By Allen Giese, ChFC®, CLU®, ChSNC®

A trend we're seeing over the last few years is stress testing. It's becoming much more popular among the affluent and their advisors, and I'm not talking about anything that involves a treadmill or a cardiologist here. I'm talking about putting a wealth plan through its paces, evaluating it, assessing it to see if the strategies that are being used are likely to achieve a family's key financial goals and their objectives. Stress testing also helps to identify any strategies or opportunities that might be overlooked that could be added to add significant value to a family's financial life.

So another big benefit of stress testing is that it can help put various financial strategies and efforts together to create a comprehensive picture. Now, some families implement their wealth solutions kind of piecemeal, using different professionals who rarely, if ever, work together on a family's behalf. It's kind of like building a house where each different contractor doesn't talk to each other. So all the rooms are going to look different. A stress test can examine how well the various solutions actually work together.

We've also found here at Northstar that stress testing works especially well when applied to a special needs financial plan because with special needs planning, it's just as critical, if not even more so, for these families to be sure that they're positioned to achieve their often more complex goals and that they're always working with the highest-quality advisors that really understand their needs and their preferences.

Stress testing can also be particularly important to more affluent families who may be targeted by so-called professionals who overpromise and underdeliver or who just outright try to steal wealth from them, a la Bernie Madoff.

Stress testing a financial plan originated with the super-rich, but it's come to the point where, quite naturally, families who are just merely affluent also wanted in on it. I mean, who wouldn't want to get a handle on how their wealth plan would behave under different scenarios and learn whether improvements could be made? So as more and more wealth management strategies and products become available to individuals and families who are perhaps significantly less affluent than the super-rich, it's really not a surprise that the stress test is gaining some traction.

3 Factors When Seeking a Financial Professional

If someone wants to stress test their personal financial situation, they need to be confident that it's being done thoroughly by a highly qualified professional. We suggest they focus on three things. First, seek out professionals who can clearly explain the process of stress testing and its value. I think it's a good sign when a financial professional can explain the value stress testing can bring and the reasons for doing a stress test in the first place.

For starters, stress testing is not really about being sold services or products, and it's not always going to result in making any changes at all to their current wealth plan. Instead, think of stress testing more like going in for an annual physical checkup. I mean you may not have any medical issues going into the appointment, but you show up anyway because you want to be sure that anything that's unidentified or hidden is uncovered, and that way you can take steps before the problems end up becoming serious.

So stress testing can also be done, and often is done, when people don't know if they have the best wealth management solutions for their particular situation. So if they feel confused or uncertain about the wealth management solutions you're employing, which might occur after a big life change, for example, then stress testing may be a good idea. So our recommendation is that the professional will do the stress testing, should be able to explain the process, as well as all the ramifications that are likely to occur. So I guess a nice bonus is if a professional could share with you examples of stress testing and how it benefited other families.

Second, we think it's important that you work with professionals who are focused on the human element. So stress testing isn't meant to callously evaluate each of your wealth strategies and compare it against some benchmark that's out there. It's really not what it is. What it is, is it's designed to help you see if they collectively are still well-suited for you based on what your needs and your wants and your particular preferences are. Then it looks at that against whatever available alternatives might be out there.

So, in short, in order to be effective, stress tests have to take into account important personal and even emotional traits. So this human element is vital in ensuring that you're getting the desired wealth management results and that those results are within the parameters that you establish. So what that means is that the professional who does the stress test has to have a deep and really clear understanding of you. So it has to include your goals and your values, what they are as a person. It's not just your net worth. This kind of understanding, it takes a little while to develop and often relies on people sharing their concerns as well as their hopes and their wishes. So advisors who employ a systematic process to develop this level of insight into their clients and are able to connect the dots based on these insights, these are the advisors that are most able to consistently create significant advantages for their clients through stress testing.

But it's important to understand going in that often high-quality stress testing doesn't lead to any meaningful changes in a family's wealth plan. So while some minor refinements or tweaks are common, major changes usually aren't needed. But, that said, when an error or oversight is uncovered, it could be rather substantial. So our recommendation is to make sure that the professional who stress tests your wealth management solutions is focused on you as a person.

And third, we think it's important that they work with a professional who is highly technically proficient. So even though the human element does take center stage, it's not going to do a whole lot of good if the person doing the stress test can't expertly evaluate their current wealth solutions or ones that potentially could be a good fit. This is especially important with special needs planning, where there are a number of different planning ideas that you just don't have to deal with in most other plans that don't involve a special needs person.

A highly proficient, professional, and elite wealth manager can evaluate the most sophisticated and complex wealth management solutions to see if they're working or if they're working as expected and are not in any way skirting laws or regulations. This person also has to be knowledgeable about alternative strategies and products and to be able to bring in specialists when they need them to evaluate current strategies and alternatives that might be better.

So our recommendation is that the technical proficiency of the professional and his or her team of specialists has to be exceptional. They have to be able to analyze the most arcane wealth management solutions and determine if there are better possibilities that would produce comparable outcomes.

We believe technically expert professionals who understand what stress testing really is and is not, and have a keen awareness of the human element of wealth planning, are the best people to conduct stress tests for you. These professionals are generally best positioned to actually deliver the significant value that a well-conducted stress test can offer you and your family.

So what point do we work with families stress testing their wealth plan? Well, we feel that they really need a minimum of $1 million of investible assets before stress testing makes a lot of sense. We find that at that level and above, there are typically added complexities where the value of stress testing becomes clearly evident, but if someone has a question about whether or not it makes sense for them, they should give us a call here at Northstar and we'll talk about it with them.