Planning for all eventualities can cushion you from the shock of a crisis – Susie HillierPublished on 02 Jun 2020
Modelling affords clients clearer visibility of what’s to come
As wealth strategists it is our job to assume that life may not all be a bed of roses. That is not to say though that we are pessimists. We talk to our clients about all the things – good and bad – that could happen in their lifetimes, both in markets and in their personal lives. That is our job; we plan for all eventualities.
To do this we need get to know our clients well by asking them a lot of questions. If you were to get married, how lavish would you want the reception to be? If you have children and they want to get married, how lavish would you want their wedding reception to be? Or, if you were incapacitated by illness who would you want to run your finances? Would you want to continue to live at home? How do you feel about different types of risk? How important is it to you to pass on a legacy to your beneficiaries? Indeed, many of the questions we ask people, they may not even have asked themselves.
Not only does this approach help us to do our job effectively, it also helps our clients to take things in their stride a little better than most, when the unexpected happens. The answers to these questions help us do our cash flow modelling. We run a ‘capacity for loss’ test, which shows a client how they might ‘cope’ in the event of a market crash or other unplanned event, based on their current strategy.
One important result is our clients have all looked down the barrel of a crisis – albeit a pretend one. It gives them real ‘visibility’ when it comes to a financial crunch.
Our models show how bad a drop in the market could be, compare it to others and track how long it has previously taken a client’s portfolios to return to where it started. You can add assumptions to add greater detail and tailor the scenario – change expenditure requirements, understand the impact of a period out of work or - more positively – of winning the lottery.
When a real crisis strikes, most of our clients are comfortable that while a market crash or economic downturn could hurt them, at least they have some idea what the journey will look like. They also know that when they come out the other side, they will still be able to afford what is most important to them. They may also take comfort from seeing that they haven’t yet hit the worst case scenario we presented to them in the modelling.
Because of this, when the outbreak of the Covid-19 hit the headlines, our clients were more sanguine than some. We were just at the end of the tax year and markets were dropping. Rather than panicking, by and large, our clients considered their options. Some wanted to take advantage of the drop in markets and started investing. Others acknowledged that investments go up as well as down and, confident that their capital was in safe hands, decided to sit tight and ride out the storm.
The crisis has also galvanised decision-making on wider topics, such as what would happen in the event that clients were no longer around to articulate their wishes for their wealth or help guide their loved ones on financial matters.
The recent lockdowns have meant that we have been in even more regular contact with our clients than usual. The pandemic has inevitably put them more in touch with the idea that bad things happen and the planning for all eventualities continues. Working with clients to tease out what is really important to them helps ensure that everyone is better prepared for the future.
Susie Hillier is Head of Wealth Planning at Stonehage Fleming.
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