Page 48 - Investment Advisor - November 2021

WEALTH & RISK

By Fran O’Brien

How Ultra High Net Worth Clients Count

Tangible Assets’ Value

A Wharton study found a gap between how advisors’ view portfolio risk

with that of uber wealthy clients, and why P&C insurance might fix it.

dvisors to ultra high net worth business (38.5% of $30 million NAV). In
(UHNW) individuals and fami- both cases, incorporating adequate P&C
A lies best serve their clients by insurance into financial management
developing a profound understanding results in improved Sharpe ratios and
of their clients’ attitudes toward money higher risk-adjusted returns.
and life. The Wharton School at the As the Wharton case studies
University of Pennsylvania recently con- explain, UHNW investors who self-
ducted a study commissioned by Chubb insure or underinsure may take on
that offers key insights into how finan- greater investment risk to compensate
cial advisors can better align their ser- for real or potential left-tail losses.
vices and strategies with the preferences Uninsured or underinsured left-tail
and values of UHNW clients. risk also can lead to overly cautious
The study — “Does Wealth Change investment decisions — such as com-
the Way You Think? Risk Tolerance, But there is good news for advisors pensating for risk by maintaining high
Tangible Assets, and Risk Management: who act to correct this shortcoming. levels of cash — that impact total port-
Observations for Prosperous Families As the study reports: “[I]t’s likely folio performance.
and their Advisors” — also demonstrates that this gap represents a market
how property and casualty insurance opportunity for wealth advisors to ACTIONABLE STEPS FINANCIAL
can improve the long-term risk-adjusted expand the horizon of their practices ADVISORS
returns of UHNW portfolios. to include the incorporation of risk- For advisors working with UHNW cli-
management assets outside traditional ents or seeking to add this clientele, one
TANGIBLE ASSET DISCONNECT? investment portfolios.” clear actionable point emerges from the
At the heart of the study, researchers Wharton study: You can better compete
found that 80.7% of UHNW investors IMPROVING RISK-ADJUSTED RETURNS and serve your clients by partnering
consider tangible assets — such as real WITH ADEQUATE P&C COVERAGE with an independent insurance agent or
estate, fine art, and jewelry — to be There also was another critical take- broker who specializes in coverage for
part of their total wealth. But financial away, the study found: Adequate prop- the wealthy.
advisors often don’t think the same erty and casualty insurance coverage Also note that the study finds that
way about wealth as their clients. As can improve risk-adjusted returns. To 80% of UHNW investors — and 95%
a result, they do not factor tangible help illustrate, the researchers mod- of investors worth $50 million or
possessions into portfolio measurement eled two case studies of UHNW cli- more — prefer to pay a higher cost for
and risk management. ents over a 40-year period, where insurance in return for appropriate
Understandably, advisors focus on the annual probability of a left-tail coverage and service. UHNW clients
the traditional elements of these high- event — a costly catastrophic event rank stability and expertise in han-
octane investment portfolios — stocks, such as an accident and accompanying dling complex risks and assets as the
bonds, private equity and other finan- lawsuit — is 1%. two most important factors in select-
cial instruments. But this focus, to the The case studies examined instances ing an insurer.
extent it excludes recognition of tan- where a substantial portion of a family’s
gible assets, can undercut the quality wealth is represented by personal real Fran O’Brien is Division President, North
of an advisor’s service and reduce risk- estate and high-value contents (17.5% of America Personal Risk Services, Chubb. She Adobe Stock
adjusted returns for clients. $30 million NAV) or an illiquid family can be reached at [email protected].

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