Wealth, Actually

by Frazer Rice

  Everyone’s situation is different, but for the most part, insurance should be more about protecting wealth than growing it. Insurance products are meant to insure against the loss of wealth and should be structured to protect you from life’s uncertainties.

  Annuities are a form of insurance that have a different function than life insurance. Many people like the idea of having a stable, guaranteed income after they stop working. Annuities promise this, although some annuities can be an expensive way to maintain an income stream. I’ve heard stories of an 8 percent sales charge going to the annuity seller, for example, and annuities are also expensive and difficult to alter. It is my preference in managing money to retain the flexibility to make adjustments every five to ten years to respond to market conditions. You need to evaluate whether an annuity is truly the best product for your objectives, or whether someone is just trying to make a profit from selling it to you.

  Insurance Advisors: Property and Casualty

  People often have many possessions they value, which makes property and casualty insurance important. Property and casualty insurers also provide products focused on protecting your business, such as errors and omissions insurance, directors and officers insurance, and coverage related to a business’s succession plan.

  For example, if you have a business partner and the partner dies, do you want to be in business with the partner’s spouse? Or do you want to be able to buy out that partner’s interest in the company and choose a more qualified partner to replace him or her? You want to ensure the current business management is uninterrupted if a key member of the business passes away and also ensure that the wealth generated by the business is successfully passed on to the next generation.

  Property and casualty advisors will also help you mitigate the risks you can encounter during your own life, such as property damage, accidents, theft, and crime. This advisor will be extremely important in helping you determine which scenarios are worth insuring against versus the scenarios that are far-fetched and highly unlikely.

  Your insurance advisor, lawyer, and accountant need to work together. The lawyer will draft the legal documents to satisfy your goals for the succession of your business. The insurance advisor will then put the right type of insurance in place to fund that succession plan, and the lawyers will make sure the process is structured neatly and without conflict. Last, you should run the final strategy by your accountant to minimize the creation of transactions that will invoke taxes. Given that tax policies and requirements differ between states and jurisdictions, a review by your accountant is recommended.

  Insurance Advisors: Disability and Long-Term Care

  There are two additional types of insurance that are increasingly being included in wealth protection plans: disability insurance and long-term care insurance. Disability coverage kicks in when you’re fully disabled and cannot earn an income. You have life insurance, but you cannot collect it to replace your lost income because you’re not dead. To make things worse, your cost of living increases sharply because of your increased medical expenses. Disability insurance is meant to cover that potential loss of income and protect your family and business in the event you become disabled.

  We advise people to avail themselves of disability coverage when possible. Many employers provide it within a suite of insurance offerings, but self-employed business owners often do not have a policy to protect against disability. It’s important coverage to have to protect your income throughout your working years. Many wealthy people nearing retirement think disability issues are not a concern, but double-checking with a good insurance advisor is a good idea. Your insurance advisor can provide extremely valuable advice to determine whether disability is a risk that warrants mitigation.

  A long-term care insurance policy helps with the costs of assisted living care, whether that care takes place in a nursing home or at your residence. It makes sense that people want to insure against the high expenses that can be incurred in the final years of life. While the thought behind long-term care coverage is noble, the policy terms are highly specific (and sometimes exclusionary) in the conditions that must be met to collect the long-term care benefits. I’ve seen cases where the policy holder needed to meet five of eight conditions for the benefits to kick in but could meet only four of the eight conditions. The policy’s benefits were never paid to the policyholder, who had paid a lot of money for the policy. Long-term care insurance forces you into the impossible position of predicting what ailments and needs will occur in the future.

  My advice to most people is to learn what long-term care policies do and don’t cover, then use that knowledge to see if it makes sense to self-insure. To self-insure, you take the money you otherwise would have devoted to the long-term care premiums and build it up in a separate fund earmarked for future medical expenses. It’s profitable for insurance companies to sell long-term care insurance they won’t have to pay out on, and it might be possible for you to keep that money in your pocket and come out ahead in the end.

  People who have gone through a late-stage health maintenance exercise with their families know about the quilt of funding sources, including Medicare and Medicare Part B. Long-term care coverage may be too specific in its qualifying conditions to be worth its expense. Your insurance advisor and wealth manager can help determine the best path for you. The insurance advisor, who may be compensated for selling coverage to you, will be able to explain what is covered. Your wealth advisor can help you understand whether it’s a good bet for your financial situation.

