How to ensure that your clients retire with more money…and less risk
By Lisa LindsayMs. Lindsay is the executive director of the Private Risk Management Association (PRMA), an advocacy group for the high net worth insurance industry that elevates the advice given to high net worth consumers through education, thought leadership and peer group collaboration. Visit http://www.privateriskmanagement.org/
Financial advisors work diligently with their clients to ensure their retirement income strategy meets their overall retirement goals and objectives.
Yet, most advisors ignore the risk of unexpected loss to a client’s assets due to a non-existent or poorly structured personal risk management plan.
High net worth clients require custom tailored solutions and services geared toward their more unusual and sometimes unique personal risk exposures. High value properties in catastrophe prone areas; valuables and collections; employees such as caretakers; not-for-profit board participation; and high limits of liability require proper risk management to ensure appropriate protection.
Protecting your Client from Costly Consequences
When a personal risk management program is not in place or kept up to date, the consequences can lead to devastating losses.
For example, a recently retired client is settling into his new lifestyle and finally has time to sit on the board of the homeowners association for his primary residence. With everything going on, he has not taken time to understand the Directors and Officers Liability coverage afforded by the association and believes he has coverage under their personal umbrella policy.
Shortly after joining the board, the association is sued for discrimination for not approving the application of a potential new home buyer. He is part of the lawsuit.
As the lawsuit unfolds, the client is surprised to learn that the homeowners association has only minimal coverage limits in place and his personal umbrella policy, which was a company provided benefit, ceased at the time of his retirement. As the case progresses, the client is required to hire his own legal counsel and may have to liquidate investment assets to satisfy any settlements that are not properly covered.
Gaps, duplications and deficiencies in coverage can be uncovered in a personal risk management assessment and could have helped avoid the financial pain and major distraction suffered in this case.
“Simple strategies” to avoid costly consequences
1. Identify and work with specialists who can design and implement a personal risk management strategy tailored to the executive’s needs and lifestyle, including loss prevention recommendations and risk mitigation techniques.
2. Work with specialists who represent insurance carriers that offer specialized products. There are several known insurance carriers that have broader policy language and have the capacity to provide coverage for high value property and high limits of liability. These carriers design their policies and services to address the needs of affluent individuals.
Personal Risk Management Plan
A personal risk management plan provides financial security through the protection of physical assets and protection from the potential loss from unforeseen liability exposures. The proper plan includes: Defining objectives – what are the desired goals to achieve; lifestyle risk analysis– what is at risk and why; identifying and selecting risk management techniques such as insurance policies; implementing the chosen risk management techniques and monitoring the risk management program to ensure it continues to meet the identified goals and objectives.
A personal risk management plan helps individuals and families “live their lives” by proactively managing the risks associated with their lifestyle. Risk must be carefully identified and the solutions used to cover those risks will vary from the placement of insurance policies to the execution of risk mitigation techniques, such as catastrophe preparedness plans, low temperature monitoring and water shut-off valves.
Lifestyle Risk Analysis
One of the most important steps is to systematically identify risks and analyze loss exposures by evaluating an individual’s lifestyle. This can be effectively conducted by assessing the following four categories: people, places, things and structure.
Who are the people in their lives that impact their loss exposure or have information to assist in the diagnosis? These people can include: spouses / partners, children, parents, employees, tenants, financial planners, attorneys or CPAs.
- What places do they own and where do they like to go? What do they have at those residences? (cars, boats, horses, pets, etc.)
- Where do they like to travel? (domestic and/or international)
- How do they get there? (commercial or private plane/boat; owned, rented or chartered)
Understanding the properties they own and may visit provides insights into risk exposures.
What types of “things” do they like to do? What are their passions and hobbies?
- Are they collectors? (art, cars, antiques, etc.)
- Do they sit on boards? (for profit and nonprofit)
- Are they philanthropic? (host parties, loan property such as art or residence)
- Recreational activities – boating, skiing, hunting, etc.
- Do family members actively engage in social media? (cyberbullying)
A complete understanding of their activities provides insight about their level of risk and may require a deeper level of involvement when it comes to risk management.
What is the ownership structure of the identified assets? Are assets individually owned jointly or in the name of a trust?
Ownership structures can change over time. It is important to continually assess and understand the ownership entity to ensure that all parties are properly protected by risk management solutions.
When it comes to high net worth clients, pay close attention to the typical red flags that can help identify risk issues. These include:
- Properties in multiple states
- Properties in catastrophe areas (hurricane, wildfire, tornado, flood)
- Properties in Trust or owned by an LLC
- Acquisition of a new property or asset
- Gifting of assets to others (family members, etc.)
- Change in family status (marriage, divorce, birth, death)
- Change in family member status (retirement, children away at school, children leaving the household)
- Household staff (including caretakers)
- Hobbies involving horses, racing, or other high risk exposures
- High value collections (fine art, automobiles, memorabilia)
- Yachts/Aircraft (including fractional ownership and charters)
- Public profile
- Board participation (including nonprofits)
- Social media activity
- Visible assets exceed the personal liability limit in place
Advisors should help their clients understand the value working with a specialist to adopt a personal risk management strategy. Once implemented, the plan should be reviewed and updated regularly to make sure that it continues to meet their needs. It will pay dividends in the long run. The win-win strategy benefits all parties and also ensures your clients can live their lives with a little less worry and a lot less risk. ◊