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How do I understand whether I am financially independent, and what does independence mean to me?
How do I understand the levels of investment and liquidity risk I am taking across my estate, and what levels should I be targeting?
Am I taking an holistic view of my personal financial planning?

Lawrence Mason, a Director at Saunderson House, recently shared the key considerations he helps his clients address in the BVCA Autumn Journal.

How do I understand whether I am financially independent, and what does independence mean to me?

A key concern for the majority of our clients is achieving financial independence; that point in time when they have achieved sufficient wealth that they can maintain their chosen lifestyle and fulfil all of their personal and financial objectives for the rest of their lives.

We have developed the specific financial planning expertise, and modelling tools, necessary to help those in private equity firms understand what financial independence means to them, from both a financial and a personal perspective. Importantly, we have the ability to help our clients set long-term financial objectives as part of an overall plan. This is particularly valuable to young private equity professionals who are receiving carry for the first time and are looking ahead into a distant future without necessarily understanding what that future could, or should, look like.

Such planning, therefore, informs decisions around how to allocate carry, what level of investment risk to take, fund participation and cashflow planning, and more widely a client’s thinking around such matters as liquidity, property, plans for their children and of course their own working lives. We believe that independent strategic thinking and planning is important to provide a baseline plan for our clients, which also then allows for scenario testing. We find this allows clients to make better and more informed life and financial decisions.

How do I understand the levels of investment and liquidity risk I am taking across my estate, and what levels should I be targeting?

We have found through experience that private equity professionals are generally taking high levels of investment risk through their investments into the firm’s funds, and their ongoing income, as well as future financial prosperity, is wholly linked to the firm’s investments. In addition, given the capital calls, and in particular up until that first payment of carried interest, private equity clients can therefore find themselves both ‘risk on’ and illiquid, which can be challenging for cashflow planning, notably for a young private equity professional.

With this in mind, we help clients understand (and potentially reposition) the levels of liquidity and investment risk they are taking across their financial
planning as a whole, and how that aligns with the levels they and their family are comfortable with, and that are appropriate for their stage in life and prevailing financial circumstances.

Importantly, this also helps inform decisions around carried interest when it is paid. This includes balancing additional opportunities to participate in funds and co-investments, with building a ‘core portfolio’ that is liquid and readily available, and typically carries with it less risk and volatility than interests retained within the firm.

Interestingly, when I speak to private equity professionals for the first time, and even when carry has been paid, their existing investment managers/advisors often assume a high appetite and capacity for risk. It is more important to: (a) understand the level of risk appropriate; and (b) if carry has now started to be paid – and our planning confirms there is no need to take speculative risks to achieve their objectives – start with the question ‘why take any risk at all?’

Am I taking an holistic view of my personal financial planning?

It is common to see personal financial planning being approached in a narrow, financial product-led way. We approach our clients’ planning holistically; the best decisions for individual areas of a client’s planning can only be taken with an awareness and understanding of the wider estate, circumstances and objectives.

This is about understanding all the various elements of a client’s financial situation (for example, across fund interests and shares, employed/self-employed income, property, cash, pension and non-pension vehicles, on and offshore interests and needs), how these align with a client’s requirements and their drivers and, importantly, what part they are playing what part they are playing in the client’s financial plan.

This form of big picture planning then needs to be supported by addressing the basics, and this involves advice on a range of topics such as: protection for the client and their family through wills, lasting powers of attorney and protection policies/assets; property decisions and debt management (taking advantage of leverage at favourable rates, together with debt repayment); using tax allowances for the whole family and indeed tax diversification (in the context of, for example, political uncertainty); and estate planning.

It is fundamentally important to start with a holistic view of a client’s planning (from a financial planning as well as an investment perspective), while ensuring all efficiencies are found and used. It is only with a combination of these that a client’s financial arrangements can be organised in the most productive and appropriate way.

If you’d like to speak to someone about your financial planning requirements, please get in touch.

About The Author

Lawrence Mason
Lawrence joined the financial services industry 20 years ago after reading Law at University. Following several years as the leading ...
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