Opportunities in stock market sell-offs attract wealthy investors.

• Tax savings and estate planning were viewed as opportunities by clients of wealth advisors due to the decline in stock prices, according to wealth advisors.
• Reducing their stock holdings is a shift that wealthy investors and family offices have already begun as part of a broader move from public to private markets.

The original article was published in CNBC's Inside Wealth newsletter with Robert Frank, providing a weekly guide for high-net-worth investors and consumers. To receive future editions, subscribe and have them delivered directly to your email inbox.

According to wealth advisors, wealthy investors and family offices avoided stocks before market swings this week, but many saw the decline in prices as a chance for tax savings and estate planning.

Wealth managers and private banks report that their clients have been decreasing their stock holdings for more than a year as part of a broader trend towards private markets due to recent worries about the overvalued tech industry.

Family offices have a larger percentage of their portfolios in private equity (35%) compared to equities (28%), according to a UBS family office survey. On the other hand, a Deloitte survey revealed that family office holdings of equities decreased from 34% to 25% from 2021 to 2023, while their private equity increased from 22% in 2021 to 30% in 2023.

Despite the S&P 500 and Nasdaq declining by 3% on Monday, wealthy investors remained calm and did not rush to buy, according to several advisors. They were left with many uncertainties.

"Sean Apgar, partner and co-head of portfolio and wealth advisory at BBR Partners, stated that the most frequent inquiry from clients was 'What's going on?' He explained that this was driven by curiosity rather than any specific objective."

Apgar stated that the clients advised by BBR, who typically have investments worth hundreds of millions or billions, do not react to short-term market events due to their long-term investment horizons. However, they expressed a desire to be informed about market movements, the Japanese carry trade, recession fears, and rate cut odds. Despite this, their investment plan remains unchanged.

"Clients should relax and be content with the investment plan we established with them previously, knowing that volatility and corrections may occur," Apgar advised.

Last Friday and Monday, a decline in prices provided an opportunity for affluent investors to utilize tax advantages and gift planning strategies.

J.P. Morgan Private Bank's head of the financial institutions group and U.S. family office practice, William Sinclair, stated that an increasing number of clients are utilizing "separately managed accounts," which are private accounts designed to hold a specific set of assets or stocks. With separate accounts, clients can easily sell stocks that have declined in value and realize losses, which they can then use to offset capital gains from their winning stocks, a process known as "tax-loss harvesting."

Wealthy investors are selling Big Tech stocks at a loss, taking advantage of tax benefits and later buying back the stocks to maintain their position.

Sinclair stated that tax loss harvesting strategies have been the largest inflows for taxable clients.

Many wealthy investors are taking advantage of the current estate and gift tax rules to give away the maximum amount before the expiration of the gift and estate exemption amount at the end of next year.

Giving away stocks that have decreased in value provides more benefits, as it enables investors to give more stock within the tax-exempt limit.

"If your stock, originally worth $100, is now valued at $80, you can transfer the lower value to the next generation, assuming the assets will appreciate again in the future, according to Apgar. This allows you to take advantage of the depressed values. Tax advisors are generally excited about such environments because they present new opportunities."

Corporate founders and top executives are more sensitive to recent bouts of volatility due to the large portion of their wealth tied up in one company stock. Advisors can help them structure complex hedges, such as variable prepaid forwards and exchange funds, to dampen the blow of big stock declines. The stock decline of the past week highlighted the benefits of "collaring" structures to many founders and CEOs.

"UBS Wealth Management U.S. advises clients with concentrated stock positions, and Jennifer Povlitz, division director, stated that people in C-suite roles understand that their job and career will revolve around the stock. Therefore, financial planning must be taken into account."

Despite the S&P 500's 10% increase this year and its 24% gain in 2023, ultra-wealthy investors and family offices are continuing to allocate more funds into alternatives, particularly private equity. Private companies are perceived as more stable and profitable in the long run compared to equities, especially after events like Monday. Additionally, investors can have a greater influence on management through direct ownership stakes in private companies.

Geoffrey von Kuhn, an advisor to several large family offices, stated that since most family offices are heavily invested in alternatives, hedge funds, PE, and real estate, they don't frequently shift their investments.

Family offices are shifting their investments to long-term options with lower volatility, as stated by Richard Weintraub, head of the Americas family office group at Citi Private Bank. Additionally, private equity and venture capital are not the only trends among family offices; they are also engaging in direct deals to acquire stakes or control of private companies.

"Weintraub stated that larger family offices, with a capital size of $10 billion or more, are investing in operating companies that they can keep indefinitely and pass down to future generations, similar to the Buffett model."

The stock swoons of the past week "strengthened the notion of transitioning to private investments."

Family offices are still ahead of high-net-worth investors in private markets and alternatives, according to Michael Pelzar, head of investments at Bank of America Private Bank.

"High-net-worth investors are under-allocated to alternatives, according to Pelzar. However, he believes that the current volatility will encourage them to diversify their portfolio further. Pelzar predicts that after this week, there will be more openness to alternatives, including private equity and real estate."

High-net-worth investors' biggest concerns regarding the overall investing environment are geopolitical risks and fiscal spending, according to advisors. Jimmy Chang, CIO for Rockefeller Global Family Office, stated that the most frequent question clients ask is not about stock market volatility but about the effects of government debt and deficits.

He stated that they desired to understand the tax planning implications, as well as the economy and market effects.