“What keeps you up at night?” is considered the classic problem that advisors seek to solve for their clients. But often it’s what’s not keeping clients up at night that poses the real threat to their financial well-being. Jonathan Crystal, executive vice president of Frank Crystal & Co., a New York City-based national insurance brokerage, says a bank executive told him about a client whose 20-something son was involved in a drunken driving accident that involved an injury and, later, a lawsuit and judgment. The verdict was so expensive that the family partnership had to be dissolved to pay for it; the son’s coverage was insufficient. “What the father was lamenting was that he left it to his adult son to decide not to spend a few thousand dollars in liability insurance,” an expense the father could readily have borne himself, Crystal says.

Family offices can help manage their clients’ risk exposure, but many advisors misperceive risks as well, according to a survey this year by Frank Crystal & Co. and Family Office Exchange. Researchers spoke with 118 family offices representing median assets under management of $211 million. Asked to pick from among a dozen risks faced by clients, 49 percent selected “identity theft” as the problem that concerned them the most. While identity theft can be disruptive and emotionally traumatizing, however, it actually poses a low risk of destabilizing a client’s assets, Crystal says. Risks that posed potentially greater damage to assets—liability lawsuits and litigation resulting from membership on outside boards—drew lower responses from advisors, who cited them as extreme concerns by margins of just 39 percent and 22 percent respectively. Crystal says he has seen judgments from such litigation reaching $30 million.

Family offices that approach risk management systematically can work with clients to explore potential exposures, the report says. A risk assessment ranking outlined in the report—subtitled “What Keeps You Up at Night?”—outlines a host of concerns ranging from personal security issues such as kidnapping and burglary to theft by personal staff and damage to fine art collections. Going over the ranking with clients can turn up some surprises that aren’t on the list, Crystal says. One advisor learned that a client was opening his home for entertainment purposes more than 20 times a year due to philanthropic activities with which he was involved.

“I think what you’re seeing is a greater awareness of risk in the world,” Crystal says. “Looking at the risks they’re facing in their lives, the wealthy aren’t any different from anybody else from the standpoint that they’re worried about families and their homes. But their needs are more complex, and they do face a wider array of exposures.”

The report recommends that family office advisors have conversations with both clients and their adult children, since the next generation’s lifestyle may be a factor in assessing risks, Crystal says. One silver lining that has emerged from the financial crisis is a greater willingness among clients to consider insurance issues. Another bit of good news: family offices that coordinate the purchase of insurance policies can often obtain savings through group rates. The report found that the typical small family office, with fewer than seven staff members, coordinated a median of 13 insurance policies. Larger offices had a median of 44 policies.

TOP PERCEIVED RISKS

Percentage of single family offices that rated a risk as a "4" or "5"

on a scale of 1 ("extremely unconcerned") to 5 ("extremely concerned").


Risk

Percentage

Risk severity

Insurance as a risk management tool

Identity theft

49%

Low

Least effective

Estate planning risk

42%

High

Moderately effective

Lawsuit by third party

39%

High

Effective

Damage to physical assets

39%

Medium

Effective

Medical travel risk

34%

Low

Moderately effective

Liability resulting from dependent children

32%

High

Effective

Quality and sufficiency of insurance for operating business

32%

Medium

Effective

Coordination of business and personal insurance coverage

31%

Low

Moderately effective

Employment practice lawsuit

27%

Medium

Effective

Lawsuit from outside board position

22%

High

Effective

Theft by client's personal staff

20%

Low

Effective

Security risk

19%

Low

Least effective


Source: Family Office Exchange