Being Rich Doesn’t Mean Being Smart About Money. 11 Costly Mistakes to Avoid.

Andrew Krei, co-chief investment officer, Barrett Upton Capital Partners: One mistake applies to public-company executives we work with who have generated their wealth through a concentrated position in a stock. Once they have amassed a large concentration through the years, they’re hesitant to sell off any of the shares. They can overvalue their knowledge of the company, or they may still be in a position of control where they feel they can dictate performance to an extent. And maybe there’s an element of underappreciating the macro factors and headwinds that can have a disproportionate impact on stock returns. So this idea of not diversifying, of holding on too long in some of those positions, is a big mistake we see. 

Another one: There are cases where investments and tax and estate planning and all those different disciplines get siloed, and there’s a lack of interaction across those different areas. So you don’t necessarily connect the dots that can create more efficient outcomes between the tax and investment pieces. A specific example would be a person who comes to us after the fact and says they just wrote a $100,000 check to fulfill a charitable gift, whereas we could have done it with appreciated securities in a more tax-efficient way. 

Belinda Stark Herzig, principal, global tax and senior wealth strategist, BNY Mellon Wealth Management: I have been in the industry long enough to see a lot of clients wish they could unwind or make changes to an existing wealth transfer plan. When you choose a vehicle that’s irrevocable and circumstances change, you’re faced with limited options. I have a lot of cautionary tales. I encourage all my clients to really think through the terms of their governing instruments and [do this] before they execute their estate-planning documents to make sure they understand the effects of different provisions. 

One thing that’s not really a mistake, but where there’s a lot of complexity, is when clients create a spousal lifetime access trust that doesn’t resolve for divorce. SLATs are irrevocable instruments, which are difficult to dissolve. If those spouses dissolve their marriage, that entity continues the beneficiary unless it’s planned in the anticipation of divorce. Sometimes there will be a provision that says something like, “If this person who is my spouse is no longer my spouse, their interest terminates.” But with the older SLATs, created back in 2011 or 2012, for example, they didn’t really do as much planning. 

Sarah Keys, financial advisor, Wealth Enhancement Group: For those with assets around the $10 million range, who are maybe in their late 50s or early 60s, they really want to share their success with their kids and make things easier for them. So often parents will step in and start giving them big chunks of money. I’m not talking about annual gifting and things like that. I’m talking about large lump-sum contributions to 529 college funds or larger chunks of money that the recipients will parlay into real-estate purchases or business ventures, without taking the long-term impact into consideration. Now, if the parents aren’t spending a ton, it doesn’t necessarily present problems. But often, the gifts continue, if not every year then every other year. And if you have a couple of years where the market isn’t stellar, it can really impact the long-term viability of a client’s plan. 

At higher asset levels, I’ve seen a number of people who’d had a successful business venture or hit it big on an investment. And they usually underestimate the luck involved in that—being in the right place at the right time, knowing the right people, etc. And having had that windfall, they will invest in private equity or venture capital investments. It’s sort of like, “Hey I made a big bet and I won, and therefore I’m good at this and I’ll be able to do it again.” What’s missing is proper consideration of the rarity of their success or, more important, any sort of thought process around how it fits into their overall financial strategy and their goals and objectives. 

Philip Richter, president, Hollow Brook Wealth Management: We often see next-generation clients receive money and then go out and spend big. Even though they might be receiving coaching and counseling at that time, the work hadn’t been done over a period of decades. So they suddenly run into a large sum of money and don’t know how to handle it. Communicating early and often about wealth and being prepared for it is absolutely vital. 

Another mistake we see often is that individuals who have a liquidity event tend to invest too soon right after the event, instead of taking a deep breath and taking the time to build a long-term holistic strategy and move into new investments cautiously. For example, when someone has a liquidity event, they obviously have a lot of friends, and the phone calls come in fast and furious. “I want to open a Viking-food restaurant, it’s going to be very unusual. I have no experience in running restaurants, but I’m a good friend of yours and I know what I’m doing.” 

Along those lines, some people who become wealthy because of years of long, hard work tend to either appoint themselves or an inexperienced family member to serve as their family office instead of hiring experts. That’s a pitfall that affects more people than you would think.

Dane Burkholder, financial advisor, Roseville Wealth Management Group (Ameriprise): One thing people should really do more is to give while living, to heirs or charity. Typically someone dies at, you know, 85, and their kids inherit the money when they’re in their 50s or 60s. But you can actually begin to give that money while the kids are in a building phase of their life, in their 20s and 30s. That can help the matriarch or the patriarch experience the joy that their kids are getting with that money, and help determine whether they’re going to be good stewards of the family fortune.

Another mistake we’ve seen lately has been recency bias. Because 2021 was a really easy environment to make money in, people may be overexposed to risk and lacking a diversified approach in their portfolio. Or, in the current environment we’re in, we get questions like, “I can get 5% in the money market, or 5.5% in a CD. Why would I want my money positioned in stocks or bonds?” We feel right now that having cash is important, and we have not seen rates like this in quite some time. But we cannot be shortsighted as far as opportunities from yield in the bond market and price appreciation with stocks. 

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