Bryce Sanders is president of Perceptive Business Solutions Inc. He provides HNW client acquisition training for the financial services industry. His book, “Captivating the Wealthy Investor,” can be found on Amazon.

Originally Published on Accounting Web. March 14, 2022.

One of the lessons learned from the Great Recession of 2008 was that the big banks should always be prepared for an emergency. How would they react under similar dire circumstances in the future? This is a good strategy for your clients, too, to get them thinking about financial planning.

Six Stress Test Questions

Here are six questions to ask your client to illustrate that scary scenarios are within the realm of possibility. Your client might be living paycheck to paycheck and thinking, “What could possibly go wrong?” Different questions will be relevant for different clients.

1. What if…you lost your job tomorrow? Even if this seems unlikely, there are several reasons it could happen. Suppose your client’s company merged or was subject to a takeover, and the new owner brought in their own management team. If the economy were to slow, reducing headcount is often a first step companies take to maintain earnings. Whether it’s called early retirement or reorganization, the result is the same.

Questions for your client: How long would it take to find a new job? What severance benefits might you expect? How would you pay bills in the meantime?

Be proactive: Your client needs an emergency fund of at least six months of living expenses. They also need to keep their eye on the job market in their industry.

2. What if…the stock market declines 30 percent? The market has done so well for so long, some clients assume a rising market is the new normal. Perhaps they tap into the appreciation in their portfolio when they are short of cash, or they aren’t diversified because 100 percent of their savings are in stocks.

Questions: Could you maintain your lifestyle without touching your investment portfolio for a couple of years? What would you do if the stock market stayed low, moving horizontally? Do you have access to funds, making dips in the market a buying opportunity for certain stocks?

Be proactive: Your client should not be dependent on selling off stocks to pay bills. They should own some total return stocks that pay dividends while they wait. They need to eliminate their margin loan, and they need a cash reserve to buy on dips.

3. What if….your child announces they need a graduate degree to get a good job? This happens, especially because some companies want graduates who are specialized to decrease the learning curve. Some jobs might require an employee to earn a graduate degree in their early years with the firm.

Questions: How much student debt are your children carrying? What would graduate school cost? How long would it take your child to complete a degree attending full time? How about part time? What are the expenses in addition to tuition?

Be proactive: Your client needs to look at graduate school costs at state schools and private schools. How will their child pay living expenses in the meantime? Would your client be providing the extra cash? Can they access cash through a home equity loan or by tapping savings?

4. What if…interest rates climb several points, and you’re carrying variable debt? We have lived in a low interest rate environment for a long time, and clients might assume it’s the new normal. (There’s that expression again!) If they have a variable rate mortgage, interest rate increases are felt immediately. This happens with credit cards, too.

Questions: How much variable rate debt is tied to your home? Do the math. What would every percentage point increase cost? What are you paying on your credit cards? Where will the money to pay these increased costs come from?

Be proactive: Your client needs to consider converting their variable rate mortgage (and home equity line of credit) into a fixed rate mortgage while rates are still low. Roll it together.

5. What if…the federal government dramatically reduces the estate tax threshold? The government has handed out a lot of money during the COVID-19 pandemic. Money doesn’t grow on trees, so they need a way to get it back. Increasing taxes is the logical route. Taxpayers feel the pain immediately if income taxes are raised. Raising estate taxes might be less controversial. Estate taxes currently top out around 40 percent.

Questions: How large is your estate now? How large might it be in a few years? Your spouse should inherit without many problems, but what happens next? What steps can you take to reduce the size of your taxable estate?

Be proactive: Clients should consider all estate planning tools at their disposal. Giving gifts during their lifetime using the gift tax exemption and donating appreciated securities to charity makes sense.

  1. What if…your rent jumps substantially because of inflation? If your client doesn’t own their home, every year their rent is reset, and rents are spiking. What would happen if your client’s rent increased beyond their ability to pay?

Questions: What are you paying now in rent? When is your lease up for renewal? What are comparable rents in the area? Where would you find the money to pay the difference? What would moving cost you?

Be Proactive: Be prepared. Research comparable rents. Estimate what your increase might be. Are there laws in place limiting the size of rent increases? How can your budget be modified to cover this added expense? What are your alternatives if you choose not to renew?

These are all daunting questions that demonstrate the need for forward thinking. Financial planning can help clients act, not react, in these difficult situations.

Disclosures:

This communication is general in nature and provided for educational and informational purposes only. It should not be considered or relied upon as legal, tax or investment advice or an investment recommendation, or as a substitute for legal or tax counsel. Any investment products or services named herein are for illustrative purposes only, and should not be considered an offer to buy or sell, or an investment recommendation for, any specific security, strategy or investment product or service. Always consult a qualified professional or your own independent financial professional for personalized advice or investment recommendations tailored to your specific goals, individual situation, and risk tolerance.

No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Past results are not indicative of future performance and are no guarantee that losses will not occur in the future.  Future returns are not guaranteed and a loss of principal may occur.

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