New Year’s resolutions are a tradition that began in ancient Babylonia, when people resolved to pay their debts. Apparently, human nature has not changed much over the millennia since resolutions related to improving one’s financial well-being continue to be among the most popular.
In that spirit, allow me to suggest three resolutions for financial advisors that — if carried out — can reduce financial risks for your clients, improve their overall well-being and underscore your role as a trusted advisor.
Resolution #1: Initiate a conversation about property and casualty risks
In addition to the many investment risks that advisors help clients manage — market risk, credit risk and inflation risk, to name just a few — there are risks unrelated to economics and markets that can pose a serious threat to a client’s financial well-being and their wealth. These risks, of which clients are often completely unaware, stem from unexpected property and casualty (P&C) losses, and they can have devastating effects on financial assets.
A conversation about P&C risks can reveal many areas of client vulnerability. Here are a few where clients may be surprisingly at risk:
- Flooding. Violent storms over the past few years have caused flooding damage in regions that never before experienced such destruction. But most homeowners’ policies do not cover flood damage and only about 12% of American homeowners have flood insurance.
Clients are likely to face large out-of-pocket — or out-of-investment-account — expenses should disaster hit. And it doesn’t take much to spell trouble. Just six inches of water can lead to a loss of more than $52,000 for an average-size home, according to the Federal Emergency Management Agency.
- Home-improvements. Homeowners spent about $340 billion on residential repairs and renovations in 2018, according to information from Harvard University. All too often, however, after spending what could be several hundred thousand dollars on designer kitchens and luxurious bathrooms, for instance, clients may neglect to update their homeowner’s policy. In the event of a fire or other catastrophe, they could find themselves underinsured for repairs to their home and the replacement of expensive upgrades. To cover costs, clients may have to deplete investment accounts earmarked for retirement and their children’s education.
- Similar to the risk they face from having inadequate homeowner’s insurance, many clients unwittingly may be assuming large financial risks by neglecting to have an umbrella insurance policy that picks up after other policy limits are reached. Given today’s litigious culture and high medical bills, the cost of settling a lawsuit stemming from, say, a visiting child getting hurt on a backyard jungle gym could exhaust a family’s assets — or even lead to bankruptcy — if an umbrella policy is absent or its limit is insufficient.
Resolution #2: Develop ties to a knowledgeable independent insurance agent
Because many property and casualty risks can be managed effectively through insurance, and since no one expects a financial advisor to be a P&C or insurance expert, developing a relationship with a knowledgeable agent can deliver great value for clients. Agents can help review coverage options and tradeoffs, structure deductibles based on risk tolerance, and optimize limits and maximize credits.
Moreover, developing such ties can help cement advisor-client relationships. A recent study by the consulting firm Oliver Wyman found that 77% of financial advisory clients surveyed would appreciate their advisor providing access to P&C guidance and counsel, and 37% said they would be willing to switch to an advisor who made such help available.
Resolution #3: Make a P&C update part of a client’s annual review
Taking a regular look at property and casualty coverage is especially valuable given clients’ ever-changing circumstances. Conducting an annual review with an experienced agent who can ask the right questions and assess risk in light of new developments is usually the best way to make such a review efficient and effective.
Going forward with all three resolutions will get 2019 off to a great start.
Fran O’Brien is Division President, North America Personal Risk Services, Chubb. She can be reached at AskFran@Chubb.com