Wealth planning can sometimes lead to unexpected and disappointing results due to changes in strategy, new laws, or shifts in personal circumstances. Life isn’t static, and what worked before may no longer be effective. The super-rich, those with a net worth of $500 million or more, are aware of this and take steps to avoid surprises in their wealth planning. The good news is that you can adopt similar strategies to stay ahead, even if your wealth is smaller. Here’s how.
Stress testing at single-family offices
Some of the super-rich use single-family offices to manage their finances and address lifestyle concerns, ensuring they work with top-tier professionals. These offices are dedicated to the family’s financial and personal well-being, often employing a mix of in-house experts and external specialists. However, even the wealthiest families can encounter challenges. Occasionally, they may hire well-intentioned but less capable professionals, or mistakes can occur even when working with top-tier experts. To ensure their strategies are on track and delivering the desired results, single-family offices engage in stress testing. This process systematically evaluates whether the financial strategies and services being used will meet expectations and identifies potential opportunities that may have been overlooked, helping the family stay on course.
A popular approach
Stress testing is typically done out of concern or uncertainty about the current financial or legal situation. The super-rich, as well as many less-affluent families, may opt to stress test their strategies when they feel unsure about their financial standing or a particular aspect of their plan. For single-family offices, stress testing ensures they are using the best solutions tailored to their unique circumstances.
In a survey of 252 single-family office senior executives, about 80% reported conducting stress tests within the past five years, showing that even the wealthiest families—who typically work with top-tier professionals—regularly engage in this process to ensure everything is working as intended. Stress testing is not only for when something seems wrong; it can also be a proactive step to confirm that strategies are solid and to avoid potentially disastrous outcomes, even when the likelihood of failure appears low. It’s a valuable tool to ensure that no critical issues or opportunities are missed.
Stress testing comes in two main types: comprehensive and focused
Comprehensive stress testing evaluates multiple aspects of a family’s financial and non-financial life, typically involving three or more sets of services or products assessed within an 18-month period. This approach is more involved, time-consuming, and costly.
On the other hand, focused stress testing targets fewer aspects, often just one part of a wealth plan, and is less expensive and less time intensive. It’s the more common approach used by single-family offices, as seen in a survey where 98% of executives reported using focused stress testing. Comprehensive stress testing is generally reserved for situations where a significant issue impacts many areas of a family’s wealth, promoting a more thorough examination.
In short, while focused stress testing is common and practical for pinpointing specific issues, comprehensive stress testing is a more intensive, less frequent process typically employed in the event of a larger systemic problem.
Finding faults
The goal of stress testing is to uncover errors and missed opportunities, and it often achieves this. In fact, over 40% of single-family offices found faults through stress testing, highlighting that mistakes can occur even among top professionals. By identifying these issues early, stress testing allows for corrections before problems become serious.
For example, a hypothetical case of stress testing revealed a major issue in a family’s will: their youngest son, at age 6, was set to inherit over $250 million at age 12—due to a simple typo. While correcting the error to specify age 21 was important, it didn’t solve the larger issue: the family didn’t want to transfer such significant wealth to a young adult all at once. Stress testing uncovered a breakdown in communication between the family and their advisors, leading to a complete overhaul of the plan. The son will now inherit his wealth in stages, starting at age 21, and the wealth plan will also safeguard the family legacy while protecting members from legal or financial risks, such as litigation or divorce.
Stress testing isn’t limited to wealth management or legal matters; it can also assess lifestyle decisions. For instance, many wealthy families now stress test their security measures, ensuring their homes are adequately protected from threats like burglary.
Final Thoughts
Even if you’re not a multimillionaire, you can still benefit from stress testing to ensure your wealth management strategies are on track and uncover any missed opportunities. By assessing your current solutions, you can ensure they align with your goals and deliver the results you expect. More financial professionals are now proficient in stress testing, making it accessible for everyone. Common areas for stress testing include investment portfolios, estate plans, and business succession plans. By taking this step, you’ll be following the example of the Super Rich and ensuring your financial strategies are optimized.
ACKNOWLEDGMENT: This article was published by the VFO Inner Circle, a global financial concierge group working with affluent individuals and families and is distributed with its permission. Copyright 2022 by AES Nation, LLC.
This report is intended to be used for educational purposes only and does not constitute a solicitation to purchase any security or advisory services. Past performance is no guarantee of future results. An investment in any security involves significant risks and any investment may lose value. Refer to all risk disclosures related to each security product carefully before investing. Homer Smith is an investment advisor representative of Konvergent Wealth Partners. Konvergent Wealth Partners and Homer Smith are not affiliated with AES Nation, LLC. AES Nation, LLC is the creator and publisher of the VFO Inner Circle Flash Report. Investment advice offered through Integrated Partners, doing business as Konvergent Wealth Partners, a registered investment advisor. Integrated Partners does not provide legal/tax/mortgage advice or services. Please consult your legal/tax advisor regarding your specific situation.