Wealth Strategies
Protecting Clients' Portfolios In Tough Times - The Insurance Angle

Today’s changing market conditions provide the opportunity for financial professionals to reengage with clients and ensure that their investment approach, wealth accumulation, and succession plans are still the right ones to meet their needs.
One theme arising out of the pandemic, and the devastating
economic results of it, is the need to re-think what risk
management is, and how insurance fits into the picture. Long
delays to being able to earn a living caused by lockdowns
probably were not contemplated six months ago. Usually, big
delays are more likely to be caused when a person gets very sick
and requires critical illness cover. (This news service has
looked at the critical illness issue before.) As we keep
reminding advisors, insurance is arguably an under-appreciated
part of the wealth solutions toolkit. (Of course, some healthy
scepticism is merited - insurers are bound to argue that what the
world needs is more of their products.)
Life insurance, in its different forms, is therefore bound to be
getting a mention as the world reconsiders how risk is managed,
priced, and explained. Here is Michael Gordon, US chief executive
and group chief operating officer at Lombard
International Assurance, the group owned by funds of
US-listed Blackstone. (Lombard has a presence in Asia, Europe,
North America and elsewhere. The editors are pleased to share
these views and invite readers to respond. Email tom.burroughes@wealthbriefing.com
and jackie.bennion@clearviewpublishing.com
The COVID-19 global pandemic is unparalleled in many of our
lifetimes. Its influence is challenging perspectives on all
aspects of life, including investments, bringing to light new
priorities beyond simply the market risk/return dynamic. Recent
research showed that 75 per cent of high net worth and ultra-HNW
individuals see future-proofing their wealth as more important
than ever, while conserving assets for their future was their top
investment goal (1). For those financial professionals managing
their investment portfolios, helping them grow, protect, and pass
on their wealth is more important than ever.
This task has been made more complicated by the current
macroeconomic environment. We witnessed record volatility in all
the major global indices at the start of the pandemic with many
industries being significantly affected, with the economic
implications going far beyond the initial expectation that it
would fall mostly on industries such as hospitality and
travel.
The market drawdown in March 2020 and subsequent unprecedented
volatility have increased investors’ concerns over their assets
and highlighted their own sensitivities towards loss. These
concerns are compounded by concerns that a post-pandemic world
will require increases in tax rates to support the debt used to
finance weathering the pandemic. In addition, the world remains
littered with uncertainty: we have an upcoming presidential
election in the United States, geopolitical unrest rattling
global markets, and strained trade and international relations
across several historical trade corridors - all of which are
further driving market uncertainty, even as market values are
increasingly unmoored from underlying fundamentals.
All of the aforementioned drivers point to a migration away from
passive investing and back to actively managed investment
strategies with low correlations to markets and that charge fees
for active asset selection expertise. In addition, many investors
are seeking investments backed by hard assets, or investments
that have a high illiquidity premium to achieve the return
profiles they need to match long-term liabilities, whether
retirement for individuals, benefits for a pension plan, or any
other liability driven type of investment.
In light of this situation, many financial professionals are
turning to alternatives (for example private equity or real
estate) to assist them with their clients’ wealth preservation
and wealth transfer objectives. It is now more important than
ever to help protect and preserve client portfolios, structuring
them in such a way that dampens the effect of equity market
drawdowns and changes in taxation, while also integrating
alternatives, further generating lower risks and higher returns
across all market environments. The overarching aim is portfolio
resilience, with a view to improved wealth growth and succession
planning over time.
Financial professionals need to be cognizant that while
alternatives exposure within a client’s portfolio can offer
decorrelation and diversification benefits, these investment
strategies can pose wealth structuring challenges in the form of
asset valuation, administrative burdens, and nuanced tax
treatment. The challenge for financial professionals is how to
incorporate alternative investments effectively into clients’
portfolios, while also taking into consideration the following
wealth planning objectives:
1. Maintaining a flexible, long term diversified, and
uncorrelated investment portfolio, including adequate
liquidity;
2. Finding efficient and goal-oriented products to efficiently
invest liquidity deriving from alternative investments;
3. Deferring or reducing taxation on investment returns;
4. Deferring or reducing taxation on accumulated wealth and
inheritances where possible;
5. Segregating and protecting wealth from bankruptcy and
third-party actions; and
6. Protecting families or businesses in case of their death.
With the recent market upheaval, investors are today presented
with the opportunity to review their wealth and succession
planning strategies and to consider transferring their portfolios
into more efficient investment structures, allowing them to
allocate to alternative investments (and stay invested in them
throughout the market cycle).
Insurance-based investment solutions, namely, for eligible
investors, private placement life insurance and private placement
variable annuities, present one such investment opportunity. PPLI
and PPVA can meet these needs and provide financial professionals
with a comprehensive means of managing their private investor
clients’ wealth in potentially more efficient structures.
In certain circumstances, insurance-based investment solutions
can offer a formidable set of advantages from a wealth
accumulation and succession planning perspective. Notably, the
illiquidity premiums from private equity and real estate (i.e.,
the additional return received for the additional risk of tying
up capital in a less liquid asset), combined with favorable tax
treatment, can provide additional alpha to investors without
changing the investors’ market risk/return exposure.
In an environment where capital gains might not be realised,
potentially better investment outcomes and possible insulation
from market fluctuations come as incredibly timely considerations
for financial professionals and their clients.
Today’s changing market conditions provide the opportunity for
financial professionals to reengage with clients and ensure their
investment approach, wealth accumulation, and succession plans
are still the right ones to meet their needs. As a flight to more
active and diversified investing unfolds, insurance-based
investment solutions, with their flexibility to provide efficient
access to alternative investments, should become a key component
of wealth accumulation and succession planning strategies.
Footnote:
1, Source: The Economist Intelligence Unit. 12 September,
2019.