Unfortunately, most families don’t have a good risk management strategy in place to protect their assets if the market takes a turn for the worse. Even those who are working with a financial advisor may not know what their advisor’s risk management strategy is. If this is the case, it may be a tell-tale sign that it’s time to change wealth managers or at least to consider asking your current advisor about risk management planning.
Given the current turbulent state of the markets, inflation, and the Federal Reserve interest rate hikes — not to mention recent geopolitical events that have triggered increased risk for all investors — it is as important as ever to have a plan that safeguards your wealth across multiple areas of your financial plan.
At Avidian Wealth Solutions, risk management is incorporated into all of our high-net-worth wealth management services. In this article, our top advisors dive into what is included in a good risk management strategy and why you should include these protective measures in your financial plan.
What is a risk management plan?
A risk management strategy is a plan set in place by you or your financial advisor that takes into account your specific assets, and liabilities, as well as short-term and long-term goals. They are typically designed by predicting potential risks, creating responses to these risks, and continuously monitoring your strategy making adjustments as needed.
For investments, predicting risk may mean considering the risk of a specific investment going to zero, the risk of needing to sell that investment at an unfavorable time, the risk of inflation diminishing the value of that security, and the risk of you outliving your investments. With this information, your financial advisor can create a comprehensive and continuous approach to mitigating these risks.
Keep in mind that while you can create a risk management strategy on your own, partnering with a fiduciary firm to do so is in your better interest. A wealth management firm has the expertise and experience to know the best ways to mitigate risk for your unique financial situation and is able to take a birds-eye approach to mitigate those risks across multiple areas of your financial plan.
Why is a risk management strategy important?
A risk management plan can help reduce the likelihood of your wealth being affected by future risks in everything from financial planning for business owners to your retirement planning and investment strategy. Without one, you could suffer from catastrophic financial loss by taking on excessive amounts of risk, known or unknown.
For example, consider the importance of risk management and estate planning. There is an inherent risk when planning for what will happen to your wealth beyond your time. Depending on how much you’re leaving behind, it’s wise to consider tax implications, check for gaps in insurance coverage, and incorporate asset protection strategies to preserve your wealth for future generations.
When the financial advisors at Avidian Wealth Solutions offer financial advice for high-net-worth individuals, we guide you in incorporating a risk management strategy that includes any of these factors that are relevant to your estate planning.
How do you develop a financial risk management plan?
Here are the four key components of a risk management plan:
1. Identify the risks and consider your risk tolerance
Before you can know how to plan for potential risks, those risks need to be identified. By identifying each area of potential risk, you are more likely to avoid missing potential sources of risk and therefore reduce your risk of being blindsided later. These can be things like inflation, volatility and market risks, or liquidity risks.
You’ll also want to consider what risk tolerance you are comfortable with based on your age, goals, income, and investment level. Someone who is closer to retirement, for example, may find themselves more comfortable with lower-risk investments than ones that risk more of their retirement savings.
2. Create a response plan
Once you understand the potential risks that your financial plan could face in each of its phases, you can start to think through the question “what do I do about it?” If you decide that the risk is too much to take, you can avoid it altogether. You may even decide that the inherent risk is worth it and allow it to play out on its own. Or, if you haven’t already, you can hire a wealth manager who is transparent about their risk management strategies to handle it for you.
3. Actively mitigate risk
This is the implementation phase of risk management in finance. It’s where you take action to mitigate risks as they come and may include reallocating, buying, or selling securities when necessary.
4. Regularly monitor your portfolio
Despite planning for and predicting future risks, your predicted risks can alter over time as political events occur, the markets change, or even as your financial goals shift. What you once saw as a minor risk, may develop into a larger risk that needs to be more of a priority. This is especially true when it comes to risk management in tax strategies for high-net-worth individuals as the tax laws are constantly changing. That said, you should be incorporating regular risk assessments as the last step to creating a good risk management strategy.
Looking for a wealth manager who is transparent about their risk management strategies? Call Avidian Wealth Solutions!
When it comes to incorporating a good risk management strategy, it’s best not to leave your wealth up to fate. Instead, it’s in your best interest to partner with a trustworthy wealth management firm that offers financial risk management in Houston.
That firm is Avidian Wealth Solutions. We offer our client’s a boutique family office experience that offers a complete suite of financial services including risk management, tax planning, investment strategies, retirement planning, and more. When you partner with us, we provide you with total clarity on how we will manage your wealth in difficult cycles so that you’re never in the dark about your risk management strategy.
To learn more about our approach to risk management, schedule a meeting with us today!
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