Setting investment goals for high-net-worth individuals

With substantial wealth at their disposal, high-net-worth individuals have the potential to explore a wide range of investment options and potentially achieve growth. However, they also face increased financial complexities that can’t be ignored, from greater tax liability to distribution and inheritance laws. So, how can HNWIs set investment goals and develop an effective strategy to pursue them?

In this guide, we’ll walk you through what you need to know about establishing well-defined investment objectives and navigating high-net-worth investor challenges. We’ll also offer tips for monitoring your goals, as well as a few thoughts on assets that may help you preserve and grow your wealth.

Before we dive into developing a high-net-worth investment plan, it’s important to understand what you’re investing toward or, in other words, the purpose of each financial goal.

The first objective of any new investor should always be to create an emergency or rainy-day fund; while often thought of as important for lower net-worth individuals, it is also true for HNWIs. Despite having more wealth to deal with unexpected expenses, it may not always be immediately available, whether it’s going toward paying down debts or tied up in illiquid investments. Regardless, it’s best to have an adequate emergency fund to support your lifestyle when cash flow cannot. We generally recommend that an emergency fund should be anywhere between three to 24 months of spending needs, depending upon the stability of your income.

Outside of establishing financial safeguards, investment objectives for the average person are often geared more toward day-to-day life or significant milestones. For instance, common goals include:

• Purchasing a new car
• Buying a home
• Supporting a family
• Saving for college
• Preparing for retirement
• Leaving behind an inheritance

Of course, a short-term goal like buying a new car might not carry as much weight with every HNWI, but long-term considerations, such as paying off a mortgage on real estate property or creating a retirement plan, are universally critical. After all, you’ll likely want to plan for your investment portfolio to help keep you afloat and living comfortably long after retirement age. And when it’s your time, you’ll want to make sure your family receives as much of your wealth as possible. That’s why retirement and estate planning are essential, no matter what your net worth is.

However, HNWIs tend to have other, more unique investment goals, whether it’s starting a business or investing in commercial real estate, such as apartment buildings, industrial facilities or shopping centers. In addition to these ventures, they also must deal with the added complexities of an expansive investment portfolio.

The last few years of economic uncertainty have impacted people from all socioeconomic classes, even HNWIs. In fact, in 2023 the global HNWI population saw a drop in both its size and the value of its accumulated wealth, dropping by 3.3% and 3.6%, respectively.¹ This marked the steepest decline in the last decade, underscoring the importance of effective wealth management in overcoming the challenges of the market. But what are the obstacles facing these investors in the first place?

DIY investing can be difficult for anyone, but especially for HNWIs. Why? The more assets you have, the more complicated it can become to manage your strategy and your portfolio. Whether it’s juggling multiple investments in each asset class, making payments on many properties or managing stakes in different businesses, organizing an HNWI's investment portfolio can be a challenging task.

In addition to keeping track of each asset, HNWIs will also need to properly weigh and allocate them across their portfolio. Without this balance, a high-net-worth investor could invest too heavily in a specific asset class such as stocks. If the market declines, this lack of diversification could lead to significant decline in your portfolio value. That’s why it’s crucial to maintain a well-diversified mix of asset classes in accordance with your risk tolerance and investment horizon.

Perhaps the most common challenge for HNWIs is the increased tax liability that often accompanies higher wealth. Being smart about investment choices, tax-aware reallocations and tax-loss harvesting can help. While there are legal strategies and tax-advantaged investments that can help reduce your tax burden, it’s always best to seek professional advice from your estate planning attorney, tax professional and financial advisor before making an investment decision.

Whether they’re implementing a charitable giving strategy or estate planning, high-net-worth investors want to make sure they can distribute their wealth in the most tax-efficient way possible. However, to help avoid bestowing a headache or worse – legal or financial burdens – to their beneficiaries, HNWIs need to carefully strategize their charitable giving and estate plans. This also often requires reaching out for advice from your estate planning attorney, tax professional and/or financial advisor.

As HNWIs advance in their careers, financial aspirations and life experiences, they often work with trusted advisors and planners to help them further their goals. In fact, finding a professional planner is typically the first step a newly high-net-worth investor will take after moving on from a DIY strategy.

Regardless of whether you’re finding your first advisor, partnering with a new planner or continuing with someone you trust, it’s crucial to regularly check in with your planner, who is monitoring your financial plan in order to make sure it continues to be aligned with your goals and to make any appropriate adjustments. For example, you may have set initial investment goals when you started in the workforce but haven’t changed them in decades. If you’re getting closer to retirement, your original goals and risk tolerance may no longer be appropriate.  In short, your plan needs to evolve with your goals and other changes in your life.

At Edelman Financial Engines, we recommend meeting with your advisor at least annually and anytime you experience a life-changing event to monitor your financial progress and revisit your investment plan and goals.

While every investor will have their own goals, risk appetite, time horizon and need for liquidity, they almost always share the same three objectives:

1. Protect and grow their investments
2. Minimize tax liabilities
3. Pass on their wealth to the next generations

Fortunately, there are a wide variety of assets that HNWIs can invest in and use to create well-diversified portfolios. Here are a few investment opportunities an HNWI might want to consider:

From apartment and office buildings to brick-and-mortar stores and industrial facilities, the world of commercial real estate can provide opportunities. While owning and renting buildings can come with additional expenses, such as property management and maintenance, HNWIs can also gain exposure to this market through liquid real estate investment trusts and exchange-traded funds. That way, they can potentially receive the diversification benefits from this asset class without incurring the responsibilities of a landlord. Of course, these investment options come with risks, including potentially high upfront costs, fluctuations in property value, leasing occupancy and illiquidity – meaning you may not be able to easily and quickly sell your investment for cash without a potentially substantial loss in value.

Municipal bonds are a common tax-advantaged security HNWIs can adopt to diversify their portfolios and work toward their investment goals. Not only are they tax-free at the federal level, but buying a bond issued in your state often allows you to avoid state and local income taxes on it as well. They’re also considered lower risk relative to taxable corporate bonds, but this relative safety can also mean more modest returns. As with any investment, municipal bonds entail risk related to credit, interest and inflation.² And although it can be uncommon, some municipal bonds are federally taxed if the holder is subject to alternative minimum tax.

Retirement investing is another crucial area for high-net-worth investors. These individuals can leverage Roth IRAs in particular as part of a long-term investment strategy because they offer tax-free growth with no required minimum distributions. For higher-income investors who don’t qualify for regular Roth IRA contributions, the backdoor Roth IRA strategy can allow them to convert traditional IRA funds into a Roth account.  But since Roth IRAs require paying taxes up front, this opportunistic tactic should only be employed at the right time. Due to the potential tax consequences, it is important to first reach out to your tax professional for advice before proceeding.

At Edelman Financial Engines, we understand that high-net-worth investors require a specialized approach that accounts for their unique aspirations and financial complications. When you partner with our team of expert financial advisors, we can work with you to develop a personalized investment plan that helps you overcome your challenges and pursue your financial goals.

Reach out to a financial advisor today to get started.