Stress Test Your Financial Plans Like a Billionaire
Updated: Jun 23
It’s not unusual for the Super Rich (those with a net worth of $500 million or more) to have family offices and a legion of professional advisors to help them create and implement financial plans. These advisors often perform “stress tests” on those plans to ensure they’re both state-of-the-art and in line with their clients’ needs and wants.
Here’s why you should be stress testing your plans, too—even if you’re not nearly as wealthy.
What Is Stress Testing?
Essentially, stress testing is asking “what if …?” It’s 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. A wealthy individual might ask questions like:
What will actually happen to my assets when I pass on?
How will my family be affected?
Who will be tracking the hard assets (e.g., artwork and jewelry) so they go to the designated heirs—as opposed to vanishing?
Who will make sure my estate plan is being executed as intended?
Stress testing helps people find the right financial solutions by seeing how their plans hold up when placed under intense theoretical pressure.
Why You Should Perform Stress Tests, Too
Any financial plan has the potential for success and failure. A plan can look great on paper, but not perform well when executed. Unintended consequences can and do happen—derailing your hard-earned agenda.
Stress testing will help you navigate uncertainty so that you can be more confident your plan will deliver as promised. When you examine your 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, most advisors will have you start with your goals. Clear objectives, potential problems, and possible opportunities should drive the financial and legal solutions you choose.
Once you clearly understand your goals, you can 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 plan supports your 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 consider alternative products or services. It can be useful to do a side-by-side analysis of the proposed solutions. Ask questions like:
What happens when I challenge the assumptions?
Are any alternative solutions better able to help me achieve my goals?
Which solutions are most cost-effective?
Once you’ve taken these steps and received recommendations from your advisor(s), it’s time to consider your options:
Stay the course. If the stress testing found the solutions being used or proposed to be on target and of high quality, stay the course.
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.
Hire 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 experts.
Modify the approach with the original professional. If the solutions can be made better with only slight modifications, it’s usually best to stick with the original professionals and have them make any minor changes.
Restart stress testing if necessary. Sometimes an advisor isn’t suited to the task of performing a stress test. If you get that sense, don’t hesitate to find a professional who knows what they’re doing.
Not Just for the Super Rich
Although stress tests are commonly performed among the Super Rich, everyone can and should be using them to vet their financial plans, products, and services. Stress tests uncover not only flaws in financial strategies, but also more efficient and cost-effective ways to achieve desired outcomes. Business owners and their families are especially likely to benefit as so much of their financial security often rides on one asset—the 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 your situation. However, a stress test fee can be a whole lot cheaper than the financial, emotional, and psychological expenses of a plan or solution that’s fundamentally flawed or in conflict with your goals.
Many entrepreneurs want to be sure they are making the smart decisions with their money. We act as a personal CFO to be sure everything is set up and working the way they want and they aren’t missing any opportunities. Stress testing is vital for this process.
If you’re interested in having your financial plans put to the test, or have questions about the stress testing process and benefits, contact AG Asset Advisory at firstname.lastname@example.org. We’d love to help.
Anthony Glomski is Founder and Principal of AG Asset Advisory (AGAA), an SEC-registered family office. The information, data and opinions contained herein were not authored by AGAA and do not constitute investment advice. Content is provided solely for informational purposes only and therefore is not an offer to buy or sell securities, and is not warranted to be correct, complete or accurate. Additionally, neither the author nor AGAA are engaged in rendering legal, medical, accounting, financial, consulting, coaching or other professional service or advice in specific situations. This publication should not be utilized as a substitute for professional advice in specific situations. Neither the author nor AGAA may be held liable in any way for any interpretation or use of the information in this publication. Investing carries an inherent element of risk, including the risk of losing invested principal. Past performance is not indicative of future results.
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