We have heard and seen many stories over our 18 years as wealth managers. From widows and widowers forced to reduce their retirement income by 30 percent to 50 percent to make their wealth last their lifetime;
to retired couples having to sell their homes when their financial plans went awry; to entrepreneurs and senior executives who postponed spending time with their families hoping to retire early only to realize late in the game that they have several more years of work ahead of them.
We can blame the financial failures on the market, economists, market prognosticators, bad luck. but these are nothing more than scapegoats.
What disturbs us about seeing lives shattered is that usually it didn’t have to happen. The potential pain was identifiable and people could have been prepared.
All of these investors relied on financial advisors, professionals trained to prepare traditional investment plans. Each identified their risk tolerance and optimized their asset allocation. Each prepared
a financial plan. but, dusted off several years later, those plans – like many based on erroneous assumptions – look pretty silly.
Each received quarterly reports of portfolio performance relative to market indices. Each followed the rules of conventional wisdom – which proved very unwise.
Think about the senior executive nearing retirement. Five years ago when he was 55, his advisor projected his retirement plan based on a“conservative” 11 percent return assumption. Next year, at 61, he was supposed to be able to stop work with $2.68 million and enjoy an annual income of $148,000.
He skipped a family vacation and took on additional work. After all, he was anticipating retirement and would soon have plenty of family time. Over the past five years, the market’s performance was nowhere near 11 percent. In fact, his portfolio is now worth $2.23 million. A year from retirement, his family
eagerly awaiting their time together, he got the bad news. His financial advisor updated the traditional plan: based on the market declines and his assumptions, he would go broke at age 82!
His financial advisor gave him two alternatives. He could retire next year… and live on $125,000 a year – $23,000 less than originally planned. Or he could work two more years and spend his principal in later years. Some choice! We would demand some answers from the advisor.
Question: What happened? We thought we hired you to create a long-term plan!
Advisor: We did a long-term plan. But in the short term, markets can go up or down. Unfortunately, we’ve had bad luck with the bear market.
Question: Bad luck? You left our financial future to chance?
Advisor: I wouldn’t say that. On average, we experience a bear market of this magnitude once every 10 or so years. But no one knew when.
Question: You knew there was a chance it would happen?
Advisor: Of course. It’s not my fault the market moved against you.
Question: So, you knew there was a chance this would happen… correct?
Advisor: Yes, I knew there was a chance of a bear market.
Question: But the plan we hired you to build didn’t consider this chance?
Advisor: Well, we assumed a long-term average return, which is the net of some up years and down years.
Question: But our plan assumed our portfolio would go up every year, even though you just said the market doesn’t go up every year?
Advisor: Sort of… at least on average.
Question: What are the chances of the market going up the same amount each year?
Advisor: About zero.
Observation: Let’s see if we understand: First, we designed a long-term plan that had nearly a zero chance of going according to plan; and second, we knew there was a chance of the market going down, but we didn’t plan for it!
Our executive’s plan had a high chance of failure from the beginning. High-confidence stress-tested wealth management plans contemplate the reality that the market goes up and down. They plan for the impact of short-term market movements on long-term plans. A trained wealth manager would have shown you that in all likelihood the changes the traditional plan did not expect were not only possible but highly probable.
Isn’t that what a long-term plan should contemplate? The difference between a stress-tested high-confidence wealth management plan and a traditional financial plan or money management is that high-confidence stress tested plans contemplate the possible impact on your wealth of many contributing risk factors.
It is the equivalent of the Wright brothers’ first flight compared with a modern jumbo jet flight. Traditional plans assume a set rate of return for the rest of your life! When was the last time the markets went up exactly the same every year?
This alone leads to false projections. No wonder people’s financial lives are constantly being devastated with traditional plans. On the other hand, our family vision planning takes into account 1,000 different scenarios based on taxes, fees, beneficiaries, lifestyle, depressions, recessions, as well as bear and bull markets since 1925.
Would you want your family’s financial future based on a traditional plan or a 1,000 times stress-tested cutting-edge jumbo jet of a plan that would have run through market fluctuations since 1925 as well as recessions, depressions and such?
Another example of the power of this new type of planning is that we can run“what if” scenarios for our clients at any time and tell them if they have an 8 in 10 confidence factor of exceeding their goals or if their confidence is only 3 in 10. Anything less than a confidence level of about 8 in 10 is not acceptable to us!
If you truly value your financial health, you might reconsider whether leaving your financial future to traditional financial or investment plans is very wise.
We know that the pain, the fear and the reality of market ups and downs can be anticipated and planned for. Current diagnostic tools can help identify the risk and implications of these financial disasters in advance. Your best course of action requires skill, knowledge and wisdom. This is what wealth management and stress- tested high-confidence plans are all about.