South: Principles for effective wealth planning

At the heart of Kleinwort Hambros’ investment philosophy are three simple objectives: Get the big decisions right, take risk only when risk is well rewarded and avoid large losses. These maxims also apply to the process of wealth planning.

To assist a client in Getting the big decisions right requires asking the right questions to promote clarity of their investment objectives. This is not to be intrusive, but to prompt thoughts which are sometimes avoided or even possibly uncomfortable, however, a plan cannot be made without parameters and direction. Communication is therefore essential. The wealth planner’s role is to understand the client’s very personal circumstances and discuss what is most important for them to achieve their goals.

New objectives will form and develop over time; initially this could be affording a property; followed by funding school fees; progressing to supporting retirement need; managing long-term care; and eventually succession planning.  For each client there will be a different road map, but what should be common for all, is obtaining a degree of clarity as to what is most important both now and in the future. These are the big decisions. Over time objectives are very likely to evolve or even change completely, so the process of returning to review is essential. A review should take a snapshot of where the client is now and where they are intending to go, before looking at the trajectory between the two.

It is important to establish a client’s capacity for loss, which is their ability to take risk and to absorb a fall in the value of investible assets beyond a certain tolerance. If capacity for loss is limited, then in many market circumstances, taking greater levels of risk could mean that objectives will not be reached. Again communication and understanding is necessary and as with the Kleinwort investment philosophy, taking risk only when risk is well rewarded applies. Taking more risk than necessary, could result in unnecessary loss of capital and having a detrimental effect on a client’s standard of living. If the agreed objectives can be achieved by taking less risk, then the risk-return reward of taking more risk is hard to justify.

The final objective is to avoid large losses. In wealth planning terms this can be mitigating losses by having diversified assets. This particular loss is market-led and somewhat outside of a client’s control. There are, however, other large losses that can be prepared for and therefore mitigated against. For example, if future objectives rely on a continued earned income stream, then insuring against the loss of this income due to sickness or accident is possible. Objectives could also be dramatically impeded by the death of a breadwinner.  Again, insurance can be used to mitigate the financial loss and protect loved ones in such traumatic and tragic circumstances.

Using the legitimate tax breaks and allowances available can shelter the value of assets owned. These can be making pension and ISA contributions throughout life and also looking at mitigating the inheritance tax due on death. Having an up-to-date and relevant Will should be at the top of a client’s planning list. The next steps would be reflective of asset values and fiscal rules. Insurance policies could be a solution to alleviate the burden of inheritance tax by providing accessible funds to pay HMRC or perhaps investing in assets that offer business property relief.

In all cases, to assess what is most suitable for a client’s needs requires regular and detailed communication. This interaction with clients is where value is added and opportunities can be taken advantage of most effectively.