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The 7 Biggest Threats Facing High Net Worth Families Today

From computer hackers to resentful relatives, more money can mean more problems. The good news: You can do something about it.

high net worth Illustration by Maguma

Ironically, good fortune often exacerbates the challenges facing high net worth families, whose affluence makes them more vulnerable to investment fraud, kidnapping, cyberattacks and other menaces. Thankfully, advance planning and expert advice can reduce their risk.

“We don’t work from the position of advocating that clients operate in a state of fear, but rather that they just be thoughtful,” says Jordan Arnold, executive managing director and head of K2 Intelligence’s private client service and strategic risk and security practices. “There’s so much you can do to mitigate avoidable threats.”

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Following are the best ways to identify and reduce potential dangers.

1
Cybersecurity

“It’s dangerous on the web,” says Mark Rasch, a cybersecurity attorney in Washington, D.C. Rasch, a former federal prosecutor who handled computer hacking cases for the Department of Justice in the 1980s, says today’s threats are exponentially more harmful, particularly to high net worth families.

“High net worth individuals tend to have a large amount of very sensitive and confidential information. Because their reputations are significant, even stuff that has no economic value can cause significant harm,” Rasch says.

Among the nightmare scenarios he confronts daily: hacking of electronic devices, allowing bad actors access to confidential financial, medical and legal information; doxxing—the release of personal information about victims and/or their family members; revenge pornography; identity theft; identity fraud; and extortion.

Then there are viruses: ransomware, which is used to take over a computer system until ransom is paid; DDoS (distributed denial of service) attacks, which flood a computer’s network and prevent access to files; malware, malicious code and “cuckoo’s egg” attacks, in which hackers access their victim’s computer and upload illegal items, ranging from child pornography to fraudulent tax documents.

“It’s essentially planting evidence of criminality onto your computer in a way that’ll get you arrested,” Rasch explains.

Cyber-intruders can also break their way into voice-activated devices, Nest thermostats and other devices and self-driving cars. “If I can get to your home webcams, I can case the joint. I can turn alarms on and off,” Rasch says. “I can also get to the data on your computer by being able to hack into your Alexa. If there’s vulnerability in one, there’s vulnerability in all.”

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Our legal system is woefully outdated when it comes to prosecuting these kinds of crimes, whether perpetrated against individuals or companies. “The law tends to deal by analogy: We think about things like trespass and theft, and we don’t have really good laws with respect to digital privacy,” Rasch says. “We have defamation law if information’s false. And then we have the concept of a public figure, which provides legal protection to the hacker. When we talk about doxxing, if I simply put out the routes you use to drive your kids to school, what’s the crime?”

Fortunately, there are strategies that can help significantly reduce some of the risks. Rasch recommends that all users be vigilant about their devices’ connectivity and exposure, create strong passwords and ensure that security cameras are not internet protocol-based.

He also advises encryption for email and phones, and a robust threat assessment program. “You need skilled researchers who are on the internet looking for information about you, your family and your companies, so you can get an early warning if any of that stuff finds its way to the dark web. Are people talking about you? Are they threatening you?”

Rasch advises his clients to purchase cyberthreat insurance and have the ready ability to buy bitcoin, if needed, to pay ransom. Their financial institutions and law firms should follow stringent cybersecurity practices.

Finally, if a client becomes the victim of a cybercrime, Rasch recommends enlisting a team of experts. “Have a rapid response program that includes legal, forensics, technology, investigations, crisis management and public relations,” he says. “The law very rarely works to prevent or punish these things. Identification, prevention and a quick response are what’s important.”

2
Physical Security

Former CIA profiler and counterterrorism expert Terry Gudaitis specializes in the nexus between cyber and physical security, both when her clients are home and when they travel.

Home security—locks, alarms, motion sensors, gating systems—has to be standalone, she says, and should not be intertwined with apps such as ring.com, which can pose cybersecurity risks.

Gudaitis, a professor at George Mason University and founder of Mindstar Security & Profiling, recommends that families hire a local security firm—which is likely to be quicker to respond and often provides more ease of access to security logs—to install alarms, motion sensors and monitoring devices, and to keep a server, with logs and video, in their own home.

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For some families, Gudaitis engineers a safe room. “Home invaders can take out the modem and electricity or use a jammer to jam phone lines and WiFi connections, so it’s key that there are additional hard lines or satellites to communicate outbound,” she says. As another benefit, she notes, the room can serve as a safe space during a tornado or a hurricane.

High net worth families can also face threats from staff, even when household workers do not have bad intentions.

“From housekeepers to groundskeepers, there is a whole collection of folks trusted by the family who have entry into the home,” she says. “It could be that they’ve taken pictures in the home and innocently posted them somewhere, and now you have as many as a dozen people who are disclosing information about that family, about the home, about the activities within the home.”

To counter the risk, Gudaitis recommends having all vendors sign strict nondisclosure agreements, forbidding them from posting anything about the family.

Arnold, from K2, cautions clients not to “put trust on autopilot.”

