President's Blog - Financial Advisors Should Not Ignore Insurance

4/12/2018

The job of a financial advisor is to provide guidance to their clients regarding the proper investment decisions that will increase the client’s assets. A wise advisor will also suggest ways in which an investor can protect his or her investments against the specious and uncertain nature of the stock market, the American economy and the frightening threat of nature.

Wait. Did the word “protect” just find its way into a discussion of the role of a financial advisor? Is “protect’’ a synonym for “insure”? Are financial advisors supposed to provide “insurance” for a client’s portfolio?

In fact, many investors who are dependent upon their financial advisor for investment decisions are likely expecting their advisor to hedge against unexpected changes in stock market prices or investment strategies. That is a form of insurance, even when the word itself is not used.

Financial advisors are not insurance salesmen, but they should have conversations with clients regarding insurance products covering life, health and property.

According to S&P Global Market Intelligence, there were $1.1 trillion in insurance premiums paid in 2016, with 53 percent of those premiums written for life and health insurance and 47 percent written for property and casualty premiums.

And yet many wealthy investors do not participate in the life insurance marketplace, and due to the fluky nature of weather patterns, many investors are discovering they are underinsured for property damage.

Every year, Spectrem surveys investors on their insurance ownership, and every year it is revealed that wealthy investors, those Ultra High Net Worth investors with a net worth over $5 million, do not always own life insurance. According to Asset Allocation, Portfolios and Primary Providers, only 52 percent of UHNW investors own life insurance. Fifty-one percent of Millionaires with a net worth between $1 million and $5 million own life insurance, and 46 percent of Mass Affluent investors with a net worth under $1 million do so.

Property and casualty insurance is another area in which investors often find themselves lacking. Whether you believe human interaction is a cause of global warming and climate change, there is no denying that weather-related property damage is on the rise. Investors with property on coastlines must consider hurricanes, investors in flood plains need to consider potential flood damage, and investors in the wind tunnels of the Great Midwest are forever on the lookout for funnel clouds.

Any storm-of-the-century, which seems to happen far more frequently, can destroy more than a family’s home or heirlooms. It can destroy a family’s financial foundation if they are not properly insured.

Then there is insurance on collectibles (go ahead, ask your investor if he (never she) has insurance on his comic book collection).

Life insurance is a financial hedge against a sudden death that could otherwise decimate the financial well-being of a family and only half of investors own it. Does it make sense that so many wealthy investors would not purchase a life insurance policy they can obviously afford?

It is true that wealthy investors protect themselves financially with products other than insurance. Investors and financial advisors often do not look at insurance as a form of investment, but advisors would be wise to examine an investor’s insurance holdings to see if there needs to be an adjustment based on the growth of the investor’s portfolio or property ownership.

Life insurance is only one type of health-related insurance investors are asked to consider. Long-term care insurance might be vital to an investor who needs to consider the cost of caring for a parent (or for family members caring for the investor) should someone become ill or incapacitated and require a lengthy care program.

In many cases, financial advisors are employed by an investor as part of a team of experts designed to benefit the investor and his or her family. It is not only NOT inappropriate, but it is prudent, for financial advisors to discuss with their clients the insurance protections they have in place, and what changes might be considered.