When many people think about their risk exposure, they often focus on how much risk they’re willing to take on in their portfolio or how much risk an individual investment may carry. But for high-net-worth investors, managing risk exposure goes beyond your portfolio and requires taking a look at your life holistically. Identifying and assessing risk factors to your wealth — and putting steps in place to help prevent losses to personal assets — requires a holistic viewpoint.
“The three Ps” — personal, professional, and passion — are what Bill Blackburn, Vice President – Wealth Advisor at Wells Fargo Private Bank, uses to help get clients thinking about their risk exposure.
“When you look at your situation personally and professionally, and then what you’re passionate about, you can begin to see risks that are under the surface,” he says.
Getting personal: Where’s your risk exposure?
When identifying the risk exposure in your personal life, consider possessions that are unique and valuable, Blackburn says. “Working with your wealth manager, you can look through your balance sheet and understand the nature of your assets — an art collection, jewelry, or other valuables. High-net-worth individuals also tend to have unique homes,” and that may mean you should consider coverage beyond the standard homeowners insurance policy.
But the personal category goes beyond possessions; defining your family goals is also important, says Nancy Anstoetter, Vice President – Wealth Advisor at The Private Bank. You may find your most important goal has more to do with family continuity than with money. “What is the family most afraid of? That may be financial, but it may not be,” she says.
She urges families to think about what they want to accomplish and where they want their wealth to take them — not just during their lifetime, but beyond. “How will they divide the wealth up? Will charitable donations be part of the estate plan? Feelings of inequity can create conflict, so that’s a risk that you should consider mitigating as you plan,” she says.
Think of “The three Ps” when identifying and assessing risk factors to your wealth — personal, professional, and passion.
Your professional life and passion projects
Your profession can be an especially important consideration if it brings certain risks. “I work a lot with entrepreneurial families, and occasionally I’ll find the business owner is the trustee on the company’s employee benefits plan or pension plan,” Blackburn says. “That opens you up to many different risks if participants aren’t happy with the plan. As we explore possible steps to help minimize the potential financial and reputational risks, it may make sense for you to move out of a role. In the case of being a trustee on a retirement plan, you can’t; but you could hire a third-party service to manage it.”
Finding ways to help protect yourself as you pursue interests outside of work can also be important. When Blackburn asks clients what they are passionate about, he says the discussion often centers on hobbies and activities that pose risks. “It could be something as simple as: If you’re a bicyclist, are you wearing a helmet? If you are volunteering in exotic locations, have you researched potential customs or safety precautions to observe? Or, if you’re on a board, do you have appropriate officer and director insurance coverages?”
Risk management tips
Once you’ve identified your risk exposure and your goals, you can take steps to help mitigate and address those risks. Insurance types and levels should be sufficient to cover any potential financial losses, but Blackburn says it’s also important to think about protection in terms of document storage and home security. “We’ll ask clients about where they keep important documents at home, or if they have a safe deposit box,” Blackburn says. “You can take digital pictures of important documents and store a copy electronically and keep the originals in a safe place.”
Also consider technological issues around risk management, such as backing up digital files. “How are you backing up your computers at home? If you have a business, do you have backup in place for that?” Blackburn says. Protecting your wealth through technology isn’t just about financial assets, but also about those priceless treasures, such as photographs or a treasured digital music collection gathered over time.
While technology can act as a form of protection, it also carries potential risks worth addressing, Blackburn warns. “Today, it’s difficult to be anonymous, and for folks with a fairly high level of wealth, it’s hard to disguise that,” he says. Criminals can be technologically savvy enough to connect the dots of different data points and view unprotected social media accounts to find targets for scams or break-ins. “It’s important for clients to understand the risks and then discuss some safeguards to help protect their identity and assets online,” he says.
There are an unlimited number of things families can be concerned about, Anstoetter says, but thinking through your specific issues is the best way to prepare. “Each family has their own set of goals and priorities,” she says. “But it’s really important to understand what your goal is. Then you can assess the risks, look at the probability of that risk happening, and also consider the magnitude of that risk.”