What Protection Do I Need? | AWM Insights #126
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Episode Summary
It only takes one unfortunate event to bring down everything. That is why risk management is such an important part of protecting your financial structure and sustaining generational wealth. It is not generally given the attention it deserves.
Risk management is more than just insurance. It is protecting against an uncertain future. This includes physical as well as online security. Families should be prepared for these risks and informed on how to deal with situations that hopefully never come up.
It doesn’t make sense to skip insurance for the things that can devastate your plan when you can insure them relatively cheaply. Home, auto, personal umbrella liability, disability, and life insurance should be dialed in appropriately for each family.
Life insurance is often sold as something more than just insurance. Sometimes it's touted as a bank or a wealth generation tool, but in general, simple is normally better. These policies are typically the most pushed because the commissions are the highest.
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Episode Highlights
(1:17) You can build great wealth and create the best investment plan in the world but all it takes is one accident to ruin everything. Unless you have built out your risk management.
(2:12) Insurance is just one piece of risk management. The future is uncertain and you should think about how to protect yourself.
(2:40) Personal security and protecting yourself online are both forms of risk management.
(3:30) How you construct your portfolio, when done right, is a form of risk management.
(4:15) Uncertainty is what we should be concerned about as individuals. Risk is what a casino should be worried about.
(4:33) Overly leveraging an investment portfolio is a risk that oftentimes blows up in the investor's face. Managing uncertainty should be done at the portfolio level too.
(5:10) Partnering with a cybersecurity firm has given us insight into how to protect yourself online.
(5:25) Using a password manager is much better than using the notes app or using an easy-to-guess password for all your accounts.
(5:42) Public wifi is often a place you are a target. What are called “dirty networks” should be avoided and using your phone as a hotspot is usually safer.
(6:06) Athletes are public figures and even if you don’t think of yourself as a target, people may look to target you because of the notoriety.
(6:37) If you’re ever being followed, head to a public well-lit place. Being aware and educated on how to handle these situations is a part of risk management.
(7:40) Even if these disturbing events don’t happen very often, over a lifetime the chances one of these events will happen to you is significant enough to be prepared early.
(8:00) A well-structured risk management plan is not difficult to get in place. It takes time and effort but should be a pillar in a wealthy family.
(8:25) Proactive risk management addresses risks before they happen. Insurance, like auto or life insurance, addresses bad things once they’ve already happened.
(9:45) Umbrella Liability insurance is notoriously missed by professional athletes. This gap is a massive risk to not just current wealth but also future earnings.
(10:27) Umbrella protects you whether you’re in your car or at home. What if you accidentally hurt someone else?
(10:59) What happens If you get sick or injured and your family relies on your income that is now gone? Disability insurance protects your family in this situation.
(11:13) You get insurance for insurance. Don’t be fooled.
(11:29) Life insurance is often pitched as a wealth generation tool but life insurance is not a bank. If you hear that pitch, turn around and walk away.
(12:09) It is incredibly important to have the right life insurance at the right amount to protect or provide for your heirs.
(12:59) Where other insurance is usually undersold, life insurance is oversold.
(13:25) Simple is better. The cheapest version is generally all you need. It isn’t sold because it pays the insurance agents the least.
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+ Read the Transcript
Brandon Averill (00:04): Well, Justin, we're back. We're going to continue on this path here talking about the ultra high net worth segment. For those of you listening that are in that segment, or just aspiring to be there, hopefully this has been helpful. Last week, we really hit on integrating your investments into this plan, and why it's so important to continue to have advice when you enter into this phase. A lot of times, I think there's an assumption when you have a lot of money, maybe you don't actually need the advice or the help you are able to generate it. But what we're hoping to establish throughout this series here is, yes, you may be able to tackle some of it on your own, but you'll be in a much better spot if you continue to seek out the right type of advice. Unfortunately, our industry's not built always for this type of client, but there are great options out there. There's multifamily offices that are excellent and definitely, probably a place for you somewhere. We hope that we're a place for the clients that we work with, make them feel really comfortable. And hopefully some of the perspective, people listening to this podcast. But one thing we're going to jump into today is we can help you guys build the most beautiful financial structure that there is. We can optimize it. We can have all your priorities nailed. We can drive investments so they're matching all those priorities really well. But it just takes one unfortunate event to kind of bring the whole house of cards down. So risk management is what we're going to use as the term here. Most people, I think jump to insurance, we're certainly going to cover that. But there's a lot more to this than just going out and buying a homeowner's policy or an auto policy. There are a lot of things that you should be doing to make sure that you're protecting that financial structure you've put in place. So I kind of teased that out a little bit, Justin, but maybe jump in from there. Before we even get into the insurance side, what are some of the more, I guess, uncommon probably to a lot of people, ways to think about risk management?
