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What does a million dollars look like? The photo below shows a cube of a million 1-dollar bills, weighing in at over 2,000 pounds — literally a ton of cash:1

While $1-million might seem like a lot, members of Canada’s 984,000-strong millionaires’ club2 still have to be careful with their money. Clients making $100,000 per year would need $62,000 a year in retirement income to maintain their lifestyle.3 And with a 30-year retirement, that’s a total of $1,860,000 in income payments (without accounting for inflation).

Here are 4 common financial and retirement missteps you can help wealthy clients — high net worth (HNW), affluent and emerging affluent — avoid:

1. Overspending, mismanaging money, and not considering longer lives

All clients need to be careful with their money, but those who gain money through an inheritance or windfall need to be especially cautious. Cindy Crean, Certified Financial Planner®, has been working with wealthy clients for over 25 years and is Managing Director, Private Client, at Sun Life Global Investments. “HNW clients who are second or third generation may not have been taught to manage their money properly. They could overspend and as a result eat away at their capital too quickly. They may have the tendency to misunderstand that, even if they have 3-, 4-, or 5-million dollars, if they spend $150,000-$200,000 a year after tax, their capital could run out, especially given the longer lifespans we’re seeing.” People need to see the overall picture for their financial future and understand how much capital they’ll need for retirement, given their income requirements.

2. Not taking advantage of charitable donations or other tax breaks

Only 21% of taxpayers take advantage of the tax credits that come with charitable donations; the average donation is only $280.4 But keeping in mind the increase to these tax benefits, Crean suggests discussing charitable giving and the best way to maximize the tax credit. “Instead of donating an appreciated publically traded security or mutual fund, some HNW clients might think, ‘I’m just going to cash in my securities or mutual fund and write a cheque,’ but then they discover they’re paying tax on the capital gain from that security.” If they instead donate an appreciated publically traded security or mutual fund, the capital gain that must be reported for tax purposes is eliminated.

The advantage of wealthy clients doing a comprehensive financial plan is they may find opportunities to optimize the tax they’re paying as a family. “Many high net worth clients aren’t taking advantage of, for example, income splitting with their spouses or opportunities they may have with their children.”

3. Leaving insurance out of the big picture

What happens when a wealthy client needs long-term care? Or what if they get a critical illness and can’t work? Having to pay out-of-pocket for unexpected health-care costs could drastically reduce the size of their estate and retirement savings, as well as restricting their lifestyles. “I’ve worked with many executives over the years — high-income earners and HNW clients — but they can also live expensive lifestyles. When I talk to them, they’re very interested in augmenting their group plans with personal insurance, such as additional disability insurance.” By explaining the benefits of critical illness insurance, long term care insurance, and personal health insurance in these situations, advisors show these clients how to preserve their wealth and plan for the unexpected. “Some clients may have more money than they’ll ever spend in their lifetime, so they’re looking for ways of sheltering it. Some types of life insurance can be very attractive to help shelter capital.”

4. Neglecting to plan for the next generation

69% of wealthy Canadians are paying for their children’s education through their personal savings.5 And with the cost of tuition on the rise, this could eat up a large chunk of parents’ personal savings. The average cost of university tuition is $60,000; if a client has more than one child, this cost could be more than 10% of their savings.6

Preparing for these rising costs by putting aside savings is a key planning strategy, which includes maximizing the government grant for registered education savings plans (RESPs). “If I’m a HNW client and I have a registered retirement savings plan, I have a non-registered account, my husband has the same thing, we have RESPs for our kids, we have tax-free savings accounts — it’s possible to link these accounts together to access management fee rebates in a high net worth program, and they may also get access to enhanced consolidated reporting and other services,” Crean says.

Regarding wealthy business owners, Crean warns against managing their businesses in isolation from their personal lives. She suggests asking how succession plans will affect their families, their plans for retirement, their estate plans, and their taxes. “There are so many things that are intertwined between your personal plan and your business plan, so you have to look at them together.”

The value of your advice

“It’s about becoming ‘black belt’ at your discovery — asking the right kinds of questions and understanding where the gaps are. The best thing an advisor can do is sit in front of clients and talk to them about all aspects of their lives — be curious,” Crean said. She suggests starting a conversation about clients’ families, and then asking the following questions:

  • What keeps you up at night?
  • What does retirement look like for you?
  • Do you know how much money you need for retirement?
  • Is your will up to date? Does it spell out exactly what you want to have happen? Who are your executors?
  • Are you prepared for the unexpected, such as a sudden illness?
  • Do you have a succession plan for your business?
  • How are you planning for your child’s education?
  • Do you understand what your net worth is? (Regarding the last question, Crean has advised many HNW and affluent clients who haven’t really taken a look at a snapshot of their net worth, and what it means.)

Crean also believes some advisors may think they don’t have the knowledge to approach wealthy clients and prospects. “If you need advice outside of your specialty and a client doesn’t already have a lawyer, accountant, or tax planner, then bring in experts you really trust and who match their personality, making them feel comfortable. As long as you have a team of experts to draw on, you can meet your clients’ needs.”

And she says don’t forget about female clients. Wealthy women who are statistically going to outlive their husbands need to be involved with financial plans and money management, “making sure they’re aware of their financial situation and that there’ll be enough capital to last.”

As a final thought, Crean believes wealthy Canadians send a strong financial management message. “They don’t typically take a lot of risk with their money. They’ve worked hard for what they’ve built, they’re very concerned about conserving capital, and they want to pass their wealth along to their families.”

Resources for advising wealthy clients

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1 Photo of exhibit at the Money Museum, Federal Reserve Bank of Chicago.

2 Wealth Report, Credit Suisse, October 2015.

3 According to Sun Life Financial’s Retirement Now Report, 2016.

4 Summary of charitable donors, Table 111-0001, Statistics Canada, 2014.

5 “Affluent Canadians pay for the majority of their children’s post-secondary education,” survey conducted by Pollara, August 2015.

6 “Parents unprepared for soaring university costs,” Canadian Press in MacLean’s magazine, March 27, 2013.