  Philanthropy Advisor

  You might be thinking, A philanthropy advisor? Seriously? How much advice do I need to give money away? However, it’s worth having an advisor to help make your charitable decisions, especially if you have a foundation or are thinking about building one. Your philanthropy advisors are the people who help you maximize the value of your philanthropic expenditures from the standpoints of taxation and social impact. Your philanthropy advisors can be an amalgamation of several people in your cabinet, or you could designate one specific person for this role.

  Certainly, accountants can provide advice in the way of taxation, but a philanthropy advisor has a larger tool kit and a wider perspective. Should your assets go into a trust that provides you with an income for your lifetime and, upon your death, donates the balance to a charity or school? Those are the questions that philanthropy advisors ask and address. They help you organize your thoughts and achieve your philanthropic goals.

  Once you become wealthy and people come out of the woodwork seeking help for their causes or dreams, a philanthropy advisor can help you sort through the opportunities and ensure your donations have the maximum desired impact. For example, is a $50,000 gift to Harvard University going to have as much impact as a $50,000 donation to a smaller college without an overfunded endowment? That’s a qualitative decision. If you give the $50,000 to Harvard, should it be earmarked for a specific function, such as a scholarship fund? A philanthropy advisor can help people crystallize their thoughts and make efficient use of their philanthropic dollars.

  A philanthropy advisor can also serve as a gatekeeper, so you don’t have to field fifty phone calls a day from charities you’ve never heard of before. By delegating that task, you free yourself to think about other things.

  Wealth Manager

  A wealth manager helps manage investments and cash flow and assists with private banking and lending needs as they surface. Investment and lending services can be performed by other advisors, but a wealth manager provides the higher level of oversight for your investing and lending tactics. Wealth managers spot the broader issues that affect your wealth. If you are taking risks in running a business or managing your career, you want someone on the wealth side dedicated to ensuring that your investments are moving in the agreed-upon direction. You also want someone to make sure the risks to your wealth are mitigated and the growth opportunities are identified and pursue
d when appropriate for your goals.

  Wealth management services can come from a variety of sources, including full-service trust companies, registered investment advisors, large broker-dealers, and financial planning firms. Not every type of provider can be great at every aspect of wealth management, and some are better than others.

  Vetting a good wealth manager is much like vetting the other advisors in your cabinet. Here are some helpful questions to ask when evaluating wealth managers and their organizations:

  How important is my business to you (the wealth manager) and your firm?

  How many clients do you have? How many does your firm have?

  What resources are available to service me as a client?

  On the investment management side, what is your approach to investment management? How customized will that be to my situation?

  Do you recommend and provide nonproprietary funds in addition to proprietary funds? In other words, are you forced to recommend your company’s own products, or are you permitted to recommend other products if they are a better fit for me?

  What are your fees? How are the wealth managers compensated?

  The final question about compensation is one of the most important questions to ask, because the answer to that question will help you understand where the wealth manager’s time and recommendations will likely be focused.

  In terms of being a specialist versus a coordinator, your wealth manager is the logical cabinet member to serve as an overall coordinator. He or she should have a broad sense of what comprises your wealth, the goals you have for your current and future wealth, and who the players are at the family level and beyond. A wealth manager can provide passionate advice or second opinions, and needs to integrate well with your other advisors without stepping on toes.

  The wealth manager should be paid for guiding your team, usually through a fixed fee or through an assets-under-management arrangement. If you pay an hourly fee for wealth management services (to a lawyer, for instance), you may end up paying for many administrative tasks, instead of paying for the growth or preservation of your wealth. How a wealth manager is paid will influence their actions and advice. When advisors are paid on a percentage of your assets, you can surmise that they will likely try to shift your assets into the areas they manage. This will increase their assets under management and will therefore also increase their compensation.

  In my case, I’m paid a fixed fee to manage wealth. I receive a salary to manage my clients’ wealth, and I also receive a percentage of any new business I bring in. This aligns the interests of my clients with my own, because when I do an excellent job of managing my clients’ wealth, my clients refer other business to me.

  If you get your wealth management services from a trust company, in most cases, everything you get will be wrapped up in the asset management fee. For a broker-dealer, it’s going to be a hybrid between transaction fees and a percentage of assets under management. As you evaluate what wealth manager to add to your cabinet, these compensation structures should be considered.

  Most managers charge an account-level fee in addition to fees for the underlying assets being managed. When receiving a proposal from a wealth management firm, be sure to ask for asset management costs, product costs, and additional fees related to planning, concierge work, bookkeeping, or other services.

