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Stress Testing Client Wealth Plans

Three keys to success.

Stress testing is becoming an increasingly popular activity among the wealthy and their advisors. It involves putting a wealth plan through its paces—evaluating and assessing it to see if the strategies being used are likely to achieve a wealthy family’s key financial goals and objectives. Stress testing also seeks to identify any strategies or opportunities that are currently being overlooked but that could add significant value to the family’s financial life.

Another big benefit of stress testing is that it can help put various financial strategies and efforts together to create a comprehensive picture. Some families implement their wealth solutions piecemeal—using various professionals who rarely (if ever) work together on the families’ behalf. It’s a bit like building a house but having different construction companies build each room without ever coordinating their efforts. A stress test can examine how well the various solutions work together.

As with so many financial resources, stress testing really got its start among some of the wealthiest families—such as the Super Rich (people with a net worth of $500 million or more). We find that many of these families want to be sure that they are positioned to achieve their often-complex goals—and that they are always working with high-quality pros attuned to their needs and preferences. This can be particularly important to the very wealthy, who may be especially targeted by “professionals” who over-promise and under-deliver—or who outright try to steal wealth from them (a la Bernie Madoff).

A Growing Trend

Naturally, many families who were “merely affluent” also wanted in on this. After all, who wouldn’t want to get a handle on how their wealth plan might behave in various scenarios and learn whether any improvements could be made? And as more and more wealth management strategies and products become available to individuals and families who are significantly less affluent than the Super Rich, it is no surprise that stress testing is gaining traction.

But we’ve noticed a troubling trend. As stress testing becomes more commonplace, it’s not always being done with as much focus and rigor as is often necessary. As a result, there can be faults, errors and missteps made by some professionals who proclaim they are adept at the process, but who don’t fully grasp stress testing. This has led to some substandard outcomes.

If you want to stress test your client's personal financial situation, how can you be confident you're up to snuff? Consider these questions:

Can You Clearly Explain The Process Of Stress Testing And Its Value?

It’s a good sign when a financial professional can explain stress testing—the value it can bring and the reasons for doing a stress test in the first place.

For starters, stress testing is not about being sold services or products, nor is it going to always result in making any changes to the current wealth plan.

Instead, think of stress testing as more like an annual physical checkup. Your client may not have any medical concerns going into the appointment, but they show up because they want to ensure that any unidentified or hidden problems are uncovered. That way, they can take steps before the problems become serious.

Stress testing can also be done, and often is done, when people don’t know if they have the best wealth management solutions for their situation. If you feel confused or uncertain about the wealth management solutions your clients are employing—which might occur after a big life change, for instance—then stress testing may be a good idea.

Recommendation: Be able to explain the process as well as all the ramifications that are likely to occur. A nice bonus is if you can share with clients examples of stress testing and how it benefited other families.

Are You Focused On The Human Element?

Stress testing isn’t meant to coldly evaluate each of your client's wealth strategies versus some benchmark. Rather, it’s designed to help your client see if the plans, collectively, are still well suited for them (based on their needs, wants and preferences) versus available alternatives.

In short, in order to be effective, a stress test has to take into account important personal and even emotional traits. This human element is vital in ensuring clients are getting the desired wealth management results—and that those results are within the parameters they want to establish.

That means the professional who does the stress test has to have a deep understanding of the client—including their goals and values as a person, not just net worth. Such an understanding takes some time to develop and often relies on individuals sharing their concerns as well as their hopes and wishes. Professionals who employ systematic processes to develop insight into their clients and are able to connect the dots based on these insights will be most able to consistently create significant advantages for their clients through stress testing.

Important: Many times, high-quality stress testing does not lead to any meaningful changes in a family’s wealth plan. While some minor refinements and tweaking are common, major changes usually aren’t needed. That said, when errors and oversights are uncovered, they can be quite substantial.

Recommendation: Be truly client-centered—that is, focused on your clients as people.

Are You Technically Proficient?

This question invoilves a bit of harsh honesty and some self awareness. Although the human element takes center stage, it won’t do much good if the person doing the stress test can’t expertly evaluate a client's current wealth solutions or ones that potentially could be a good fit for them.

A highly proficient professional can evaluate the most sophisticated and complex wealth management solutions to see if they work, are working as expected and are not in any way skirting laws or regulations. He or she also will be knowledgeable about alternative strategies and products and be able to bring in specialists if needed to evaluate current strategies and alternatives that may be superior. Being able to construct side-by-side comparisons and looking at all qualities of a wealth management solution (including efficacy and cost effectiveness) are characteristic of a highly technically proficient professional.

We believe technically expert professionals who understand what stress testing really is (and is not) and have a keen awareness of the human element of wealth planning are the best people to conduct stress tests for clients. These professionals are, generally, best positioned to actually deliver the significant value that a well-conducted stress test can offer your clients and their families.

Eric Lawton is president of Impact Financial Wealth Management and Family Office Services.

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