“A family will hire someone to join their inner circle, and they either do no or subpar diligence at the point of hire, and then do nothing else on a going-forward basis,” he says. “A person can be worthy of trust on the day they get hired, but within a matter of months or years later, their profile could change dramatically.”

The solution, Arnold says, is thorough vetting before hiring, and regular monitoring of all employees.

Still, both Gudaitis and Arnold note, high net worth families needn’t feel under siege.

“I’m not a big believer in putting bars on your windows, and making your house look like a federal prison. There are a lot of things that can be done through architectural detail, landscaping and lighting that can make a huge difference and be a deterrent,” Gudaitis says. “No home is burglar-proof or break-in-proof, but your home needs to look less vulnerable to a thief than your neighbor’s.”

Since potential robbers often observe their targets for several weeks before acting, Gudaitis also advises families to change their daily routines, varying their vehicles, commuting routes and departure times as much as possible.

3
Travel

Illustration by Maguma

When families travel, basic common sense makes a big difference. Keep copies of all important documents, particularly passports and credit cards, in a safe, secondary location, and use your initials and a corporate address—never your full name or home address—on your luggage, says Gudaitis.

Another significant but easily avoided risk: public WiFi. “The amount of data on a phone, a laptop and an iPad is so valuable that roaming WiFi should be turned off at all costs,” Gudaitis says. “This is a bit crass, but when you have your WiFi turned on, you’ve got to think of that as a digital STD waiting to happen. You are sticking your device into different WiFi connections and you have no idea if they’re rogue.”

Instead, use your cell service. Arnold recommends carrying your own MiFi device.

High net worth travelers should also travel with a satellite phone or a Bluetooth beacon, which will send authorities a request for help and a GPS location if needed.

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For foreign travel, Gudaitis urges her clients to register with the U.S. State Department, which will alert them to any known threats. Sometimes she arranges private security details, even in places that may not seem dangerous.

“You’re going to the regatta in Monte Carlo, where it’s going to be a hotbed of you and 200 other 100-plus-foot yacht owners; it’s a really good place for all kinds of criminals to also be circulating,” she notes.

Another essential precaution is arranging licensed transportation ahead of a trip.

“The risk of ‘express kidnappings’ is extraordinarily high when a family is going with someone at an airport who may present as a private driver or an Uber driver,” says Arnold. “They could be either an individual or part of a crew that does express kidnappings, where victims are taken, often at gunpoint, to a series of ATM machines and are forced to withdraw money until they hit their maximum.”

In the extremely rare event that families experience a more traditional kidnapping, Gudaitis says that standard kidnap and ransom insurance is typically insufficient.

“Ninety-nine-point-nine percent of people will never use their K&R insurance, but everyone should take the time, at least for a day, to sit down with their security professional and make a crisis response plan,” says Gudaitis. In an overseas kidnapping, the U.S. Embassy won’t have investigative jurisdiction, and national police are unlikely to help. A professional team will know how to coordinate the efforts of a negotiator and an insurance company with the intelligence provided by the kidnapper.

“In most of these situations, the kidnappers want money,” she notes. “It’s not because they’re terrorists.”

4
Collectibles Security

Fine art, fine wine and collectible cars are all subject to fraud and damage, says Arnold, who prosecuted art theft and fraud prior to joining K2, where he oversees investigating acquisitions prior to purchase, establishing secure environments for transporting and displaying collections, recovering property and handling lawsuits over fraudulent items.

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In 2018, Arnold and a colleague recovered a stolen painting on the West Coast on behalf of an insurance company, saving it a “hefty six-figure payout.” His team includes experts in art storage and preservation and a Princeton-educated PhD in art history, who was previously a provenance researcher for the Cleveland Museum of Art.

Collectible owners need to be very mindful of potential fraud, of course. The old adage of “penny wise, pound foolish” applies.

“Investing in avoidance is always less costly than trying to unwind a fraud,” Arnold says, noting that diligence has to extend beyond the objects themselves to staff members working with the collectibles.

Before conducting any high-stakes transaction, whether it has to do with art, wine or vehicles, Arnold recommends investigating the dealer, looking into whether there have been any fraud lawsuits or if the seller has experienced financial distress.

“A significant amount of the fraud that we see is either perpetrated or at least facilitated by insiders,” he says.

5
Investments

High net worth investors should be especially careful about taxes, illiquidity and legacy, says Kelly DiGonzini, senior financial planner at Beacon Pointe, one of the country’s largest registered investment advisors.

DiGonzini notes that poor record-keeping can lead to big tax penalties. She has clients whose father invested 40 years ago in a nascent company that’s now extremely successful. Lacking the original cost basis documentation, they will be taxed on all gains, as if the original purchase price had been zero. DiGonzini’s firm works with its high net worth clients to create meticulous records of all of their investments in a secure online vault.

Once this material is organized, DiGonzini helps clients strategize about taxes. For those with large gains, she recommends tax-loss harvesting and taking advantage of the charitable deductions provided by donor-advised and qualified opportunity zone (QOZ) funds. Still, with a time frame of 10 years for maximum benefits, those funds also pose risks of illiquidity.

