why and how to stress test client plans

what if? better to ask now.

by anthony glomski

i wrote this series of posts to help successful entrepreneurs and their advisors learn how they can build on their impressive accomplishments and utilize their wealth to achieve even greater things going forward – for themselves, for their families, for their communities and for the causes they care about.

more: three questions for clients who want to manage their own wealth | how to build your team of experts | why a virtual family office? why now? | preserving wealth is a different mindset | three approaches to investment consulting | 2022世界杯32强赛程表时间
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the fact is, your clients should take their financial health as seriously as they take their physical health. one of the best ways to ensure that their financial plan is strong enough to withstand whatever the market, the economy and life circumstances throw their way is to perform a regular “stress test” of their financial plan.

when most people hear the phrase “stress test,” they think of a treadmill in a cardiologist’s office or banking regulators assessing the reserves of a financial institution post-global financial crisis. perhaps they think about how we got through the worst days of the 2020 global pandemic.

as we discussed earlier, the super rich (those with a net worth of $500 million or more) have long turned to the family office model to address the complexity in their personal financial lives. they have a legion of the top professional advisors to help them create and implement bespoke wealth plans. you may be surprised that despite being served by the best of the best, nearly 70 percent of these family offices incur a large cost every few years to run a stress test with outside advisors. why? excellent question. they want to 1) ensure that everything is set up, running properly and 2) confirm that they aren’t missing any opportunities. at this level usually everything is correct and fully optimized. however, if that isn’t the case, it can have massive implications.

now there’s a way to stress-test your clients’ financial plans – even if they’re not ultrawealthy.

what is stress testing?

essentially, stress testing asks, “what if?” it’s a process of looking at a range of possible scenarios and outcomes, pushing those scenarios to their breaking points, weighing viable solutions and choosing plans that are most likely to deliver as desired.

let’s look at estate planning, for instance, which is less than “boilerplate.” an entrepreneur with a complex situation might ask questions like these:

• what will actually happen to my assets when i am no longer here?
• am i completely certain that my family will be taken care of in the way i see fit?
• how do i prevent my future ex-son-in-law or daughter-in-law from getting my money?
• who will be tracking the hard assets (e.g., artwork and jewelry) so they go to the right place – as opposed to being liquidated below market value?
• how do i prevent the executor of my estate from going awry (doing something different than what i want)?
• how do i put guardrails in place for my son who would otherwise spend all his inherited money on a lamborghini and ferrari collection (yes sadly this happens and not just with collectible cars).
• how do i create fairness among my kids, even though they aren’t equally equipped as individuals to handle the complexity?
• what incentives can i put in place to get my children involved in causes i/they care about?

stress testing helps people find the right set of solutions by seeing how their plans hold up when placed under intense theoretical pressure.

why you should perform stress tests for your clients

any financial plan has the potential for success and failure. they may look great on paper, but not perform well when actually executed. unintended consequences can and do happen – derailing your client’s hard-earned agenda.

stress testing will help you and your client navigate uncertainty so that you can be more confident that their plan will deliver as promised. when you examine strategies with a series of smart “what if?” questions, you’re more likely to find the right solutions and achieve your desired results.

how it’s done

to be effective and informative, stress testing should be done in a systematic manner. while there are variations on the process, it must start with your client’s goals and concerns. clear objectives, potential problems and possible opportunities should drive the financial and legal options you eventually will present.

once you clearly and deeply understand a client’s goals and concerns, you can work with a team to evaluate the specific existing or proposed financial services or products. here’s how we suggest you assess them:

• challenge assumptions. 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. make sure your client’s plan supports their objectives.
• calculate cost structure. the intent here is to identify the best and most cost-effective solutions possible. when calculating cost structures, all expenses should be specified – including long-term costs.

based on the stress test’s evaluation of the existing or proposed solutions, you might recommend alternative products or services. it can be useful to do a side-by-side analysis of the proposed solutions. ask your client questions like these:

• what happens when we challenge the assumptions?
• are any alternative solutions better able to help you achieve your goals?
• which solutions are most cost-effective?

once you’ve taken these steps, it’s time to consider your options:

1. stay the course. if the stress testing found your client’s current (or proposed) solutions to be on target and of high quality, stay the course.
2. choose different solutions. if the stress testing found a “system failure” – a financial product isn’t likely to achieve the desired results – choose an alternative.
3. bring on the right professionals. if the solutions proposed are appropriate, but the professionals involved aren’t able to implement those solutions (or they charge too much money), switch to more capable and/or cost-effective outside experts.
4. modify the approach with the original professional. if the solutions can be made better with only slight modifications, it’s sometimes best to stick with the original professionals and have them make any minor changes.

not just for the super rich

although stress tests are commonly performed for the super rich, all of your successful clients (and referrals) should be using a stress test to vet their financial plans, products and services. stress tests uncover not only flaws in financial strategies, but more efficient and cost-effective ways to achieve desired outcomes. business owners and their families are especially likely to benefit from financial stress tests as so much of their financial security often rides on one asset – their business.

a small price to pay for peace of mind

certainly, there’s a cost to stress testing estate, asset-protection and income-tax plans. that cost will depend greatly on the complexity of the testing and their situation. however, the fee for a financial stress test can be a whole lot less costly than the financial, emotional and psychological expenses of a plan or solution that’s fundamentally flawed or in conflict with your client’s goals.

many entrepreneurs want to be sure they are making the smart decisions with their money. as your client’s personal cfo, you want to be sure that everything is set up properly, working the way they want, and that they aren’t missing any opportunities. stress testing is vital for this process.

it would be restating the obvious to say the world is in a much different place than it was just a short time ago. socially, economically, politically, everything we took for granted has been shaken up. now more than ever, the world needs you and your clients need you. i know from consensus that savvy cpas like you quickly pivoted to meet the challenges we face. the world turned upside down and you turned your practice around in warp speed, shifting from a compliance provider to an advisor and trusted partner.

you are in a unique and very important position. you are the most trusted advisor to your clients. countless studies and data confirms this fact. i also hear it all the time from successful entrepreneurs who tell me, “i trust my cpa more than anybody else.” and you know this deep down as well. bridging the gap for the clients you’ve helped – the people who mean so much to you – can radically transform the meaning of your life. i know this, because that’s exactly what happened to me when i started marching down the collaborative wealth management path. i challenge you to start the journey.

posted on december 26, 2022