ELITE ADVISOR BEST PRACTICES
Family Office Risk Management
Five ways advisors can use insurance knowledge to strengthen client relationships
By Scott Justice
- Family office managers may not realize the broad range of exposures that can threaten their employer’s assets and legacy.
- You don’t need to be an insurance expert to help your clients and business colleagues become better aware of the risks they face as well as the solutions at their disposal.
- Family offices value vetted relationships and networks. The more plugged in you are, the more indispensable you become.
Much like financial advisors, not all family offices operate in the same way. Some solely address the personal needs of a family, some operate independently as a business and others blend these approaches. Yet regardless of the structure, all family offices can face serious consequences if an unexpected event puts the family’s assets or reputation at risk. Typically these situations might stem from a poor investment decision or an estate planning oversight; however, there are countless examples of losses that occur due to external circumstances. Consider the following:
- A family’s unoccupied vacation home was destroyed after a pipe burst and the leak went undetected for two weeks.
- After a matriarch’s death, the family decided to sell her multimillion-dollar art collection, only to have it damaged during transit to the auction house.
- A family was hosting a charity gala at their primary residence. During setup, a worker slipped in the pool area, sustained severe injuries and sued for seven figures.
Insurance as a wealth management tool
As wealth grows, so do the complexities regarding how it should be protected. Following are five key opportunities for advisors to introduce an upgraded approach to insurance:
1) Introduce an independent specialist.
If you work with family offices and have not heard your client mention a personal property casualty insurance relationship, then step in to forge a connection between the office and a trusted independent insurance agent. Choose an agent who has extensive experience managing the comprehensive and fluctuating needs of ultra-high-net-worth families. Surprisingly, the majority of successful individuals and families unwittingly outgrow the capabilities of their insurance providers. Those who identify this disconnect before a substantial loss occurs can potentially safeguard family wealth for generations to come.
A skilled independent agent will start with a comprehensive “needs assessment” based on information gathered from personal discussions with clients. In addition to physical assets, family circumstances, travel frequency and other factors can contribute to personal risk. Agents must consider everything and design a customized insurance program with robust, unbiased solutions for their clients.
2) Connect the residential dots.
Families who own multiple homes may insure each home in different ways; people typically use local providers and resources. However, this approach can lead to gaps in overall property protection. In the event of a claim, the underlying coverage may not be as adequate as expected.
In addition, some families prefer property ownership structures involving an LLC, LLP or trust. If the underlying policy is not worded appropriately, protection could be compromised. While the insurance agent ultimately offers professional assistance with homeowners’ insurance decisions, you can proactively raise some of these commonly overlooked concerns.
3) Remind families of our litigious society.
Insufficient liability insurance is one of the leading threats to wealthy families, and unfortunately those with perceived “deep pockets” are more likely to be targeted with claims of personal injury and property damage. Only a select few insurance providers can adequately address the circumstances that affluent family members face, including a need for higher umbrella policy limits ($100 million as compared with the average insurance provider limit of $5 million). Equally important is the availability of coverage for scenarios that aren’t commonly faced by the average household, such as lawsuits brought about by domestic staff, risks stemming from sitting on the board of a not-for-profit organization and protection for incidents that occur while out of the country.
4) Help families protect their passions.
Established family offices are likely to have at least one relative who collects fine art, estate jewelry or other valuables. As wealth transfers to the next generation, these possessions can also change hands to heirs who are less knowledgeable about their protection or who wish to liquidate the items and replace them with new assets that align with their own interests, such as contemporary art, collector cars or wine. Family offices may be extremely diligent about tax and estate considerations, but as a savvy advisor, you can help ensure that family offices also contemplate physical risks that can threaten long-term value.
Families may also own high-value assets tied to their hobbies, such as yachting or competing in the equine circuit. All of these pastimes present unique risk exposures that can be addressed through insurance and/or proactive loss mitigation practices.
5) Recognize the needs of the business structure.
Although some family offices may have first been established as personal ventures, ultimately they are business structures that require appropriate protection. Insurance coverage is available to address circumstances such as business property ownership and liability, online/cyber threats, employee benefits and liability, trustee activity, and accident and/or health concerns.
Insurance is a critical part of the personal wealth management puzzle, yet it’s just one of the core disciplines that family offices depend upon to meet the ongoing demands of their employers and secure the future of each family member. Wealth advisors are in a highly advantageous position since your daily efforts put you in contact with a multitude of specialists in real estate, estate planning and other relevant industries. By investing in your personal network, you inevitably invest in yourself as well.