Preparing Clients’ Portfolios to Weather Either Election Outcome
Although Presidential elections usually cause at least some market volatility and investor uncertainty, this week’s election comes at a time when our nation is not just politically polarized, but also enduring the eighth month of the COVID-19 pandemic.
Among the ultra-high-net-worth (UHNW) investor community, we are witnessing two strategies for coping with election-related volatility. There is a small percentage who are uncertain about the future, and prefer to take a wait-and-see approach before making any major investment decisions.
Then, we have a sizable amount of UHNW investors who want to be as organized and hedged as possible. This segment is willing to take measured risk on investments, but is primarily interested in higher-yielding investments than bonds. It’s our job as advisors to organize them.
To position all of our UHNW clients for success regardless of the outcome on Election Day, our advice to clients right now consists of the following four recommendations:
- Be Hedged: While nobody has a crystal ball, we see a disconnect between Main Street and Wall Street. By way of example, our clients’ equity portfolios are up over 20% year-to-date, despite the VIX (CBOE Volatility Index) being at all-time highs and small businesses (the backbone of our economy) getting crushed. There are many reasons to explain the dislocation, but our message to clients is that this is not the time to be passive—it is absolutely necessary to be hedged.
- Use Up Lifetime Gift Tax Exemptions Today: We are advising UHNW investors to use up their lifetime gift tax exemptions (the amount that investors can give away the course of their lives without being subject to federal taxes) now, instead of later. The lifetime gift tax exemption is $11.58 million beginning in 2020, and for married couples, both spouses can obtain this exemption amount. It is interesting to note that in certain jurisdictions, trust and estate attorneys may be able to help younger investors who are not yet married and/or have children create trusts for distributing their lifetime gift tax exemptions to their future wives and children.
We also strongly advise clients who have assets they are gifting, such as real estate or proceeds from the sale of a business, be appraised by an independent third-party appraiser. The appraisal should be attached to the gift tax return. The Internal Revenue Service (IRS) generally assigns more sophisticated auditors to scrutinize gift tax returns. Therefore, if an investor has not included an appraisal from an independent, third party company valuing the asset to be gifted, there is a much higher probability of the investor’s gift tax return being audited. Lastly, we advise clients that it is well worth spending a few thousand dollars to get an independent appraisal done because the legal/accounting costs associated with an audit and possible penalty for over-stating value(s) are considerably higher.
- Obtain Exposure to Real Estate & Hard Assets (Ideally, Outside of a Fund Structure): Given the enormous amount of money from the government that has been poured into the markets, asset inflation is a concern. To mitigate this risk, it is important to have exposure to real estate and other hard assets. Our solution has been to establish partnerships with the country’s most successful real estate funds and developers in order to expose our clients to bespoke investment opportunities in industrial, multi-family, and student housing. We see those real estate asset classes doing particularly well.
In our solution, we do not come in as limited partners (LPs), but as general partners (GPs) co-investing pari-passu to the sponsor. Doing this outside of a fund structure, as we have, may seem challenging, but is necessary so that clients don’t have to pay as much in fees, experience as lengthy of a lock-up, and obtain the full tax benefits associated with investing in real estate.
- Pursue Opportunities in Distressed Real Estate & Private Equity: In addition, we are speaking to particular investors about seizing upon the attractive distressed opportunities in real estate and private equity that are about to emerge as defaults on debt increase. Family offices have been waiting for a correction in the market for a while now, and COVID-19 has accelerated and deepened the potential for winning amazing deals at bargain-basement prices.
We as an industry must do our best to ensure our clients’ portfolios are positioned to perform well, no matter what happens after Election Day. By advising investors to create hedges and have cash available to seize on certain distressed opportunities, we can generate significant value for our clients.
Brian Weiner, JD is Co-Founder of Audent Capital Partners and Managing Partner of Audent Family Wealth Advisors, where he leads the firm’s global family office services program, Outsourced Chief Investment Officer (OCIO) platform and next-generation education program.