The Super Rich (those with a net worth of $500 million or more) who have family offices typically engage a sizable lineup of professional advisors to help them create and implement financial plans. To help ensure those plans are both state-of-the-art as well as in line with their needs and wants, many of them regularly “stress test” these plans.
Here’s why you should join them in that effort—even if you’re not nearly as wealthy.
Asking “What if?”
Stress testing financial plans can be a very smart way to help make certain that the plan will deliver as promised. The fact is, financial plans that might look great on paper all too often prove to be much less impactful once they are implemented. It is not uncommon for there to be unintended consequences that can even derail one’s agenda.
At heart, stress testing is when you ask, “What if …?” about a variety of areas of a financial plan you have or are considering. When it comes to estate planning, for instance, a wealthy individual might ask questions like:
- What will actually happen to my assets when I pass on?
- How will my family be affected, precisely?
- Who will be tracking the hard assets such as artwork and jewelry to make sure they go to the designated heirs—as opposed to vanishing?
- Who is going to make sure my estate plan is being executed as it’s supposed to be?
To be effective and informative, stress testing should be done in a systematic manner. While there are some variations, the basic process starts by determining your goals. Your goals, any problems to be addressed and opportunities to benefit should be the driving forces behind the financial and legal solutions you employ.
STRESS TESTING FOR EVERYONE
Once you clearly understand your goals, you can evaluate the specific existing or proposed financial services or products. There are numerous ways to dissect and critically assess financial services and products:
- Work the assumptions. A plethora of assumptions underlie all services and products. In stress testing, these assumptions are modified to determine how the solutions will work when a given scenario changes.
- Evaluate alignment with goals and objectives. A solution might prove to work extremely well, but still not achieve the desired results. It’s essential to help ensure that the services and products will accomplish your goals.
- Calculate cost structure. The intent here is to identify the best and most cost-effective solution possible. When calculating cost structures, all the expenses should be specified—including long-term costs.
Based on the stress test’s evaluation of the existing or proposed solutions, you might consider alternative products or services. It can be very useful to do side-by-side comparisons between the solutions being considered or currently used and such alternatives, asking questions like:
- How do the assumptions compare?
- How do the alternatives rate when it comes to potentially achieving my goals?
- Which solutions are more cost-effective?
The end result of the process: recommendations. Based on those recommendations, there are five courses of action to consider taking:
- Stay the course. If the stress testing found the solutions being used or proposed to be on target and of high quality, the recommended action is to stay the course.
- Choose different solutions. If the stress testing finds what may be described as a system failure—the financial products being used are not going to achieve the desired results and might even blow up, for instance—the right move is to take a different course of action.
- Choose a different professional. If the solutions are appropriate but the professionals involved are really not up to the task of implementing them (or they charge too much money), it will usually make sense to switch to more capable and/or cost-effective experts.
- Modify the approach with the original professional. If the solutions can be made more powerful with only slight modifications, the best route is often to stick with the original professionals and have them make the minor changes needed.
- Continue stress testing. There are occasions when the individual or family chooses a professional to conduct a stress test and that professional is not up to the task. This comes out often clearly in the process or results of the stress testing. The only viable course of action is to select a different professional to conduct the stress testing.
Although stress tests are commonly used among the Super Rich, they should be a part of most people’s due diligence process when vetting financial plans, financial products and financial services. Frequently, stress tests uncover flaws in financial plans as well as better ways to achieve desired outcomes. For those reasons, stress tests will likely benefit a great number of people—especially business owners and their families, who generally have so much of their future financial security riding on one asset: their business.
DISCLOSURE: Projections or other information generated by the use of tools designed to test various investment outcomes are hypothetical in nature, can vary with each use and over time, and do not reflect actual investment results and are not guarantees of future results.
ACKNOWLEDGMENT: This article was published by the VFO Inner Circle, a global financial concierge group working with affluent individuals and families and is distributed with its permission. Copyright 2018 by AES Nation, LLC.
This report is intended to be used for educational purposes only and does not constitute a solicitation to purchase any security or advisory services. Past performance is no guarantee of future results. An investment in any security involves significant risks and any investment may lose value. Refer to all risk disclosures related to each security product carefully before investing. Securities offered through Robert W. Baird. The Gervais Group is a registered representative of Robert W. Baird. The Gervais Group and Robert W. Baird are not affiliated with AES Nation, LLC. AES Nation, LLC is the creator and publisher of the VFO Inner Circle Flash Report.