Total Wealth Risk Management for Uncertain Times

This article was originally published in Wealth Management Magazine.

Imagine that you’re camping at a lake that periodically floods. Do you camp close to the shore, but risk the rising waters? Or do you camp far away from the shore, but miss out on the lake experience?

Here’s a better answer: stay on a boat. The water level can rise and fall, and you float right along with it.

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When advisors talk about risk management, we often hear about “conservative portfolios” and “plans with high probabilities of success.” In my 25+ years advising ultra-affluent clients, I’ve come to appreciate that true risk management is much more complex than what’s communicated to your average investor, and yet at the same time it is much simpler.

At the end of the day, risk management is about building a boat—when the water level rises, do you float along with it, or do you end up underwater? Simply put, it’s about identifying financial instruments that go “up” when something about your portfolio or life is “down.” Here are a few practical examples:

1. Inflation-protected bonds: many investors, particularly retirees, worry about how high inflation could erode the spending power of their wealth. Inflation-protected bonds, such as TIPS, can help nullify this risk.
2. Treasuries: when markets crash, investors tend to pile into treasuries – this phenomenon is called the “flight-to-quality.” As a result, the value of short-term treasuries tends to go up when equity markets go down.
3. Cash and short-term bonds: during their wealth building years, many people rely on their paychecks to fund monthly expenses. Here’s the problem—most people are at higher risk to lose their jobs when markets crash, which is the worst time to sell from a portfolio to cover short-term needs. A reserve of cash and short-term bonds can provide funding for immediate needs so an investor can take the time needed to find a new job while also staying invested in the markets.
4. Life insurance: the death of a family member can be financially devastating for families with a single income earner. Life insurance offsets this risk—it triggers a payout when an income earner dies, which helps replace the lifetime value of the lost future career earnings.
5. Insurance, in general: right now, many investors are focused on economic risk and market uncertainty. But what happens if a client becomes disabled, is subject to a personal/ professional liability claim, or experiences major property damage while markets are down? They may find themselves selling equities at a discount to address these needs. Insurance addresses personal risks, which ultimately bolsters confidence in the portfolio by helping people stay invested when the unexpected happens.

Ultimately, a successful financial strategy requires a “total wealth” approach to risk management. It should ensure that each client’s portfolio, reserves, properties, private assets, insurance, and wealth management products work together so that their financial success is as robust to the unexpected as a boat is to changes in the water level. The next step is finding a technology solution to help you deliver this approach to each and every client.

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