As the saying goes, “it takes money to make money.” But what is the point of building wealth if you’re not protecting it?
Talking with investors every day I have learned that people are interested in a return ON capital, but what’s just as important is that people are also interested in a return OF capital.
Whether you are an entrepreneur, investor, or simply someone looking to safeguard your hard-earned savings, having a solid plan is essential. Firms such as PPR seek to help generate income and wealth for investors, and while providing a return is important, keeping your capital safe is equally important and can require an entirely distinct set of strategies.
There are steps you can take to protect your wealth from lawsuits and creditors, as well as market volatility and investment concentration, giving you both peace of mind and security. Building a solid asset protection plan doesn’t have to feel overwhelming either.
Understanding the Importance of Asset Protection
Before we dive into some strategies, the mindset behind asset protection is just as important. Think of asset protection like building a fence around your house. It is about creating layers of financial security that make it harder for creditors, litigants, or even criminals to reach your hard-earned wealth. It’s legally protecting your hard-earned assets from unnecessary risks. A solid plan takes a multi-layered approach, combining various tools and tactics.
Tangible assets like real estate, vehicles, or business equipment are all vulnerable. Even financial assets, including retirement accounts, aren’t entirely immune. It’s vital to acknowledge the cracks in your asset armor; only then can you effectively shield them from internal and external threats.
The various Asset types and their associated risks
Real estate
This can include properties such as homes, commercial buildings, and land or what is commonly referred to as hard assets. For many individuals, their home is their most valuable asset. However, homeownership comes with its own set of risks, including weather-related catastrophes, illiquidity, legal and domestic disputes, property value fluctuations, and economic downturns. To mitigate these risks, it’s essential to have comprehensive property insurance, seek expert counsel for transactions, and consider utilizing legal structures such as LLC’s or living trusts to help shelter these hard assets.
In contrast to investing in hard assets, other types of real estate investments can also reduce your risks. For example, an investment in a mortgage note fund such as our Reliant Income Fund, offers the investor access to multiple and diversified real estate assets with limited risk. Since the investor is a limited partner in the fund, there is no personal risk associated with legal liability, and the investment itself can be reasonably liquid depending on the distribution option selected.
Business Interests
Ownership in entrepreneurial ventures comes with complex legal compliance and valuation risks, including business-related legal issues, economic downturns affecting topline revenue and profits, and liquidity risks. To protect business interests, it’s essential to seek legal counsel, establish legal agreements, maintain comprehensive insurance, and employ risk management strategies and diversification of business interests. For some, this may seem obvious, but not all entrepreneurs take the time to focus on protecting their ideas and business, as they fully focused on building a business or working in it.
Personal Property and Valuables
Personal property and valuables, such as jewelry and collectibles, are often overlooked when it comes to risk management. However, these items are susceptible to theft, damage, and depreciation. To protect these assets, it’s crucial to have high-value item insurance, secure storage, and periodic appraisals.
Effective Strategies to Protect Assets
Thankfully, there are many different strategies that can help protect your assets from risks. These methods can range from straightforward tactics like purchasing insurance to more complex setups involving trusts and business structures.
1. Diversification
Diversifying your investments is a key principle of asset protection. By spreading your wealth across different (and uncorrelated) asset classes, such as stocks, bonds, real estate, and commodities, you can reduce your exposure to any one particular market, sector, or economic cycle. This approach can help you weather economic downturns and minimize losses.
An obvious example is when an investor invests in a diversified pool of assets held in a fund. If a single asset in that fund (that owns many assets) were to lose some or all its value, this typically wouldn’t have a large impact on the overall fund returns and thus wouldn’t affect an individual investor to a significant degree. Investing a large percentage of your net worth in a single asset may result in outsized gains but it also puts “all your eggs in one basket” risking substantial losses should the market turn against you.
Diversifying across time horizons is also important, as having a portfolio of short-term, medium-term and long-term assets can help manage risk and improve portfolio performance. Setting up a financial plan across different time horizons can be extremely helpful in achieving your long-term goals.
