ramifications.