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Paul Yates: Why wealth managers should think again about protection

Cheltenham, UK, September 19th, 2017 -

Mind the ‘wealth protection gap’

Protection should be considered as an essential part of a financial plan for the wealthy every bit as much as the financially vulnerable, argues Paul Yates

There are lots of reasons to talk to clients about protection - but, unfortunately, an equally long list of perceived reasons why many advisers just do not bother. There is no need to repeat either list here because, if you have read this far, you probably already know the reasons all too well.

Instead, it may be helpful simply to point out what might happen to a complex investment portfolio should the owner of those investments die prematurely or fall ill. How many of those investments are liquid? How many are wrapped up in property, trusts, schemes, private company shares - whatever badge we want to put on it - where they cannot be accessed quickly? My hunch is quite a lot - maybe all of them.

So what happens to the partner of the owner of their investments, who is most definitely asset-rich? With a dead or dying partner, it is cold, hard cash that is needed. Do your clients' have enough free cash to tide them over, or will they have to make rash disinvestment decisions that will harm their financial future?

Jack Wild Consulting director Jack Wild is a protection specialist who deals with high net worth clients regularly and approaches his advice with these considerations in mind. "It is vital to assess the protection needs for all clients regardless of their net wealth," he says. "The wealthier clients, however, have a particular requirement to consider - if they become ill or die without adequate protection in place, it is likely their investments will need to be cashed in."

Which investment will they sacrifice first - and what will the consequences of that decision be? How much might it impact the overall planning structure when illiquid investments need to be called upon at short notice?

From personal experience, I can say the extra burden of having to make illogical disinvestment decisions or taking on short-term debt is a stress my family wishes it did not have to face. The costs to deliver a liquidity buffer are small in comparison with benefits it will deliver to a family in a period of extreme anxiety.

The ‘wealth protection gap', as it might be called, is not just about protecting the person's income, mortgage, lifestyle and so forth - it is specifically about protecting the investment portfolio by making sure there is enough cash at the point of death or ill health to allow a complex wealth-planning strategy to continue unaffected, as it was originally intended.

"Most of my clients are at the wealthier end of the financial spectrum with large sums assured and, although they earn high salaries and often have significant investments, it is still important to make sure not only their salary and debts, but their investments are properly protected too," says Wild.

"Timing is important when liquidating assets and investments, and a sudden death or illness can put families in an awkward situation if the market is unfavourable. Correctly structured life and illness insurance allows clients and their families to access cash quickly in a time of need without risking their portfolio."

‘A Second Of Misfortune'

Roxburgh Financial Management principal Damian O'Connor agrees, saying: "It takes years to build up a well-balanced substantial investment portfolio but that can be ruined in a second of misfortune if the client does not have the right protection in place. Good wealth management includes properly protecting that wealth."

Many wealth managers focus on investments, pensions and tax efficiency, but protection should also be a part of that as, without the proper policies in place, the whole plan can be brought down by a serious health issue.

Some wealth management firms hire protection specialists to take care of their book, others outsource it. Both approaches are fine. The most important thing is that protection is being considered as an essential part of a financial plan - not just for the financially vulnerable but for the wealthy too.

Paul Yates is product strategy director at iPipeline