2. Be adaptable
Adaptability includes acknowledging one’s limitations and actively seeking new perspectives or skills. High net worth individuals understand that while they have certain skills and experience, they don’t have all the answers and are willing to seek professional advice and guidance to refine and enhance their asset management plans. This willingness to learn and adapt is essential in today’s fast-paced and ever-changing financial landscape. For most people, achieving financial success is generally not a one-time achievement, but rather a continuous process that occurs over time.
3. Asset Allocation
To have a diversified portfolio, it is important to allocate your assets across various categories and asset classes. One such way to break your assets into broad groups may be as follows (although there may be crossover between buckets):
- Liquid assets: Easily convertible to cash, such as savings accounts, money market funds, and short-term bonds.
- Growth assets: Public and private equity, invested for long-term growth, such as stocks, real estate, and private equity.
- Income-generating assets: Producing regular income, such as dividend-paying stocks, bonds, mortgage notes and rental properties.
- Alternative assets: Private equity could count here as well but also think non-traditional investments, such as art, collectibles, and cryptocurrencies.
4. Business Entities: Creating a Legal Shield for Entrepreneurs
If you’re a business owner, it’s crucial to structure your business correctly to protect your personal assets. By establishing a separate legal entity for your business, such as a corporation or LLC, you can create a barrier between your personal and business liabilities. In many cases, if your business is sued, your personal assets are protected.
Limited Liability Company (LLC): An LLC is a popular choice for small business owners and entrepreneurs because it provides personal liability protection and offers flexibility in management and taxation.
Trusts: Trusts transfer assets to a separate legal entity, hindering creditors from reaching them in lawsuits. Different trust types exist (like revocable and irrevocable trusts), so it’s important to consult an attorney to choose the most appropriate one.
Family Limited Partnerships (FLPs): FLPs transfer assets within a family, usually with a reduced tax burden. Primarily for estate planning, they offer some asset protection.
5. Maintain Accurate Financial Records
Proper record-keeping isn’t just good business practice; it’s also an effective asset protection strategy. It’s important to always maintain detailed, organized and separate financial records for both your personal and business dealings. Accurate recordkeeping not only simplifies tax filings and fiscal management, but it strengthens your position in potential legal situations.
6. Seeking Professional Guidance
Asset protection strategies are complex, and the best approach for you depends on your individual facts and circumstances, risk tolerance, and financial goals. An experienced financial advisor can analyze your asset portfolio, identify potential risks, and develop a customized strategy that aligns with your financial goals.
It’s also wise to consult with an attorney specializing in asset protection and estate planning. They can offer personalized legal guidance and help you properly implement any strategies you choose to pursue.
7. Estate Planning
Creating a comprehensive estate plan can help protect assets for the next generation. Estate planning involves creating wills, trusts and power of attorney documents to ensure an orderly transition of assets in line with desired wishes, minimizing tax burdens as well as the potential for legal disputes.
Conclusion
Taking proactive steps to protect your assets from risks can offer invaluable peace of mind, knowing you have measures to safeguard the financial assets you’ve spent a lifetime building. At first glance, these strategies might seem complex or overwhelming, but seeking professional guidance (and managers) can make all the difference in simplifying the process and establishing a plan.
While PPR’s clientele consists of accredited investors and high net worth individuals, asset protection strategies aren’t just for the wealthy. And it’s not about just avoiding risk entirely, it’s about mitigating it, so you can enjoy the fruits of your labor without constantly worrying. Anyone committed to a stable financial future would be wise to keep these tools close at hand. Start by making a plan, talking to counsel, and consider putting your assets inside a Fortress of Solitude – where they’re safe from life’s curveballs.
Hopefully with this simplified and quick overview of asset protection, you can avoid some analysis paralysis. And if you have any questions or want to learn more about the investment options PPR currently has available to accredited investors, please schedule an appointment with our Investor Relations team.
