Experience Seamless Financial Services!Wealth Management Liquidity Mistakes Every High Net Worth Individual Should Avoid
Wealth management for high-net-worth individuals (HNWIs) isn’t as simple as dividing your wealth into different asset classes and assuming returns will just grow your wealth, nor is it as simple as keeping all of it in a bank, assuming that way, you can avoid the risks associated with investing. In the UK, an HNWI is someone who has liquid assets, meaning investable assets worth between £1 million and £5 million. Now, one can imagine when your wealth is in millions, math can’t be that simple, and the stakes are way higher. That’s why wealth management for HNWIs is a tricky domain that not only requires financial literacy, but also strategic decision-making, long-term planning and a strong portfolio.
Here comes the most-asked question: why is balanced liquidity so important for HNWIs? That’s what we’ll discuss in this blog, explaining why too much or too little liquidity can be a risk for your wealth!
What is Liquidity?
Liquidity, in simple words, can be explained as how quickly you can turn your wealth into usable cash, without impacting its value. That means if you keep cash savings or invest in assets that are easy to convert into cash, like shares, you have ‘high liquidity’, which means you can easily use your wealth for immediate needs. On the other hand, if you invest in real estate, art collections, private equities, businesses or other valuable assets that can be very lucrative long-term, but can’t instantly turn into cash, that means you have ‘low liquidity’. With a significant amount of wealth, you need both the freedom to use your wealth as well as long-term planning to support your future needs and legacy planning. Therefore, you need a perfect balance between the two.
Excess Liquidity Means:
- Higher Risk of Erosion
As financial advisors, we always discourage holding large amounts of uninvested money, because that can silently erode away during inflation. Over time, inflation reduces the purchasing power of money, meaning cash held in bank accounts can lose real value if interest rates fail to keep pace.
- Opportunity Costs
Every pound that sits in your bank could have been an investment for your future financial growth. We understand that investment is a risk, but not investing at all is also costing you a lot in terms of lost opportunities.
- Lower Portfolio Returns
Compared to growth-focused investments, cash and cash-like assets generate much lower returns. In the long run, too much liquidity dilutes returns and impacts compounded growth.
Insufficient Liquidity Means:
- Unplanned Asset Sales
In wealth management for HNWIs, planning is everything, and if you have not planned well and invested too much into illiquid assets, then a lack of reserve may force you to sell investments at a market downturn, resulting in losses to meet immediate cash needs.
- Succession Complications
When there isn’t enough liquidity, families can face great challenges during the transition phase, from paying estate taxes to smoothly passing on a business. In some cases, this lack of ready cash can force rushed decisions or disrupt a transition that should have been carefully planned.
- Lost Opportunities
One perk of being an HNWI in the UK is that you have exclusive access to investment opportunities, but due to a lack of liquidity, you don’t have immediate access to cash, and you might miss that golden chance that could be a highly lucrative deal.
Wealth Management Advice for Every High Net Worth Individual
Consider lifestyle needs, risk appetite, long-term goals, and legacy planning, and then plan the portfolio accordingly, creating a balance where you have a liquidity buffer to capitalise on deals, but not so much idle money sitting in banks at the mercy of inflation. Maintain a purposeful mix of cash, marketable securities, real estate, and alternative investments and regularly perform liquidity reviews as per market conditions and personal circumstances. You can do this by dividing your wealth into three categories:
- Immediate cash, to cover the needs of the next 12 months.
- Opportunity fund as a reserved capital for investments
- Strategic investments that offer long-term value
If you don’t know how to protect your money from risks, create a long-term plan or need private banking services, Wirewand is here for you!
Wirewand: Trusted Financial Advisors for HNWIs
At Wirewand, we connect UHNW families with tailored financial solutions and access to private banking services, without the hurdles of traditional banking. Through our trusted global network of providers, we simplify complex wealth needs, and with our expert financial consultancy, we offer future-focused wealth management, ensuring their wealth serves both today and generations to come.
Speak to our experts today!