Advising the Wealthy

2026 Curriculum CFA® Program Level III Private Wealth

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Introduction

This sixth reading covers some of the challenges high-net-worth individuals and their wealth managers often face, ranging from dual citizenship and global family considerations to managing concentrated asset positions like large privately-owned businesses.

Citizenship plays a pivotal role in determining an individual’s legal obligations, including tax liabilities. Affluent individuals frequently opt for dual citizenship or invest in countries offering residency and citizenship to secure long-term stability for themselves and their families. Legal frameworks worldwide have a profound impact on how assets are disposed of and estates planned. Due to potential jurisdictional conflicts and opportunities for optimizing tax through gifting, tax planning is an important consideration.

Additionally, entrepreneurs, business owners, and executives often encounter unique challenges stemming from their wealth being tied to, or concentrated in, one or a few enterprises. This reading will provide an in-depth examination of strategies to mitigate risks and monetize such concentrated positions of wealth. It will also touch upon the psychological biases that influence investment choices as well as issues related to family conflict resolution and succession planning.

Learning Outcomes

The candidate should be able to:

discuss and recommend appropriate citizenship, nationality, and legal residency approaches for private clients;
discuss and recommend appropriate private wealth management approaches that maximize the human capital, financial capital, and economic net worth of complex family situations;
discuss and recommend appropriate private wealth management approaches that maximize the human capital, financial capital, and economic net worth of entrepreneurs and business owners;
discuss and recommend appropriate private wealth management approaches that maximize the human capital, financial capital, and economic net worth of professionals, executives, and others.

Summary

Citizenship establishes an individual’s legal relationship with a specific country, encompassing rights, duties, and responsibilities. Citizenship can be acquired at birth or through descent, naturalization, or marriage. An individual may hold citizenship in multiple countries.
Tax obligations of an individual in a country may be based on the income earned or received within that country, the residence of the income earner in the country, or the citizenship of the individual.
Conflicts can occur between different tax systems in which each country seeks to tax income. Such double taxation issues can be resolved through unilateral foreign tax credit provisions or double taxation treaties (DTTs).
People can renounce citizenship for different reasons, such as obtaining citizenship in a country that prohibits dual citizenship or tax reasons.
Countries often charge an “exit tax” on citizens who renounce citizenship to compensate for lost tax revenue. A similar tax applies to those who change their tax jurisdiction in the same country.
There are several countries that offer residency through investments.
Different countries have unique legal frameworks, including civil law, common law, and Shari’a law, which affect wealth planning and the ownership transfer and disposition of assets between family members. International families encounter specific challenges in creating and recognizing legal documents across borders, including marriages and wills.
Key considerations in wealth planning around a divorce includes asset protection, fair property division, and financial stability.
Asset division can be influenced by various factors, such as community property versus separate property, prenuptial and postnuptial agreements, property types like real estate, fund commingling, and forced heirship rules.
Cohabitating couples in separate property systems and same-sex couples in non-recognizing countries lack the benefits available to traditional couples. Legal agreements can offer clarity and protection for both parties.
The main methods for transferring asset ownership in families are lifetime gifts and bequests in wills. Often, tax considerations influence the choice of legal avenues transferring wealth.
Utilizing tax-free gifts under periodic or lifetime exemptions can reduce estate tax, particularly if planned early. Tax-efficient gifting strategies also exist when gifts are taxed, especially if the donor pays the gift tax.
Business owners often have most of their net worth in their companies, making them asset rich but cash poor. Such a concentrated position in a privately held or publicly traded business is exposed to many risks, including systematic risk, unsystematic risk, liquidity risk, and, potentially, property-specific risk.
Owners of concentrated positions and their advisers need to address unique challenges in managing a concentrated position: tax implications from selling, lack of easy cash conversion, and mental biases.
Owners of concentrated positions often aim to liquidate a portion for risk diversification or to completely exit from the business. In closely held companies, existing shareholders usually lack the liquidity to purchase additional shares and facilitate the monetization of another owner’s stake.
Owners of concentrated positions and their advisers typically mitigate both the overall risk and the company-specific risk and create the liquidity that the owner seeks. Investment objectives for such concentrated positions have implications for taxes and wealth transfer.
Owners of concentrated positions and their advisers can employ goalbased planning to determine if selling or monetizing a concentrated position could achieve financial independence.
Selling a closely held business can result in different valuations based on the type of acquirer. Strategic buyers, who seek business, commercial and similar synergies, may offer higher prices than financial buyers. Employee or management buyouts (MBOs) are an option, but they often require the seller, the previous owners, to finance at least part of the purchase.
Equity monetization turns an ownership stake into cash without an outright sale, often avoiding the immediate payment of taxes, and includes taking out a line of credit, total return equity swaps, and prepaid variable forwards.
There are often several economically equivalent ways to hedge or monetize a concentrated ownership position. Tax regimes governing the taxation of financial instruments differ, which impacts after-tax wealth. Investors can reap substantial tax savings or reduce tax risk by selecting and implementing the form of a transaction that delivers the optimal tax result.
Managing a large stake in a family business goes beyond investments. Conflict in wealthy families can be managed by agreeing on shared values and responsibilities. Advisers should also help with succession planning and post-sale family dynamics.
To hedge a large investment in a single stock, there are two main alternatives: exchange-traded options and futures and over-the-counter (OTC) options, forward sales, or swaps. Each alternative has its own benefits and drawbacks.
Athletes and entertainers require tailored wealth management solutions to accommodate their brief, high-earning careers and prolonged retirements.

2 PL Credit

If you are a CFA Institute member don’t forget to record Professional Learning (PL) credit from reading this article.