  Industry Colleagues

  If you’re a furniture maker, it doesn’t hurt to seek advice from friends who are also furniture makers who are facing similar issues. This type of industry-specific sharing of information is quite effective in real estate, for instance. Prominent New York real estate developers often know one another and stay in touch. They may compete intensely at times but will also collaborate in many instances, because the information gleaned through collaboration makes each of them an even better real estate professional. This helps them mitigate risks and take advantage of opportunities before they become known.

  Even an informal lunch with your colleagues may be productive when it comes to gathering ideas about managing your wealth. It’s an interesting way to see what’s out there beyond your own four walls.

  Family and Friends

  Your family members can be an important part of your cabinet, because they are interested stakeholders in what you do. With family in place in your cabinet, you will have better information with which to make decisions.

  Discussions with family can be formal or informal, and they can help you understand what risks and costs may be coming down the pike. Family members often understand where you’re coming from when it comes to your thinking and what bothers you. When you talk as a family in this context, it’s important to do so under the umbrella of the family’s position in the cabinet, rather than relationship issues unrelated to wealth. This protects you from the danger of combining financial matters with family.

  Friends also can play a role, particularly as a feedback mechanism for topics you aren’t comfortable broaching with your family or professional advisors. Similar to industry colleagues, you may have friends in similar circumstances who can share beneficial information and insights.

  Professional Designations

  Professional designations and certifications may look impressive, but for most people, they’re confusing. When evaluating advisors and the letters behind their names, it can feel like you’re swimming in a sea of alphabet soup.

  A person with more designations after his or her name may have more expertise, as well as more products and solutions at their disposal. Let’s take a quick look at a few of the most common professional designations in the wealth management industry.

  CFP

  A Certified Financial Planner (CFP) has been educated and tested in a wide array of investment, wealth, insurance, and other areas. They will normally have a broad range of knowledge regarding legal issues, taxation, and estate planning. CFPs can provide a broad level of knowledge and be helpful in spotting risks and opportunities.

  CFA

  A Chartered Financial Analyst (CFA) represents a more specialized degree of expertise in the realm of investments. To qualify for this designation, an analyst is required to pass three intensive and difficult tests over three years. You should expect to receive excellent investment advice from a CFA. They understand the investment world in terms of what investments can and cannot do for your wealth.

  MBA

  A master’s degree in business administration (MBA) is typically less focused on investment and wealth management issues and more focused on business management issues. People with MBAs tend to have a decent ability to spot issues in finance and accounting, but I wouldn’t automatically assume an MBA holder is well-versed in wealth planning issues.

  JD

  A juris doctor (JD) is required to practice law in the United States, Canada, and several other countries. In addition to earning a JD, a lawyer must also pass that state’s bar exam to practice law within a state. Similar to a CFA’s expertise in investments, a JD degree may provide a solid training in spotting risks and threats regarding legal matters but not necessarily the full spectrum of risks affecting wealth management.

  Insurance Designations

  There is an overwhelming menu of insurance designations. The distinctions most relevant in wealth management will be those relating to property and casualty insurance, such as Chartered Property Capital Underwriter (CPCU), or life insurance, such as Certified Life Underwriter (CLU). The health insurance market also has a designation for Certified Health Underwriter (CHU).

  Advisory Team Objectives

  What are the objectives of your advisory team? From a wealth management standpoint, you and your cabinet of advisors seek to reduce your taxes, expenses, risk, and liability. You want them to manage your assets in a way that you can live the life you want, both currently and in retirement. If you have assets that will last beyond your lifetime, you want your team to help you provide the afte
r-tax, after-fee, after-inflation assets needed for your family and your philanthropy.

  Be aware of your roots, but carry new tools and consider new perspectives. You need to solicit a blend of advice that acknowledges your origins and the struggles you went through to achieve success. That context can be important in making decisions. However, many of the people you grew up with (or who helped you build your business) may be too narrowly focused or outdated regarding the tools available to help you achieve your wealth-related goals.

  If you were forming a corporate board, you would want a mix of ideas and expertise that challenges you to think in new ways. The same is true with your cabinet of advisors. You don’t want to assume that just because there’s so much wealth, everything will take care of itself. You also don’t want to tell your team that you want them to strictly follow the instructions in the last will and testament you wrote sixteen years ago. You want up-to-date input, so you can avoid unnecessary taxes and cover the needs of your family.

  To accomplish those goals, you need to meld historical context and longtime relationships with current, practical expertise. You want the healthy contrast of young versus old and qualitative versus technical to drive the dynamics of your cabinet. If one advisor wants to do something complicated to maximize investment returns, you want another advisor to say, “This is way too complicated. You’re going to drive yourself crazy managing all of this.” This push-and-pull between advisors will help you make more informed, stronger decisions.