Wealthy Investors Find Opportunities in Stock Market Sales

A version of this article first appeared in Vscek’s Inside Wealth newsletter with Robert Frank, a weekly guide for high-net-worth investors and consumers. Registration to receive future editions directly in your inbox.

Wealthy investors and family offices avoided investing in stocks ahead of this week’s market swings, but many saw the price decline as a tax-saving and estate-planning opportunity, wealth advisers say.

Private banks and asset managers say their clients have been reducing their stock holdings for more than a year, part of a broader shift from public to private markets amid recent concerns about an overheating technology sector.

According to a UBS survey of family offices, family offices have 35% of their portfolios in private equity, the largest of any asset class, compared to just 28% in stocks. A Deloitte survey found that family offices’ equity holdings fell from 34% to 25% from 2021 to 2023, while their private equity jumped from 22% in 2021 to 30% in 2023.

When stocks plunged Monday, with the S&P 500 and Nasdaq down 3%, wealthy investors didn’t panic or rush to buy, according to several advisers. They had a lot of questions.

“The 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 ultra-wealthy clients. “It was more of a curiosity thing; there was no real reason to act.”

Apgar said the clients advised by BBR, most of whom are worth hundreds of millions or billions, don’t react to short-term market events because of their long-term investment horizons. But they wanted to be informed about market movements, the Japanese carry trade, growing recession fears and the likelihood of rate cuts. For his clients, their investment plan is still their investment plan.

“The best thing clients can do right now is sit back and feel good about the investment plan we put in place with them a long time ago, with expected volatility and corrections along the way,” Apgar said.

The price declines on Friday and Monday also provided opportunities for wealthy investors to take advantage of tax breaks and gift-giving strategies.

William Sinclair, head of the financial institutions group and U.S. family office practice at J.P. Morgan Private Bank, said a growing number of clients have so-called “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 on their winning stocks, known as “tax-loss harvesting.”

With some Big Tech stocks down 15% or more in the past month, wealthy investors are selling at a loss, reaping the tax benefits and buying back the shares later to maintain their positions.

“For taxable clients, the largest inflows have been into tax-loss harvesting strategies,” Sinclair said.

Others are using the price swings for estate planning. Under current estate 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 working to give away as much as they can before it expires.

Donating stock that has declined in value has greater benefits, as it allows investors to donate a larger amount of stock within the exemption amount.

“Let’s say you have 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 appreciate again,” Apgar said. “So you’re taking advantage of depressed values. Tax advisors are generally excited about these environments because they open up new opportunities.”

A client group most susceptible to recent bouts of volatility are corporate founders and senior executives. Because they often have a large portion of their wealth tied up in a company’s stock, advisors can help them structure complex hedges, such as variable prepaid forwards and exchange-traded funds, to help cushion the blow of big stock declines. Last week’s stock decline highlighted the benefits of so-called “collaring” structures for many founders and CEOs.

“The people in these roles, in the C-suite, know that their work, their careers, are going to be focused on stocks,” said Jennifer Povlitz, division director at UBS Wealth Management US, which advises many clients with concentrated stock positions. “So the financial planning part has to be taken into account.”

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 shift more of their money into alternatives, particularly private equity. Many see private companies as more stable and profitable over the long term than stocks, especially after days like Monday. And they can have a greater impact on management with direct stakes in private companies.

“Most family offices are so invested in alternatives, hedge funds, PE and real estate that they can’t move their investments anyway,” said Geoffrey von Kuhn, an adviser 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 shifted their money toward long-term investments that can grow over decades or generations, with less volatility. Along with private equity and venture, the big trend among family offices is direct deals to buy stakes or control of private companies.

“The larger family offices, so $10 billion-plus, are investing capital in operating companies that they can own in perpetuity and pass down from generation to generation,” Weintraub said. “Like building the Buffett model.”

He added that last week’s stock market crash “has reinforced the case for moving toward private investment.”

Michael Pelzar, chief investment officer at Bank of America Private Bank, said high-net-worth investors are still playing catch-up with family offices when it comes to private and alternative markets.

“In general, I think high net worth investors are under-allocated to alternatives,” Pelzar said. “We see that [volatility] as a catalyst for high net worth investors to continue to grow their portfolios. I think after this week there will be more open-mindedness when it comes to alternatives, both in PE and real estate.”

Advisors say that when it comes to the overall investment environment, high-net-worth investors’ biggest concerns are geopolitical risks and fiscal spending. Jimmy Chang, CIO of Rockefeller Global Family Office, said the most common question clients ask is not about stock market volatility, but about the impact of government debt and deficits.

“They want to know the implications for tax planning and also for the economy and the market,” he said.