The high net worth (HNW) and ultra high net worth (UHNW) population continues to grow, with a global UHNW population at a record high of 211,275, according to The Wealth-X and UBS World Ultra Wealth Report 2014.
Greater wealth offers these individuals more investments opportunities and heightened discretionary income, resulting in a web of assets, staff and advisors. But the flip side of every asset is liability.
If your client’s portfolio includes multiple residences, luxury goods and services, priceless collectibles or personal staff, insurance simply doesn’t cut it.
Jack and Jill’s Insurance Policies Aren’t Enough
Insurance is a necessary measure for safeguarding one’s net worth, but for HNW individuals, insurance policies alone don’t offer enough protection.
This is because HNW and UHNW clients face unique risks, such as:
- Potential for Loss: The HNW client may have an extensive collection of possessions including multiple cars, residences, yachts, luxury goods and services, and more. (The UHNW spend $15 billion annually on luxury apparel alone.) Because they have a loss potential that far surpasses normal policyholders, it’s easier for assets to be overlooked or underinsured. Risks threatening a client’s future earning potential are another common blind spot.
- Perceived Tolerance for Loss: Wealth, particularly quickly earned wealth, can create an illusion of impenetrability. Wealth management should be built on data, and not a client feeling financial secure.
- Unusual Assets: Access to exclusive products and experiences not available to the general public can result in niche assets such as memorabilia, unique collections or exotic pets. They can be difficult to insure, and are often under-insured unless an experienced underwriter is consulted.
- Complex Exposures: Wealth, and particularly fame, draw attention to individuals and make them more susceptible to liabilities and lawsuits in a plaintiff’s pursuit of personal financial gain. The UHNW must take added precautions to protect themselves and transfer risk whenever possible.
These risks create additional exposures that require a 360-degree strategy of protection around HNW clients.
Risk management is a broader approach to offsetting liability and risk. Risks can be identified with the help of checklists, in-depth interviews, site visits, asset inventories, activity logs and income streams.
Once identified, risks are ranked by their potential severity and relative likelihood of harming a client or his wealth. A risk management strategy is often three-pronged:
- Risk avoidance through lifestyle or behavioral changes.
- Risk transfer through legal contracts or insurance policies.
- Risk reduction through loss control or safety engineering.
In short, risk management is more comprehensive than insurance, and is tailored to the unique lifestyle and liabilities of the client.
Risk Management—a Critical Element of Wealth Management
The goals of risk management and wealth management strongly overlap. As a result, I believe risk management is an important component of any responsible and balanced wealth management portfolio.
Why? Risk management:
- Safeguards who can touch client assets. Employees are an easily overlooked, and potentially dangerous, blind spot for HNW clients. A risk management consultant will ensure any individual who handles a client’s possessions are properly vetted and managed.
- Shields wealth. A well-devised risk management strategy will outline the responsibilities of all parties handling client assets, and can hold them accountable should something go wrong.
- Minimizes losses. In the case of a claim, lawsuit or other issue, a proactive risk management strategy will have minimized losses, protecting client wealth.
Ultimately, the recommended strategy should be uniquely tailored to your client’s lifestyle. Full disclosure and transparency with a trusted risk management consultant will ensure no blind spots remain and all vulnerabilities are exposed.
If your client needs risk management, remind them that the more they have, the more they stand to lose. And remember: Risk management’s aim is not to burden or restrict. In fact, active risk management will free your clients to pursue the lifestyle they want without worry, and while responsibly planning for the future.
Parker Beauchamp is a fifth-generation insurance professional. He serves as CEO and president of INGUARD. For more information, connect with Parker on LinkedIn, or visit www.INGUARD.com.