The Super Rich Stress-Test their Financial Plans-So Should You!

The “Super Rich” (those with a net worth of $500 million or more) are those who typically have family offices. In addition, they typically engage a sizable lineup of professional advisors – from attorneys and CPA’s to insurance agents and an M&A team – to help them create and implement financial plans.

Granted, this “Success Team” is incomplete without a financial advisory firm, but in order to help ensure their 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 an incredibly intelligent 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. Upon review, it is not uncommon to discover 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 such as:

• What will actually happen to my assets when I pass on?
• How will my family be affected?
  Who will be tracking the hard assets such as homes, rental properties, 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 investment solutions by:

• Working the assumptions: A plethora of assumptions underlie all strategies and solutions. In stress-testing, these assumptions are modified to determine how the services 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 ensure that the services and strategies will accomplish your goals when tested amongst several scenarios, both good and bad (to extremes).
• Calculate cost structure: The intent here is to identify the best and most cost-effective solution possible. There are many “hidden” fees in the financial world, so it’s crucial to ask the question, “Are there any other fees I would be paying that I can’t see on my statement?”

Based on the stress test’s evaluation of the existing or proposed solutions, you might consider alternative strategies or investments. It can be very useful to do side-by-side comparisons between the solutions being considered or currently used and such alternatives, asking questions such as:

• How do the assumptions compare?
• How do the alternatives look when it comes to potentially achieving my goals?
• Which solutions are more cost-effective?

The end result of stress-testing culminates in recommendations and suggestions for improvement, and when observing these recommendations, there are typically five courses of action to consider:

1. Stay the course / No change: 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.
2. Choose different solutions: If the stress-testing finds what may be described as a system failure (i.e., 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.
3. Choose a different professional: If the solutions are appropriate but the professionals involved are really not up to the task of implementing them (if communication is poor/lacking, or if you don’t feel a warm, high level of comfort and trust with the professional in question), it will usually make sense to switch to a different and/or more capable experts.
4. 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.
5. Continue stress-testing: There are occasions when the individual or family chooses a professional to conduct a stress-test and that professional is either not up to the task or he/she seems to be somewhat incapable (or disinterested) in doing so. In cases such as these, the only viable course of action is to select a different professional to conduct the stress-testing and consider other alternatives.

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! In fact, the Exit Planning Institute released a report in which it found that 80% of the average owner/CEO’s net worth is their company.

Certainly, there is a cost to stress-testing estate, asset protection and income tax plans. That cost will depend greatly on the complexity of the testing involved and your situation.

However, the fee to perform a stress-test can be a whole lot cheaper than the costs (financially, but also emotionally and psychologically) of a plan or solution that is fundamentally flawed or in conflict with your goals.

At our office, we work with our clients in one of two ways:

Fee for Plan: This is when an individual or family enjoys finance, the markets, research, and prefers to do things on their own. In this case, we charge anywhere between $4,000 on the low-end, upwards of $45,000, all depending on an individual or family’s net-worth, providing the client with comprehensive financial planning advice, including investment recommendations.

Full Service: This is when an individual or family prefers to hire a fiduciary financial advisory firm, not only for financial, tax, insurance, estate, and retirement planning advice, but also for implementation of the plan, including full-service investment / portfolio management. In this case, we have a minimum of $500,000 (total investable assets) and charge anywhere between 0.50% to 1.75%/year, depending on the amount of assets we’re managing for you.

If you don’t have a plan – or if you haven’t stress-tested your plan in a while and would like to get a second opinion, we’d love to help! Just CLICK HERE to take the first steps and answer a few questions.

‘till next time!

Adam