Timothy McNeely

Timothy McNeely

Stress testing can help ensure your wealth plan is on the right track.

The key to effective stress testing is to understand exactly what you want to achieve.

The best time to use a stress test is any time you’re not 100 percent sure of your wealth management strategy.

Using professionals to manage your finances and lifestyle is one of the biggest plays in the playbook of the superrich — or those with a net worth of $500 million or more.

The superrich, however, know that it can’t stop there. Just as President Ronald Reagan exercised a “trust but verify” approach for his 1980s nuclear missile treaty, we must keep the same mindset with the financial advice we receive — and the financial solutions we rely on.

This is important because, despite our best intentions, it’s possible for us to fall prey to professionals who either:

• Can’t make it happen because they don’t have the skill or resources (the pretenders).

• See us as a cash cow and therefore promote risky or illegitimate solutions to earn higher commissions (the exploiters).

• Simply want to steal from us (the predators).

For these situations, stress testing is how we separate the wheat from the chaff.

FROM PIECEMEAL TO COMPREHENSIVE

A stress test can assist in ensuring your financial solutions are in line with your objectives — and that these solutions are state-of-the-art in an ever-changing world.

Stress testing is a systematic way of assessing how your financial management solutions will stand up in different scenarios and deliver the results you want The reasoning for stress testing by the superrich are twofold.

Avoid destructive economic and legal situations.

Ensure you are benefitting from all possible opportunities. One of the biggest reasons wealth planning efforts need repairing or fine-tuning is because investors — both superrich and “merely affluent” — often conduct “piecemeal planning.”

There is little or no coordination between the professionals helping them or between the various financial planning solutions they implement.

The fragmentation ensures that their planning will not be as rewarding as it could potentially be. Stress testing allows individuals and families to formulate holistic solutions and strategies that incorporate the most appropriate, cost effective and up-to-date techniques. And while the superrich and merely affluent often make use of stress testing, the democratization of financial services has brought it to a wider audience.

THE KEY TO STRESS TESTING

There are countless financial planners who can skillfully address the technical aspects involved in stress testing. For example, they can evaluate a family’s estate planning to hunt for operational errors and/or identify more cost effective or appropriate strategies. But technical proficiencies are limited.

The true key to effective stress testing is profiling. In order to know if your solutions are viable, you must know what you are trying to achieve.

This means you must ask important questions like:

What are my specific goals and objectives?

What am I seeking to attain?

What problems am I trying to solve?

What opportunities can I benefit from?

Answers to questions like these is the driving force behind the stress testing because it’s never just about financial products or legal strategies. Without sensitivity to the human element, stress testing loses its power.

STRESS TESTING FOR THE SUPERRICH VERSUS THOSE LESS WEALTHY

Just like their superrich peers, those who aren’t quite there (yet) want to limit their mistakes and maximize their opportunities.

However, in our direct experience working with both sides as advisers and consultants, we have seen several key differences appear.

For the superrich, there are usually fewer errors or opportunities for improvement (see Exhibit 1).

The main disparity lies with the caliber of professionals that are used — the professionals used by the superrich are often more diligent about their clients’ matters. One caveat when mistakes are made at this level is they are often serious due to the amount of capital and the complexity of the solution.

Example: In stress testing the estate plan of a multibillionaire, due to the family dynamics and needs that have changed from the beginning of the planning until now, the likely outcome of his death would be a war between his children for the estate.

This would likely spell destruction for his 200-year-plus business.

By thinking through the situation with intense focus on the human element, a new estate plan and well-structured asset protection and succession plans were created.

When the less wealthy have a stress test performed, more errors tend to come up mainly due to there being more pretenders being used who aren’t as detail-obsessed as their more successful peers.

Example: Most merely affluent families don’t have an effective enough umbrella policy, which can result in an outcome both financially and emotionally exhausting.

This is an issue that is usually cheap and easy to correct. Similarly, many business owners do not have their life insurance structured to maximum effect and, therefore, won’t mitigate risk as well as they think it will.

THE RIGHT TIME

When is the right time for a stress test?

Whenever you aren’t 100 percent sure you have the best available financial management plan, where you may be concerned that:

• There are possible errors in your wealth plan.

• You’re missing out on possible opportunities that will benefit your plan.

By stress testing you plan or even aspects of it, you can determine whether you are on target or you can identify corrections that will get you back on track toward the end results you’re looking to achieve.

TAKING THE NEXT STEP

Discuss your wealth plan and solutions with an adviser to ensure they remain set up to accomplish your goals.

Tim McNeely is CEO of The LifeStone Companies. Tim works with a select group of high-net-worth individuals and families by helping them make smart decisions with their money. You can reach him at 661-368-0947, tim@lifestoneco.com, or on Twitter @timmcneely.

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