Justin Dyer (02:11): So like you said, insurance is an incredibly important piece of it, very common, but then you have to think about other risks that are out there in this uncertain world. Really what this all boils down to is that we live in a world of uncertainty where the future is unpredictable. And cyber security or security broadly speaking is another great way of thinking about risk management, but cyber security in this new digital, I shouldn't say new any longer, but this digital age that we live in, protecting yourself online, taking both pretty simple, basic steps, but also in some cases really locking things down and securing your digital presence in a lot greater way is a perfect form of risk management. You don't know. And when you could be attacked online, you don't know if and when you could be attacked in the physical space as well. Hopefully it's not an actual physical attack, but a robbery or something like that. These are all forms of risk management, where a singular event can be incredibly damaging to you, your priorities, your family, your overall net worth, and doing little things to prevent it is a great framework or a great way to think about risk management. Also, you mentioned financial structure, but portfolio construction in and of itself actually is a really could be, can be, I should say, can be a very good risk management tool. A well constructed portfolio gives you the ability to manage risk or adverse events that come out of the proverbial left field, or just our unpredictable in nature, which again, that is the world we live in. So many people think about the future in kind of predictable statistical terms like a casino or some other large pool of numbers where you can predict some certainty. The outcome. Flipping a coin is a perfect example. In reality, we don't live in that reality to be redundant. There is this element of uncertainty that is very prevalent, going forward, and constructing a portfolio to deal with that, to acknowledge that as opposed to constructing a portfolio that, hey, the markets only go up into the right. I'm going to go all in or I'm going to be overly leveraged. You see that time and time again, where that just ends up blowing up in people's face unfortunately, and people don't really learn their lesson when it's all said and done. But I think those are two additional items that are really good in this risk management framework.
Brandon Averill (04:54): And I think you hitting on this cyber security part is so interesting. There are steps that all of us can take, whether we're ultra high net worth or just the normal Joe walking around. I mean, simple things. So we've partnered with a firm that really focuses on the cybersecurity and really security holistically for clients. And we've learned a lot from them, I think simply right. Don't keep all your passwords in the notes app on your phone. Let's start there. Not don't have the same variation of the password for multiple applications, but use something like a password manager, a 1Password or a LastPass are fantastic examples. If you don't know what those are, you want some help or happy to hop on the phone and walk you guys through it. But something like that, or when you're in a Starbucks or at the Ritz or one of these types of things, they refer to them as dirty networks, don't opt yourself into that dirty network. One way to do it. It is hotspot from your phone. Another way is to use something called a VPN. And there's different versions of that. So there's all kinds of little things that you can do to try to protect yourself or even the physical security side. We have a lot of people probably listening to this that are public figures. Athletes, entertainers, et cetera. And for instance, if you're somebody like that, you might even not even think of yourself as a target. You maybe not even the most famous person on your team, but people are kind of crazy nowadays. And so tailing you home from the ballpark for instance. Think about what that looks like and how you maybe work out of that. So this group that we've partnered with will put on a clinic to help guys and gals to understand when they're leaving, what to look for and how to get out of things. Quick hint, don't go to some remote place. Go to a very populated place, and make sure that you're in a well lit area, for instance. So thinking through all these types of things, kind of sound silly, or maybe not obvious, but they are a big part of risk management.
Justin Dyer (07:05): And I just want to add to that, the likelihood that something happens to you while in any one arena, a cybersecurity breach or a car accident or anything that falls in this overall risk bucket, statistically speaking, it can be low. Depending on who you are, what kind of car you drive, where you drive, all these things, change that profile. But if you put all of these various events into a bucket, the chance of one thing happening to you throughout your life, and then not to get too statistical on people, but as a day passes and something doesn't happen to you, chances are it will happen to you greater in the future. But you put all these things into a basket and there's a likelihood that something will happen to you. And we're in the fortunate or unfortunate world or reality where we have a large enough client base where you see these unfortunate events hit people. And when they don't have the right insurance in place, they don't listen to advice or their new clients or whatnot. It's impactful. I mean, it really is. And there's just these simple things. It takes time and takes understanding, and it takes some effort, but all things considered, it's not the biggest most complicated thing to get in place a well structured risk management plan that really, really can make or break you to a large extent.
