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Stress-Testing The Ultra-Wealthy Is Essential

The worlds of the ultra-wealthy (net worth = $30 million or more) and even more so the super-rich (net worth = $500 million or more) is growing at a precipitous rate. Without question, the rich are getting significantly richer and there are more of them.

While, on the surface, this bodes well for financial advisors and other professionals, there are headwinds. Competition for these clients is more intense than ever before. With potential broad-based industry difficulties such as fee compression and the commoditization of services and products, the attractiveness of the ultra-wealthy multiplies.

What is consistently proving to be a service in extreme demand by the ultra-wealthy is stress testing. While fairly common among the super-rich, stress testing is now becoming more and more normative for those of lesser wealth.

Understanding Stress Testing

While more and more professionals are talking about stress testing, relatively few of them are proving adept at it. By definition: Stress testing challenges a client’s wealth management solutions to assess the likelihood of their holding up in different scenarios and delivering the desired results.

Simply put, the rationale for stress testing is twofold:

• To avoid potentially economically and legally destructive situations.

• To ensure the client is benefiting from all possible wealth management opportunities.

Where a great many legal and financial advisors fall way short in their approach is because stress testing is not primarily (or even secondarily) about the financial products or legal strategies being employed by the client. The mechanics of a client’s wealth management solutions do need to be evaluated. However, this is comparatively simplistic compared to the essence of stress testing. When it comes to stress testing a client’s wealth management solutions, the human element is far and away the most important factor.

The human element is the personal and emotional component of wealth management. It encompasses everything and everyone that is important to the client as well as everything and everyone that could be affected by the wealth management solutions. For the best professionals, it is not the tool kits they have, but their knowledge and skill to use the most appropriate tools that best achieve a client’s agenda.

The Role Of Stress Testing

The idea that a financial advisor or any professional can bring “new” wealth management solutions to a client is increasingly limited. This is more the case going up the wealth spectrum. There is pretty much nothing billionaires or their teams of advisors, for example, have not been shown (see sidebar).

This does not mean that—when it comes to wealth management—everything the ultra-wealthy are doing is the “best” thing for them to be doing or the “best” way to get the results they are looking for. When potential issues and concerns are uncovered, even billionaires with their legions of advisors are often very willing to engage in stress testing some or all of their wealth management solutions.

The same is even more evident among the less prosperous. Overall the ultra-wealthy, as well as the merely wealthy and affluent, likewise want to make sure their wealth management solutions are going to enable them to achieve their goals and objectives. When stress testing is properly introduced, they also are generally very willing to stress test their wealth management solutions.

Done well, stress testing provides incredible value to any client. However, only the more sophisticated clients such as a large percentage of the super-rich tend to initiate stress testing on their own. Currently, for the great majority of the ultra-wealthy, professionals such as financial advisors need to set the stress testing process in motion.

Initiating stress testing is usually quite easy when financial advisors are centering their discussions on the human element. In contrast, discussions about wealth management strategies and products from investment portfolios to estate plans will occasionally elicit some interest but fail to get the strong positive reactions and desire to move forward as discussions where the focus is on the human element.

Making the human element center stage is actually quite easy. There are highly developed profiling and framing systems, interactive dialogues and questioning protocols and behaviorally oriented decision trees that financial advisors can use to move from concept to stress test. In fact, the use of these tools and behavioral strategies makes the decision to stress test, as well as all follow-through activities, including adjusting their wealth management solutions, flow easily for most clients.

High-End Technical Proficiencies

Although successful stress testing hinges solidly on the human element, it would be a mistake to overlook the need to have high-end technical proficiencies. An aspect of stress testing is being able to dissect the wealth management services and products a client has and conduct comparative analyses with other possible solutions.

Sometimes these analyses are simple because the wealth management solutions are not complex. However, especially when it comes to the ultra-wealthy, the analyses tend to get quite complicated. Being able to take any wealth management solutions apart and provide viable alternatives does indeed require a high degree of technical proficiency.

For capable financial advisors—if they personally lack the requisite expertise—the ability to source qualified specialists is rarely a major obstacle.

In sum, while state-of-the-art technical expertise is needed for stress testing the wealth management solutions of the ultra-wealthy, if financial advisors do not have this know-how in house they can certainly find it. BlackRock has made its institutional Aladdin platform available to advisors and numerous smaller software programs like Rixtrema and Riskalyze are now available specifically for advisors. Moreover, while high-end technical proficiencies are essential, because they can be outsourced without much problem, the differentiating factor is the human element.

The Stress Testing Process

There is a systematic way to go about stress testing (see Figure 1). Unfortunately, few professionals today are particularly adept with the process. Most professionals mistakenly concentrate on the technical aspects of a client’s wealth management solutions. In reality, the core of the stress testing process is the human element.

What clients are seeking to attain, what problems they are looking to solve, what opportunities they are seeking to benefit from should be the driving force behind the wealth management solutions they employ. Then, the wealth management services or products can be evaluated. There are numerous ways to dissect and critically assess financial services and products.

Based on the evaluation of the existing or proposed wealth management services and products, alternative services and products might be considered. It can be very useful to do side-by-side comparisons between the wealth management solutions. The result of the process is recommendations.

Implications

The success of financial advisory practices is predicated on added substantial value. When it comes to the ultra-wealthy and most individuals—and more so the super-rich—being able to introduce ideas and concepts can sometimes work. On the other hand, such an approach has empirically repeatedly shown to have some but limited ability to generate new opportunities.

Stress testing, in contrast, has empirically and experientially proved to be a tremendous way to deliver value to the ultra-wealthy. Financial advisors who master the stress testing process—being able to provide high-end technical proficiencies plus, and more important, being attuned to the human element—are in great demand by the ultra-wealthy.

A Personal Note

Billionaires throughout the world are very concerned that their wealth management solutions are delivering as “advertised.” They are also seriously concerned, for example, that there are various wealth planning possibilities available that may be very beneficial for them that they are not appropriately considering. Thus, many of them—not all, but many—are very supportive of stress testing. Directly or through their family offices, they are more likely than not to initiate the stress testing process.

In order to help coordinate stress testing for the exceptionally wealthy, I spend most of my time—using a number of strategies and tools—going deep to understand the family’s preferred outcomes. Often, the preferred outcomes are tempered by legal, financial, interpersonal, as well as other limitations. Discussions of wealth management products and services come up but usually have a small supporting role.

To address the mechanics of the wealth management solutions of my clients, I turn to various specialists. Outstanding technical specialists are quite plentiful, making them easy to source and access. Very importantly, the specialists I work with are always compensated extremely well.

Because of stress testing, my clients find that either their wealth management solutions are top-notch and will indeed deliver the results they want or there are problems that can usually be corrected. When stress testing is done systematically, there is no question from any client about the value they are receiving.

I do this for the exceptionally wealthy and I have taught the methodologies to others. What is absolutely essential to realize is that there is no “magic” to stress testing. It does not matter if the client is a billionaire many times over or has a negative net worth. In my experience, professionals can learn how to conduct stress tests with the requisite emphasis on the human element. Also, generally like wealth management, the strategies and tools I use are commodities.

Russ Alan Prince is president of R.A. Prince & Associates.

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