Protecting What You’ve Built: A Risk Management Playbook for High-Net-Worth Individuals

By Adam Rauscher, Vice President of Insurance Services, Wealth Manager, Partner

High-net-worth (HNW) individuals and households, defined as those with $3 to $20 million in wealth, face unique wealth-protection challenges compared to mass-affluent individuals. Federal Reserve data shows that 6.26 million U.S. households have a net worth of $4 million or more, representing less than 5% of the population. Cerulli reports that this segment is expanding quickly due to equity market gains and asset appreciation. To help safeguard their wealth, these households should work with a financial planner to create a customized risk-mitigation strategy.

Beyond inheritance, how do high-net-worth individuals build wealth differently from the mass affluent?

Both mass affluent and high-net-worth individuals typically build wealth over time, not solely through income but also through investments such as home equity or retirement plans. However, HNW individuals often diversify further by creating additional revenue streams. Many have significant wealth tied to companies they have worked for, through stock options, equity interests, or business ownership.

What are some common challenges that HNW individuals face?

Inflation affects everyone, including high-net-worth individuals who often take on additional fixed expenses as their wealth increases, such as secondary homes or vehicles. They may also borrow against their portfolios, which can be advantageous when managed by a knowledgeable advisor who secures favorable rates. However, excessive leverage poses significant risks if portfolio values decline.

Proactive planning is essential. Many high-net-worth individuals overlook long-term care insurance, which can provide financial protection for families and assist heirs in managing care expenses. Securing this coverage is more than just a financial hedge against the high costs of long-term care. It can improve quality of life by easing the physiological impact these costs can have, not only on the care recipient, but by helping prevent family disputes over caregiving related decisions and expenses.

Do HNW individuals need more than one professional to manage their wealth? 

A strong financial advisor acts as a strategic lead, coordinating a team of professionals and providing three key benefits:

• Professional Coordination: Effective planning requires collaboration among the advisor, CPAs, estate planning attorneys, and specialized insurance providers.
• Advisor Screening: Clients should ask prospective advisors if they serve as true fiduciaries and offer comprehensive planning beyond investment management.
• Red Flags: Be cautious of advisors who focus solely on portfolio strategy and neglect external risks such as estate planning, tax considerations, or liability coverage.

How do you build a risk management playbook for HNW individuals and families?

1. Engage a qualified advisor if you have not already. The titles ‘financial advisor’ or ‘wealth advisor’ are not regulated industry designations, and some professionals may focus only on portfolio strategy without considering broader planning needs. Carefully evaluate your advisors and don’t rely solely on titles or fiduciary claims. It is important to ask substantive questions, such as:

• How do you make money?
  • The advisor should clearly define their compensation structure. There are many options here including: fee-only, fee-based, hourly, or commission-based. Advisors who are fee-only will be paid a percentage of the assets they manage. They will not make money from a recommended investment inside of a fee-based account. Fee-based advisors and commission-based advisors will make part of their money off of financial products they recommend.
• Do you focus mainly on investment management?
  • You’ll want to determine their areas of specialty and see if they match the type of wealth management team you need to build. Make sure you understand each service and area of expertise that your advisor team will be handling for you and your family.
• Are you incentivized to help me build a holistic financial plan?
  • Ideally, you are looking for an advisor who will fit all the puzzle pieces of your financial strategy together into a comprehensive plan, not simply your investments. HNW families often choose to work with an advisor who has a team of experts within their organization, as no one person can be an expert in all areas of wealth management and wealth preservation.
• Do you function as a fiduciary?
  • Not every advisor is a fiduciary. While industry designations such as CFP® or AIF® next to their names can be an indicator that they are legally bound to act in your best interest, it should not be relied on solely as a measure of an advisor’s experience or level of expertise.

2. Identify your potential risks within the following key categories.

• Lawsuit and Liability Risk — The risk of a legal claim can undo many years of hard work and years of wealth creation.
• Liquidity risk — this refers to how quickly an asset can be converted to cash, and is tightly tied to market risk. You can also think of this as being land-rich and cash-poor.
• Market risk — this refers to the potential for personal losses from a downturn in the financial market.
• Concentration risk — the potential for severe financial loss when your investment portfolio is heavily weighted in a single asset or concentration within an industry, company, or geographic region. For example, do you hold excessive stock or equity ownership interest in one company?
• Cyber Risk — is the risk that a cyberattack, data breach, fraud, or technology compromise causes financial loss, operational disruption, reputational damage, or theft of sensitive information.
• Tax and Estate Risks — The risk that taxes will not be minimized or properly managed and estate wishes will not be optimized. Mitigating income and capital gains taxes should be an integral part of the planning process, and estate planning is not only vital for those over the estate tax exemption threshold but also for anyone who wants to reduce future complexity, avoid unnecessary costs, and maximize the impact that their accumulated wealth can have on their loved ones or charitable interests.

3. Address catastrophic risks as a priority. Ensure appropriate insurance policies are in place, and have your advisor collaborate with insurance professionals to resolve any coverage gaps.

4. Distinguish between risks to mitigate and those to pursue, such as investment risks. The objective is to reduce unnecessary risks that could threaten your lifestyle while leveraging calculated risks for growth. Risk, when managed wisely, can be a tool for wealth accumulation.

For high-net-worth individuals, an effective risk management strategy focuses on three priorities: protecting liquidity, reducing catastrophic or unnecessary exposure, and engaging a financial planner to coordinate the process.

Interested in developing your own risk management playbook? Merit Financial Advisors offers complimentary consultations to help bring clarity and structure to your financial life. Let’s start the conversation today.