How to Preserve Your Wealth During Uncertainty?
Finance Monthly sat down with Dustin Serviss - the founding partner of Serviss Wealth Management – a company that helps people get financially organised and strategic all on one page. The firm uses this one-page map to enable people to live more of their life and be financially responsible for their future and takes pride in facilitating family meetings to bring clarity to wealth transitions be it a business, a cottage, cash or investments.
What are the current trends shaping wealth management in the high-net-worth space?
One trend we’re seeing is the push-pull relationship whereby clients have cash on hand and want to deploy it but they have a mental block that is preventing them from deploying large lump sums of their capital. There is a reservation that real estate is potentially overvalued. There is also a reservation about geopolitical issues that affect the stock market or may affect the market in the future. We also see a lot of fortune-telling syndrome happening.
51% of Canadians still don’t have a will and money is starting to move from one generation to the other. I’ve spent 17 years in the business and now more than ever, money is intentionally being given to adult children. “Do something responsible with this X dollars” say the parents.
We work with people who are about to sell their company or are thinking about doing it and yet they have no idea what they spend each month. The second part of this situation is a spouse who has not worked for many years, who really has never been part of the finances so getting them to look at how much is being spent can be a challenge. We walk clients through an exercise called BAM. BAM stands for Bare Ass Minimum, referring to monthly expenses that exist regardless of your lifestyle spending. The baseline bills. This is the starting point for someone who is considering retiring and it is useful for clients to accumulate and wonder how much they need to build up before selling. They can accumulate a mix of cash, stocks, real estate and business equity to make a total pot, and then use the BAM to figure out how long the money will last spending X per month with 0 return. That is a starting point.
Over the near two decades in the business, I have used permanent insurance where appropriate and some years have not implemented a single policy. In other years I have encountered many clients who have effectively used the permanent insurance solution. Currently in the market with the continuous tax reforms in Canada in the government and limitations being implemented, permanent insurance seems to be more of interest to some clients now. From an estate planning tax standpoint one of the last standing advantages is the Capital Dividend Account. Life insurance death benefit is one of a few items that create a capital dividend account (CDA) which can flow money out of a company tax-free.
With the recent real estate values growing at a fast pace and the continuous business sale activity many clients are utilising reorganisations of the corporate structure. For wealthy families, they likely know they will never run out of money or assets, but if they can organise their companies in a certain fashion and it enhances their tax efficiency or enables a more seamless estate transition while they are alive or dead, this can be effective planning. We are working closely with estate lawyers and accountants to set up structures. Having investment accounts in corporations that have large corp loss carryforwards or shareholder owing allows for effective planning.
Blended families is a real thing. Wealth and blended families can be a challenge but when you have blood children involved in the family business (or family farm) and new spouses (recent or long time). Ensuring there is estate equalisation is key. More time and communication should be spent by adviser teams to get deep into the motivators of founders and also the family members involved. Dr Tom Dean’s book, Every Family’s Business, is a must-read for all family-run businesses.
At Serviss Wealth, we help clients with creating a one-page road map by using a software called Asset Map to provide a visual experience that displays all of a household’s members, entities, financial assets, liabilities, cash flows, and insurance policies.
They need to consider our help with this because being successful and running a profitable business has many dynamics to it. Over the years, successful families accumulate a number of financial buckets, property buckets and insurance buckets. Keeping track can be done by some but many of our clients come to us handing us the keys and delegating, so they can live a certain lifestyle, under a certain premise of comfort knowing their wealth, health and dreams are being constantly checking in on.
The best wealth preservation advice I can offer is to stay broad in your assets.
What are your top financial tips during uncertainty?
- Invest something regularly if you are unsure there is a correction.
- For strategic investors, one idea is to hold some money in a high-interest account and earmark it that if the market goes down more than X% in a month, you invest it.
- Consider your “Wealth Edge” or figure out what your wealth edge is. For some, it is generating a large cash flow in their career. A handyman can add more value to a reno house that they flip or accumulate rental houses. Realtors watch the hot sheets for good buys. If you are a manufacturer, consider owning the property where you operate your business.
- Buy permanent life insurance if you have a life insurance need. Consider having the insurance forever and then plan to spend and give away your wealth in your lifetime (way more fun than leaving all your buildings and stocks to your kids who likely will be 60+ when you die).
