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How to Build Generational Wealth
Discover strategies for building, preserving, and transferring generational wealth. Learn how EP Wealth financial planners help families set a plan...
Explore how high-net-worth individuals can balance liquid and illiquid assets to support flexibility, long-term growth, and legacy planning. Get guidance from EP Wealth financial advisors.
Balancing Liquid and Illiquid Assets in a Wealth Portfolio
A well-constructed wealth portfolio goes beyond choosing investments based solely on performance potential. For high-net-worth individuals and families, striking the right balance between liquid and illiquid assets is key for aligning financial flexibility with long-term objectives.
While liquidity allows for adaptability and access to funds, illiquid investments can offer diversification and contribute to legacy planning. Understanding how both asset types function within a broader strategy will help guide wealth management decisions that support your personal and financial goals.
What Is Liquidity?
Liquidity refers to how easily an asset can be converted into cash without significantly affecting its value. Highly liquid assets include cash or cash equivalents, marketable securities such as publicly traded stocks and bonds, and short-term government instruments.
In contrast, illiquid assets are more difficult to sell quickly and may present challenges in determining their value. Examples of illiquid assets include private equity and venture capital, real estate and investment properties, and collectibles, art, or interests in closely held businesses.
While liquid assets provide flexibility for meeting short-term needs, illiquid investments can offer potential benefits such as long-term growth, income generation, and strategic tax planning.
How Much Liquidity Is “Enough”?
There’s no universal benchmark for liquidity. For affluent households, the ideal level depends on a combination of personal and portfolio factors, including:
- Portfolio size and allocation: Larger portfolios may support a higher portion of illiquid assets without sacrificing flexibility.
- Income sources: Consistent cash flow from business operations, dividends, or real estate may reduce the need for liquid reserves.
- Spending goals: Philanthropic commitments, large upcoming purchases, or legacy gifting can affect liquidity needs.
- Life stage: Retirees or those nearing retirement may prefer more liquidity to support lifestyle transitions.
EP Wealth takes a personalized approach to portfolio management, aligning your liquidity strategy with your financial situation and long-term goals to create a firm foundation for successful wealth management.
Unlocking the Value of Illiquid Assets
While illiquid assets may present challenges in access and valuation, they can offer unique benefits in the right context.
Growth and Diversification
Certain illiquid investments, like private equity or direct real estate, can add diversification beyond traditional stocks and bonds. These assets may be less correlated to public markets, potentially helping to manage volatility.
Limiting Redemption Risk
Illiquid investments are intended to be long-term investments. Managers of illiquid investments may retain control over share liquidation, giving the manager more control over which holdings are sold and when to fulfill redemption requests. By limiting redemptions, managers may avoid selling strong assets during unfavorable market conditions.
Estate and Legacy Planning
Illiquid holdings such as closely held businesses or legacy properties may play a central role in multi-generational wealth planning. Proper structuring can support long-term family or philanthropic goals.
Tax Planning Opportunities
For those subject to higher tax brackets, strategies involving illiquid assets, including charitable remainder trusts or intrafamily transfers, may offer tax efficiencies worth exploring with professional guidance.
Risks of Over-Allocation to Illiquid Assets
Over-allocating to illiquid assets can create financial friction, especially when unexpected needs arise. These assets may offer long-term growth or diversification, but they also come with distinct challenges, including:
- Limited access to capital – Converting illiquid investments to cash can take time, involve transaction costs, or require selling at a discount in unfavorable market conditions.
- Complex valuation – Assets like privately held businesses, real estate, or collectibles can be difficult to value accurately, making it harder to assess your portfolio's true financial position.
- Lack of a defined exit strategy – Without a clear plan for liquidation or succession, investors may find themselves committed to assets longer than intended.
Strategies for Balancing Liquidity
There’s no one-size-fits-all framework, but several approaches may help align liquidity with long-term goals.
Tiered Liquidity Framework
Organizing assets into tiers based on their level of liquidity and intended use can help address short-term needs while supporting future opportunities:
- Tier 1: Cash and equivalents for immediate needs
- Tier 2: Marketable securities for near-to mid-term flexibility
- Tier 3: Illiquid assets for long-term growth or legacy purposes
Rebalancing and Stress Testing
Periodic reviews can help assess how different market or life scenarios might impact liquidity. This might include modeling how a market downturn, significant capital needs, or delayed asset sales could affect overall financial health.
Exit Planning for Illiquid Holdings
A clear exit strategy can help improve flexibility and align timing with broader objectives. This is especially true for complex holdings like businesses or real estate.
When to Revisit Your Liquidity Strategy
Life and markets change. That’s why liquidity planning should be a dynamic part of your financial approach.
Situations that may prompt a reassessment include:
- A shift in income (e.g., business sale, retirement, inheritance)
- A new investment opportunity requiring accessible capital
- A major life event (e.g., marriage, divorce, relocation)
- Economic shifts or increased market volatility
As your life and financial priorities evolve, regular check-ins with an EP Wealth advisor can help keep your plan on track.
Integrating Liquidity with Broader Wealth Goals
Liquidity decisions shouldn’t exist in a vacuum. They’re deeply tied to your investment strategy, tax positioning, estate plans, and charitable goals. At EP Wealth Advisors, we support clients in building portfolios that reflect their complete financial picture.
Whether evaluating the tradeoffs between growth and flexibility or coordinating liquidity with philanthropic giving, our financial planning professionals take a holistic approach to wealth management. Contact an advisor near you to discuss your needs.
DISCLOSURES
- EP Wealth Advisors, LLC. is registered as an investment advisor with the SEC and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the advisor has attained a particular level of skill or ability.
- Request an appointment with an EP Wealth Advisor when you have a minimum of $500,000 in investable assets – which includes qualified retirement plans (IRA, Roth IRA, 401(k), taxable brokerage, cash (savings / checking) and CDs. Investable assets do not include your home, vehicles, or collectibles.
- Hiring a qualified advisor and/or financial planner does not guarantee investment success, and does not ensure that a client or prospective client will experience a higher level of performance or results. No guaranty or warranty is made that any direct or implied results or projections being represented here will be met or sustained.
- The need for a financial advisor or financial planner and/or the type of services required are specific to the uniqueness of each individual’s circumstances. There is no guarantee or warrantee that the services offered by EP Wealth Advisors, LLC will satisfy your specific financial services requirements. Services offered by other advisors may align more to your specific needs.
- Information presented is general in nature and should not be viewed as a comprehensive analysis of the topics discussed. It is intended to serve as a tool containing general information that should assist you in the development of subsequent discussions. Content does not involve the rendering of personalized investment advice nor is it intended to supplement professional individualized advice.
- EP Wealth Advisors (“EPWA”) makes no representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information presented. All expressions of option are subject to change without notice.
- All investment strategies have the potential for profit or loss. Different types of investments and investment strategies involve varying degrees of risk, and there can be no assurance that any specific investment strategy will be suitable or profitable for a client’s portfolio. The risk of loss can never be eliminated even if working with a professional.
