Stressed About Your Wealth Management Strategy? Do as the Ultra-Rich Do and Stress Test
Are your finances causing your hair to fall out and your head to throb from the stress? You’re not alone. According to a survey by Northwestern Mutual, money is the No. 1 source of stress for Americans, topping both personal relationships and work. And even though 68 percent of survey respondents said they were “happy about their financial situation at least sometimes,” a significant portion of the population regularly struggles with anxiety (54 percent), insecurity (52 percent) and fear (48 percent). Needless to say, all of this stress is terrible for our health. Migraines, ulcers, and even heart attacks can result from stress.
Perhaps it’s time you approach your financial wealth management strategy the same way you would a health concern. When facing a significant health issue, it’s the norm to seek out a second opinion. Your financial plan of prescription might benefit similarly: by seeking out a stress test. Let’s review what stress testing is, the implementation process, the questions involved, and the possible outcomes.
What is stress testing?
Stress testing has long been a method of getting a second opinion on a very important component of family wealth management. It is an organized process in which you review your goals, your family dynamics, recent tax legislation, and your strategy expenses to ensure what you thought you had in place is still viable.
Basically, when stress testing, you are testing the outcome or assumptions of your current wealth management strategy and its components to determine if they are right for you. In doing so, you may identify gaps or conflicts. Left undiscovered, these gaps can potentially put your family goals in jeopardy.
Now, it may be that you are already familiar with stress testing. If so, you may associate it with the wealthy. The highly affluent (those with a net worth of $500 million or more) regularly stress test their strategies to review and ensure they are in sync with their goals and objectives. However, you don’t have to be fabulously rich to employ the tactic of the super wealthy.
Given the recent Tax Cuts and Jobs Act of 2017, it is in everyone’s best interests to take stock of their financial goals and strategies. Think of your most recent big purchase. It could be a home remodel, new car, tuition, etc. While the purchase may look good on paper, it could function or be less effective than you originally thought. Stress testing is the means by which you revisit and reevaluate your spending and savings to make sure there are no unpleasant surprises. It’s the power of asking “What if?” and then planning accordingly. If more than 93 percent of the single-family offices serving the wealthy have stress tested their financial solutions, you should too.
How is a stress test implemented?
There are six basic steps to any stress test at any income level:
- Establish your goals
- Review and evaluate existing or planned strategies/tools
- War game the plan and components
- Make sure the outcome is what you wanted
- Determine whether or not the strategy/tool is cost-effective
- Identify better solutions if necessary
Once the stress test is complete, all that’s left to do is implement the new strategy or reaffirm/modify your current strategy.
What questions do I ask while stress testing?
While undergoing a stress test, consider the following questions:
- If I pass unexpectedly, how does this document guide what happens and who implements the instructions?
- When I pass, what happens next?
- Who is in charge of my family and my assets?
- How will the family heirlooms, antiques, art, guns, jewelry, etc., be passed to the person designated?
- Who will implement my estate document and what happens if that person or entity is unable to perform?
What are some of the possible outcomes?
In most cases, a stress test won’t force you to make any drastic life changes. For the highly affluent, 90 percent reaffirmed that their strategy, services, or products were appropriate for their goals. In that regard, stress testing removes anxiety and restores confidence. However, a number of senior executives in family offices for the affluent, after stress testing, decided to pursue an entirely different direction or solution. Many of these executives serving the affluent after getting a different opinion chose to implement the plan but with a different provider. Close to half chose to modify the suggested approach with the original professional after the stress test.
Stress testing has been widely adopted by the highly affluent and should be part of any family’s discipline to proactively review their wealth management plans, financial products, and services. Just as it’s better to regularly screen yourself for high cholesterol and other health problems, it is much better to uncover gaps during a stress test. Then, when flaws are discovered, changes can be put in place without jeopardizing goals. Reach out to your financial team or advisor to see if they think this might help. After all, the ultra-rich do.
*The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor Securities Offered Through LPL Financial, Member FINRA / SIPC. Investment advice offered through RS Asset Management, a registered investment advisor and separate entity from LPL Financial.*
By Bob Roark, President, Wealth Management, Financial Advisor, RS Asset Management. As President and co-founder of RS Asset Management, Bob Roark concentrates on offering high-quality service and independent financial advice to clients. He specializes in addressing the individual concerns of extraordinary professionals, business owners and retirees.