- If unsure, pay down debt. Although interest rates are low, debt is debt. When you don’t have any debt, you are free.
- Debt can be used very effectively to magnify wealth but if not deployed correctly it can limit lifestyle and attainment of goals if markets are correcting while you hold the debt. Be cautious here with this one.
The best wealth preservation advice I can offer is to stay broad in your assets. There is so much conspiracy talk out there that XYZ will happen and if this happens, then that will happen so you should own all ABC assets if you want to be protected. Realty is no one knows what will happen and if you look back at history, some assets perform better than others. Some assets benefit from world events and others don’t. Having investment vehicles that are positively affected by inflation that have been around for decades and navigated through trying times has worked out fairly well in the past. Having some cash in high-interest accounts, doing some research on Bitcoin and Ethereum might be worth looking at for a host of reasons. Physical gold and a small amount of physical cash others say is prudent. Lending money to a quality source provides a different exposure and one asset class often overlooked and considered by some as risky is the Small Cap space. And looking at your own business, practice, real estate holdings, invest in yourself. Invest in what you can control. Have you cleaned up your own kitchen as best you can before exploring investments outside of your own world?
Liquidity is a concern or an area that I think many business owners are vulnerable in. A large part of their net worth is tied up in the value of their operating business. We help people find ways to extract the value out of their business but still keep the business a solid going concern for decades to come. And we help them to engage the management team in the process.
Some of the key lessons the past year has taught me is time goes by very fast. Returns for equity in 2021 for the most part were very good depending on your exposure. In late 2020 the world was unsure if it was opening up or closing down. Then 2021 was full of lockdowns, variants, some friends getting ill but not dying. And if a person watched the news, it was very bad. It was negative, scary, anxiety-ridden and not centred around wellness by any means. Yet the market roared double digits plus percent up. So, one may conclude if you are only watching the market you could have made a lot of money, but if you were watching the news you stayed out of the market.
Some of the key lessons the past year has taught me is time goes by very fast.
This is a key lesson that I learned over the last year - the good news is hard to find. If you set goals that need positivity then be aware of your news sources and the amount of time you consume. Think: Does what I am doing right now serve me and my goals?
Case Study
Business partners expanding their business, initiating a succession plan, and taking on debt for the right reasons. A reference to how Dustin facilitates family meetings to bring clarity to wealth transitions be it a business, a cottage, cash or investments.
The common scenario we help our clients with is simple risk management when it comes to partnerships. The file fact pattern is this – two business partners own a manufacturing business. Partner one, John, owns 75% and partner Bill owns 25%. John is older and eventually wants to retire so he is selling 24% more to Bill. To purchase the 24%, Bill needs to come up with $3,000,000 which he does not have in cash. John has no other buyers so he needs to work with Bill and knows the company is more valuable with Bill since he has worked there for 20 years. The operating company is currently debt-free and worth about $12,000,000. This is oversimplified for this case study purpose, but financing was put in place inside the operating company and the $3,000,000 was given from the operating company to John’s holding company. Now the operating company is holding new debt and the share split is 51% John and 49% Bill. So where is the risk in this situation as it applies to if one partner dies? Well, the company now has debt, it would also lose a key contributor to the business which likely would affect the company value, which affects the families of both the deceased partner and surviving partner (who by the way now needs to pick up the slack of the partner who died). Since the goal is to sell this business to a third party within 10 years, the simple solution was to take out 10-year-term life insurance on both partners for the amount of their respective share ownership. In this case $6,000,000 each.
The question really was: John or Bob, if you died, would you want to be partners now with the deceased partner’s wife? Both answered no, so the question was how do we buy out the surviving partner’s wife as quick and easy as possible and know there is near sufficient cash to do so. Taking on large or more debt in the near future was not desired by either partner.
We then discussed if they would like to extinguish the debt at the same time if a partner died. They felt this extra $3,000,000 each was not needed since they usually carry around $2,000,000 in the bank account as afloat. We also discussed having a policy slightly above the value now to account for growth. They felt that if the company grew in 5 years, the debt would likely be a lot less and they would use new financing at that time to solve any shortfall the insurance didn’t provide. The shareholder agreement was also adjusted, and the life insurance was noted in the agreement.
For more information, visit https://servisswealth.com/