Managing Risk in an Era of Rising Wealth

Written by Ray V. Padrón, CPA, CFP®, CIMA® on January 1, 2016

In today’s age of ever-increasing wealth, litigation, and exposure to technology, wealthy families are required to spend more time evaluating the risks in their lives in order to ensure they keep what they have worked so hard to accumulate — something we call wealth preservation.

Everyone is interested in wealth enhancement and a large part of what we do for our clients through the Brightworth Global Investment Solution does just that. What most people do not know is that part of the process that makes our investment solution successful is our focus on the wealth preservation aspect of maintaining assets through risk management.

As individuals progress through the stages of life, the financial and personal risks they confront enlarge in number, complexity and financial severity. Just like a well designed portfolio, our lives need to have wealth preservation “techniques” in order to ensure that all the life enhancement activities and assets are protected from the threats they expose us to. We need to review our Wealth Preservation Plan regularly to ensure that any risks that creep into our lives are appropriately dealt with. The wealth preservation process for an individual or family includes several steps: Risk Identification and Assessment, Risk Mitigation, and finally Risk Transfer.

Step 1: Risk Identification and Assessment

Risk Identification includes assessing exposure in the major risk areas such as Cash Flow (i.e. loss of income, health care expenses), Property (i.e. real estate, autos, jewelry, trademarks), Personal Security, and Personal Liability (litigation risks from accidents, board of directors activities). It is important in this stage to identify the risks, make an assessment of the level of exposure, and evaluate the adequacy of prevention
and mitigation efforts as well as insurance coverages currently in place.

Step 2: Risk Mitigation

Risk mitigation is the process of “doing what you can to eliminate or minimize an exposure.” Not all risks can be transferred (through insurance for example) and because of the costs involved, it makes sense to take actions to reduce your exposure first before determining if and to what extent the remaining risk can be transferred. Risk mitigation techniques fall into four broad categories (physical security, virtual security, behavior modification, and legal structures). The “legal structures” category of risk mitigation is one of the most important for wealthy families, but is also one of the most ignored. The use of legitimate legal tools such as family limited partnerships, trusts, and proper asset titling can be powerful protection against a litigious society.

Step 3: Risk Transfer

Once the risks have been identified, assessed, and mitigated, the remaining risks should be addressed through insurance. Insurance is designed by definition to cover low probability, high impact events. The cost and risk of occurrence is shared through diversification by a pool of participants in the insurance plan. The inherent complexities of insurance require an expert to determine if the true risks are adequately covered. A detailed reading of policy terms is required. For example, in the area of personal watercraft, some policies state that individuals who have used a jet ski three times are “experienced” and therefore are excluded from coverage. Scary thought.

Now more than ever, we are confronted with a perplexing array of risks challenging our financial assets. The management of those risks requires a comprehensive and integrated approach which will include coordination by your Wealth Advisor with your CPA, insurance agents and attorneys.