Wealth Strategies

Protecting Clients' Portfolios In Tough Times - The Insurance Angle

Michael Gordon 29 June 2020


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.

1, Source: The Economist Intelligence Unit. 12 September, 2019.



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