Cannon Financial Institute

Contingency plan: Help your wealthy clients better manage risk

By definition, you are a financial advisor, not a risk manager. However, you know well enough that there is overlap between the two professions, and the wealthier your clients, the more important your risk-management guidance will become.

High-net-worth individuals will come to you with multiple houses, cars, jewelry, and all manner of assets - and they'll depend on you not just for advice, but for risk management. This has become even more important over the past several years, as the Great Recession left some investors exposed, and it reaffirmed concerns many Americans had about the economy and their personal wealth.

As Parker Beauchamp pointed out in an article for Wealth Management, "every asset is a liability," and risk management is a conversation you need to have with all your HNW clients.

Wealthy clients encounter certain risks
The need for risk management is there for every client, but it can be magnified for the high net worth among us for several reasons. Beauchamp explained that your wealthy clients often encounter risks related to their significant assets. These include:

  • Increased opportunity for loss - A wide range of assets, from properties to stocks and goods, increases your HNW client's risk of loss. The sheer volume here can actually be a hindrance, so make sure you are planning ahead for any possible negatives that could impact earning potential.
  • Unique assets - Some HNW clients have decided to invest in unique assets. For example, they might have an expensive wine or cigar collection, or they could have collected valuable art. Spend extra time accounting for their more specialized assets as you plan their wealth management strategies and evaluate risk management.
  • Mental hurdles - The wealthy often feel invincible. Their substantial assets feel more secure to them, and as a result they may not understand their true risk tolerance. You'll need to discuss their mental hurdles when you plan for risk management. Make sure they know the wrong choice can have a dire impact on their net worth.

How risk management benefits your clients
Having a high net worth doesn't make your client immune to risk. Instead, it means they have more to lose, according to Beauchamp. That being said, you should either act as a risk management consultant when advising your HNW clients, or recommend a professional to provide further assistance.

Risk management is an important step for any client because it can mitigate the damage. If your client has a plethora of assets, they'll need protection from liabilities. You can recommend certain insurance policies, low-risk investments, trusts and other wealth management strategies to provide protection. Ideally, the end result will be minimal losses should anything unfortunate occur.

Understand risk to become risk-oriented financial advisor
Knowing how and why risk impacts HNW clients is only the beginning. You will need to better understand risk in order to become a risk-oriented financial advisor. In an article for the American Institute of CPAs, Samuel Won, founder and managing director of New York-based Global Risk Management Advisors, Inc., detailed several steps that can help the process.

  • Outline the boundaries of risk - Your first step should be to talk with your HNW client about their risk parameters, Won noted. This includes their tolerance for certain investments, their assets' liquidity and their ability to withstand an economic downturn. Keep in mind that any review you perform will not last. A client's relationship to risk is fluid, and you need to revisit your assessment on a periodic basis.
  • Identify your client's risks - Next, you will want to identify all your client's risks. This is easier said than done. According to Won, many wealth management firms are lacking the proper risk management tools, like staff, systems and processes. Start there if you need to improve your own company's risk management capabilities. If not, consult with your client to analyze their assets, investments, overall portfolio and the current market. Locate and document their risks, then monitor those risks for the foreseeable future.
  • Redefine the investment strategy - It can be hard to tack risk management on top of an existing investment portfolio. Instead, it is much easier to start from scratch. This can be achieved by redefining your client's investment strategy. In some cases, the priority is on returns, explained Won. Advisors and their clients only want to see the rewards. You can be smarter by focusing on risk management. Create strategies where this is the priority. With the right tolerance and deterrents in place, your clients will be able to grow their wealth without worrying about substantial losses.

Bring risk to the forefront
For HNW clients, "risk" can be a dirty word. They may shy away from the idea, instead interested in the next big investment. This can backfire. You can bring risk to the forefront as a way to demystify the concept and better educate your clients.

By doing this, you'll have the ability to control your clients emotions. For example, a client who has never thought about risk in relation to their wealth management may panic at the idea of an economic recession. They'll come to you worried and afraid. A client who has a strategy built around effective risk management will know that they are prepared for whatever the market throws their way.

Money is emotional, investing is even more emotional and risk brings out the strongest emotions in all of us. Excel as a financial advisor by planning for these contingencies and protecting your high-net-worth clients for the long haul.

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