We live in a world fraught with risk. Almost no activity is "risk free" and a prudent investor knows that greater risk does not always mean greater reward. I believe successful families have a duty to be well educated on the risks they are exposed to in order to determine which are acceptable and which must be addressed. Here are three areas of risk many successful executives often overlook.
When most people first think about financial risk, they typically think about protection from loss due to market volatility. In reality, that is just one of the many financial hurdles that faces them on a daily basis. A conversation of risk should involve market changes but must extend far beyond the ups and downs of daily market activity. What good are incremental portfolio returns if massive preventable wealth transfer taxes are left unaddressed? Through efficient estate structures and utilizing creative planning vehicles such as Grantor Trusts or Irrevocable Life Insurance Trusts, a family could be shielded from massive tax exposures that if left unexplored could have devastating multigenerational repercussions.
Another area of risk is the very fact that your success or public image could make you the target of a frivolous and/or fraudulent lawsuit. Many executives recognize this truth but are unaware of ways to hedge the threat. Here's a great way to start: When was the last time you evaluated your liability insurance, not just in terms of limits but specifically what the policy will cover? If you become the target of a frivolous lawsuit, simply defending yourself and your family can become very costly. Ensuring you have the proper protections in place can mean the difference of you eating those legal fees yourself or having that risk offset by an insurance provider. Often times these protections can be added to your existing liability insurances, it is just a matter of securing the right coverage.
Lastly, during the most recent financial meltdown of '08, the topic of "black swan" events was front and center. While a true black swan is an event you could not have known to exist, this does not mean you cannot be prepared for the next. Always remember that economic and market events are out of our control but the way we prepare our assets for such events is well within our grasp. Understand the level of risk in your portfolio and especially in your equity compensation. It is practical to consider implementing downside hedging strategies to cushion you portfolio against the next bear market. Downside hedging is especially important for those with large employer stock holding so be sure to employ deep analysis of the tax and volatility risks of those holdings and then employ techniques such as written Investment Policy Statements, 10b5-1 Trading Plans or other formalized strategies.
Don't just evaluate volatility risks and throw on your blinders to the rest. Now is the time to put a team around your wealth who truly has your best interest at heart. Now is the time to ensure your family is prepared and your wealth is preserved.
If you would like to learn more about how we work with clients to address these risks while also restoring time to their busy lives, please request a private discussion with a member of our team.
Until next time...
-Tim Golas
Partner