Stock exchange information displayed on the Nasdaq MarketSite in New York, USA, on Monday, August 5, 2024.
Michael Nagle | Bloomberg |
A version of this article first appeared in CNBC’s Inside Wealth newsletter with Robert Frank, a weekly guide for high-net-worth investors and consumers. Sign up to receive future issues directly to your inbox.
Wealthy investors and family offices shied away from stocks ahead of this week’s market volatility, but many saw the price declines as an opportunity to save taxes and optimize their estate planning, wealth advisers say.
Private banks and asset managers say their clients have been reducing their equity holdings for more than a year amid recent concerns about an overheated technology sector, part of a broader shift from public to private markets.
According to a UBS survey of family offices, family offices have 35% of their portfolio in private equity – the largest share of any asset class – compared to just 28% in equities. A Deloitte survey found that family offices’ equity share fell from 34% to 25% from 2021 to 2023, while their private equity share rose from 22% in 2021 to 30% in 2023.
When stocks collapsed on Monday, with the S&P 500 and Nasdaq down 3 percent, wealthy investors didn’t panic or rush into buying, several advisers say. But they had plenty of questions.
“The most common question from clients was, ‘What’s going on?'” said Sean Apgar, partner and co-head of portfolio and wealth advisory at BBR Partners, which advises super-rich clients. “It was more out of curiosity; there was no real reason for action.”
Apgar said the clients BBR advises – most of whom have hundreds of millions or billions of dollars in assets – are not sensitive to short-term market events given their long-term investment horizons. Still, they want to be informed about market movements, the Japanese carry trade, growing recession fears and the likelihood of interest rate cuts. For his clients, their investment plan is still their investment plan.
“The best thing clients can do now is sit back and be comfortable with the investment plan we put in place with them long ago, even though volatility and corrections are to be expected along the way,” Apgar said.
The price drop last Friday and Monday also offered wealthy investors the opportunity to take advantage of tax benefits and gifting strategies.
William Sinclair, head of the Financial Institutions Group and the U.S. family office practice at JP Morgan Private Bank, said a growing number of clients have what are known as “separately managed accounts,” discrete accounts designed to hold a specific group of assets or stocks. With separate accounts, clients can more easily sell stocks that have lost value and realize losses that they can use to offset capital gains from their successful stocks, known as “tax-loss harvesting.”
With some stocks of major technology companies falling 15 percent or more over the past month, wealthy investors are selling their shares at a loss, taking advantage of the tax benefits and buying the shares back at a later date to maintain their position.
“For taxable clients, the largest inflows have been under loss-abatement strategies,” Sinclair said.
Others are taking advantage of price fluctuations for their estate planning. Under current inheritance and gift tax rules, married couples can transfer up to $27.22 million to heirs and family members, while individuals can transfer up to $13.61 million. With the gift and estate exemption set to expire at the end of next year, many wealthy investors are trying to gift the maximum amount before the deadline.
Giving away shares whose value has fallen is more advantageous because it allows investors to give away more shares within the tax-free allowance.
“Say you own a stock that was worth $100 and is now worth $80, you can pass that lower value on to the next generation, assuming the assets will eventually rise in value again,” Apgar said. “So you benefit from the low values. Tax advisors generally love these kinds of environments because they open up new opportunities.”
One group of clients that has been particularly sensitive to recent price fluctuations are company founders and top executives. Because they often have a large portion of their wealth invested in a company’s stock, advisers can help them structure complex hedges – such as variable prepaid forwards and foreign exchange funds – to mitigate the impact of large price losses. Last week’s drop in prices has shown many founders and CEOs the benefits of so-called “collaring” structures.
“People in those positions, in the executive suite, know that their job and their career depends on stocks,” says Jennifer Povlitz, division head at UBS Wealth Management US, who advises many clients with concentrated stock positions. “So the financial planning aspect has to be a consideration.”
While the S&P 500 is still up about 10% this year after gaining 24% in 2023, ultra-wealthy investors and family offices continue to pour more money into alternative investments, particularly private equity. Many see private companies as more stable and profitable over the long term compared to stocks – especially after days like Monday. And they can have more influence over management with direct shares in private companies.
“Most family offices have invested so much in alternative investments, hedge funds, private equity and real estate that they are not going to shift their investments anyway,” says Geoffrey von Kuhn, an advisor to several of the country’s largest family offices.
Richard Weintraub, head of the Americas family office group at Citi Private Bank, said family offices have been moving their money into longer-term, lower-volatility investments — which can grow over decades or generations. In addition to private equity and venture capital, the big trend among family offices is to directly acquire shares or control of private companies.
“The larger family offices, those over $10 billion, are investing capital in operating companies that they can hold for the long term and pass on from generation to generation,” Weintraub said. “As if they were building the Buffett model.”
He added that last week’s stock market declines “have reinforced the idea of a shift toward private investment.”
Michael Pelzar, head of investments at Bank of America Private Bank, said wealthy investors still have to catch up with family offices in private markets and alternatives.
“In general, I think wealthy investors are underinvesting in alternatives,” Pelzar said. “We see this volatility as a catalyst that will allow wealthy investors to continue to expand their portfolios. I think that after this week there will be more openness to alternatives, whether in private equity or real estate.”
Advisors say wealthy investors’ biggest concerns about the overall investment environment are geopolitical risk and government spending. Jimmy Chang, CIO of the Rockefeller Global Family Office, said the most common question from clients is not about stock market volatility, but the impact of government debt and budget deficits.
“They want to know what impact this will have on tax planning as well as on the economy and the market,” he said.