Brandon Averill (08:32): And I think when we can transition now to what most people think about, but that's insurance. So you can do all these, and all what we've been talking about previously is mostly proactive. Things that we can do to make sure that we're reducing some of those risks. We're using the password manager, those types of things, so we just basically become a little bit faster than everybody else. Little bit less of a target. But flipping over to insurance. This is the stop gap. This is to make sure that it's there in the event that something does unfortunately happen. And I think most people think of auto insurance, very important, by the way, that you have good auto insurance and the appropriate limits. Time and time again, we see that come in, people are shopping for price on auto insurance and they expose themselves. And almost to the point where yes, you may be paying a little bit lower premium, but it's basically useless. So make sure you have a robust auto program in place. Same with a homeowners. A lot of times we see people not have the liability piece on a homeowner's insurance. I think people think about what happens if my house burns to the ground, they don't think as much about what if somebody is over or even somebody trespasses, because the gate was open and they fall in the pool and drown. I mean, those types of things you want to make sure that are really established within your homeowners. If something does happen and it burns to the ground, do you have enough coverage to actually rebuild the house to the quality that it was? These are things we see all the time. And then there's the umbrella. This is something we commonly see missed, or athletes are notoriously more difficult to get umbrella coverages on. A lot of companies actually won't underwrite it. So we'll see some kind of a Geico, a State Farm, an umbrella policy on an athlete, but they never disclosed they were an athlete. And so now you're in a situation where you're paying a premium for something that will definitely not pay out for you. So it's really understanding in an umbrella again, it's the shield kind of like the name suggests, it goes over everything. So protects you liability-wise, wherever you're at. Whether you're home, something happens at your home, you're in your car, and something happens and it could be purely an accident. I think that's the other thing people get tripped on. They think like, oh, this is something that I really messed up. And I did. Sometimes accidents just happen. And you want to make sure that for yourself, you're protected, but what if you accidentally hurt somebody else? You should, I would argue, feel that you want that person to benefit from this and make sure that they're taken care of as well. And then there's disability. I think a lot of people don't think about this, but you get sick, you get injured. I mean, your family is very reliant upon you. And if you don't have disability and coverage in place, that can be very disrupting as well.
Justin Dyer (11:30): And then lastly, and I think probably one of the more familiar ones is life insurance. And overarching this whole conversation around insurance, I want to say you get insurance for insurance. The reason why I say that is very often in the world life insurance is pitched as a wealth generation tool. There can be some interesting side benefits from various insurance policies. Generally, they don't make a lot of sense, but that's a whole nother.
Brandon Averill (12:03): Let's just make it abundantly clear. Life insurance is not a bank, folks. If you ever hear that pitch, immediately turn around and walk away.
Justin Dyer (12:13): Walk the other way.
Brandon Averill (12:14): Just walk away.
Justin Dyer (12:15): There you go. But life insurance is a very valuable tool. If again, the worst case scenario happens, a lot of what we're talking about here is accidents where life continues on. But if the worst case scenario happens where you die prematurely, let's say, you want to make sure that your heirs, your legacy, whatever that may be, is taken care of. And it's a very tough conversation to think about quite a bit or quite often, especially when you're dealing with the estate plan. And there's some interesting conversation around who will take care of your kids, et cetera, et cetera. But it's incredibly important to think through that and have the proper life insurance that ties in with your overall goals, your plan, and make sure it's the right size. So, alluding to what Brandon just said. Often you see these ridiculous life insurance policies, which quite honestly was sold to somebody because the insurance agent got a huge fat commission, and they were sold all these additional bells and whistles. And you look at it and you're like, well, you don't need 10 million of life insurance. You need five or whatever the case may be. And the unfortunate truth is this piece of it is really often an oversold part of the business. Where a lot of the other pieces of insurance are undersold. Life insurance is typically oversold. So it's a really important area to have your alert, your alarm bells ready to go. Your radar sense, your spidey sense, whatever you want to call it, really at it, at its height, if you're having an insurance conversation with a typical insurance agent.
Brandon Averill (13:50): And I would just leave the last point on life insurances. 90 plus percent of the time simple is better. So a simple term policy, the cheapest version that you can possibly get, stripped down again, not sold as much, because life insurance agents don't make as much money. But, that is generally oftentimes all that you need, but you do need it. And life is expensive if something happens to you, something happens to your spouse. You got to really think about the impacts of that. And then in the estate's planning situation, really going through this planet or planning really protects that legacy that you are trying to leave to the next generation. And we're going to actually jump into that in the next episode here. We're going to talk a lot more about that next generation. That legacy impact, money is a tool. So it's actually a pretty good segue to end on today. But again, I wanted to remind you just telephone number, that you can text. So 602-704-5574. If you have questions, specifically on the risk management piece, anything that was confusing you'd like clarified, please shoot us a note. Also, additionally, we're going to be talking about that legacy piece and really using money for impact and as a tool. So if you have questions on that, make sure to shoot us a text. We'd love to hear from you. But until next time, own your wealth, make an impact, and always be a pro.