The following is in response to Bob Veres’ article, Envisioning the Planning Firm of the Future, which appeared last week:
Dear Editor,
Veres touched on all of the key points. But he as well as others always omits risk management of human capital. What happens to that wonderful portfolio planning for the family if the key income generator or accumulator of capital dies too soon or gets sick and is unable to work? Why doesn’t anyone ever recommend using life or disability insurance as human-capital risk-management tools? “It is always more important to focus on the consequences of an event than the probabilities of the event occurring,” as Peter Bernstein once wrote.
We administer and manage significant non-qualified deferred-compensation portfolios for senior executives (88,000 in 65 countries). We too have been guilty of managing for accumulation and distribution. But, we use institutional life and disability insurance to cover those risks. We experience premature deaths, illness and witness first-hand the planning for death and disability.
Joe Carpenter
President
NFP Executive Benefits
Brentwood, TN
Bob Veres replies:
You raised a good point, and one that I actually left out deliberately in the interests of space. In actual fact, the human capital work that Richie Lee, Elizabeth Jetton and Mike Haubrich are doing brings the life and disability needs into very clear focus. When you start tending the "human-capital portfolio," and start quantifying and enhancing it, then you realize that this much larger (in some cases) piece of the client's expected net worth is at constant risk – and perhaps more importantly, you can start to define its value with some precision. The recommendation is no longer: How much can you afford? It becomes: This is what is at risk, during this time period. Do you want to make that financial risk go away or not?
The problem with life insurance is that it isn't a very flexible tool. Over time, gradually, the value of a client's human capital is transferred to the tangible retirement portfolio, one paycheck at a time. But you can't buy life insurance that way. Disability insurance, as you know, can be more flexible simply because it focuses on the current income of the client. But there, too, you have to work to adapt it to the circumstances, with questions, for example, about what a client's human capital is worth before and after any particular injury.
This may be an article all in itself, but only people like you who dig below the surface are going to be willing to read more than a page or two. One of the constraints on my profession is that things that people seldom enjoy are exactly what they ought to be reading about.
Thanks for your comments. They were entirely justified.