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“You have to be really careful and make sure you understand what the underlying investments are, especially before locking up your money for 10 years,” she says.

Some QOZ funds may not require a 10-year commitment, but DiGonzini notes that any early redemptions would result in the forgoing of some of the additional tax benefits.

DiGonzini also creates two portfolios for clients: one for lifestyle expenses—everything from travel to tuition to long-term healthcare costs—and a second one, the “legacy” portfolio, invested more aggressively for a longer time horizon and intended to benefit children, grandchildren and/or charitable causes.

DiGonzini also advises vigilance against online fraud, urging careful protection and monitoring of credit scores.

High net worth families need to communicate clearly with each other, both to establish their values and to share intelligence about assets. “Not sharing information is a big risk,” says DiGonzini. One family she worked with suffered the unexpected loss of their father, who had a number of investments and accounts that he hadn’t told his family about.

“It took them years of going through probate, a very expensive and time-consuming process,” she says. “It took a sad situation from bad to worse.”

Being underinsured is another area that high net worth families ignore at their peril. “It’s a huge risk. Everyone should have an umbrella policy because we live in an increasingly litigious society,” she says. “We all need to protect ourselves.”

Finally, high net worth families need to keep an eye on the cost of long-term healthcare, which has increased dramatically in the last 10 years. “We build in large buffers for those expenses, because we really don’t know how much it’s going to be when our clients need it,” DiGonzini says. “A lot of the carrier insurance companies that used to sell long-term care insurance have gotten out of the business.”

6
Weather-Related Damage

Illustration by Maguma

“Weather patterns are changing. What we used to call 100-year events seem to be happening every two to five years now,” says Kenneth Sidlowski, practice group leader of the Horton Private Client Group. “We’ve been seeing major weather events, between the hurricanes on the East Coast and the wildfires on the West Coast.”

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For Sidlowski and his colleagues, providing coverage for high net worth homes affected by flooding and fire poses new challenges.

“Insurance companies are really starting to buckle down on underwriting guidelines and which risks they will take. They’re being very selective and/or are not offering the coverage at all,” he says.

Sidlowski’s advice: Consult your advisors before making a major real estate purchase, particularly on the East or West coast. Investigate things like wind mitigation and hurricane-resistant glass on the East Coast. On the West Coast, he says, brush clearance is essential.

High net worth homeowners have a few options, Sidlowski says: buying excess and surplus line insurance or simply self-insuring for perils like fire, theft and vandalism. Some clients self-insure hurricane and flood coverage. Regardless, he says, clients should always extend their personal and excess liability to all of their homes.

Sidlowski also recommends that homeowners work with professional inspectors who can analyze weather-driven variables like wind or flood mitigation.

Fran O’Brien, a division president of Chubb Personal Risk Services, agrees. Since 2005, Chubb’s water-related loss claims of more than $500,000 have doubled and those over $1 million have tripled. “Water damage is actually the most common type of property-related damage,” O’Brien says. “What’s worse, these types of claims are only getting more expensive.”

7
Relationships

As extreme affluence becomes an increasingly contentious issue in America, resentments born of differentials in wealth can wreak havoc on personal relationships.

“Wealth can create a sense of isolation and distance. Money can loom so large because it’s emotional and often is not discussed even with people close to us, maybe especially with people close to us,” says Jennifer Risher, author of the upcoming We Need to Talk: A Memoir About Wealth (Red Hen Press, May 2020).

Risher was an early employee at Microsoft, where she met her husband, David, who later became one of Amazon’s first executives. When the couple became extremely wealthy in their 30s, their massive windfall posed a number of challenges to their relationships with family and friends.

Risher and her husband had offered her brother $20,000 as a gift. When he was single, he didn’t accept the money. After he got married, he did accept it and then came to expect the annual offer. The Rishers struggled with how to react when her brother stopped thanking them.

“When he didn’t take the initial money, I felt rejected, but I didn’t say anything. If I had spoken up or just tried to connect at the moment, it would have been helpful,” Risher says. “And then we gave them money for their wedding, and then every year and over time when he didn’t thank me, I didn’t say anything, but I felt resentful.”

Risher also struggled with how to celebrate the twin good fortunes of having a new baby and new financial freedom. “We had our first child, and Amazon went public. It felt so wonderful to share the experience of new motherhood with other women, but the opposite was true with wealth: I didn’t know what I was supposed to do with it,” she says.

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One solution: returning to the normal activities she would have done had she not become so wealthy, like carpooling. “I felt more of a connection to other parents,” she says. “They were relying on me and I was relying on them, and our kids were more connected and part of the community and the afternoon shuffle.”

Risher’s daughters are now 20 and 22 years old, and from the sound of it, are admirably self-motivated and well adjusted. Still, Risher says, she wishes she had communicated more openly about money and financial planning when they were younger. “We got the values right and the attitude and the gratitude, but they’re lacking tactics and tools about finances,” she says.

Ultimately, Risher says, candor, though difficult, is best. “The timing for any discussion about money has to be right. Acknowledge how awkward it is,” she says. “More intimacy is created when you share how you feel.”

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