How to holistically stress test client portfolios

Mortgage rates rise. A tech bubble bursts. Oil prices crash. When these types of events happen, good financial planning software can help advisors to model the effects on their clients’ portfolios.

That same software can also account for the financial impacts of more personal ups and downs: the loss of a job, a serious health diagnosis, or the changing needs of aging parents. Just punch in the amount of a severance package, a critical illness benefit, or the cost of a long-term care facility and you can calculate the monetary consequences and advise clients accordingly.

But what about the non-financial impacts? Supporting clients is about more than running the numbers. Take a job loss: Can you provide references to a resumé coach or recruiters, or guide a client through applying for EI? Or perhaps you help a client find a lawyer to review his severance agreement (see “Sample job loss checklist”).

Wealthy clients may face different questions: If they don’t actually need more income, are they emotionally ready to retire? Are they interested in consulting or going back to school? Do they have unrealized goals that might be appropriate to pursue now? Be prepared to ask these questions.

This type of situation is familiar to investment advisor Madeline Woodhead.

“In Niagara, we’ve had a lot of industry come and go,” says Woodhead, who works with National Bank Financial in St. Catharines, Ont. For her, the timing of advice is as important as its content: “If they’re coming in and [their job loss] is still raw—they’ve just been let go, got their package in one hand and the uncashed cheque in the other—as an advisor you’ve got to use common sense. Now is not the time for the deep dive.” Instead, she says, “I’ll ask, ‘Are you okay? Are you going to be okay to go home by yourself?’”

Sample critical illness checklist

• How will you get to the hospital?
• Who will take care of your children?
• Who will do groceries, cook and clean while you’re ill?
• Is there enough documentation at work so someone could take over if you’re away for a long period?
• How will you pay for medications not covered by your drug plan?

After the initial chat, Woodhead will call the client a few days later to check in, and again a week or so after that to say, “Let’s sit down and start answering some questions.” At that point, she says, “everything’s on the table. We’ll start a conversation about what they’ve envisioned they might like to do.”

Another way to provide a resource is to look to your pool of clients. If one client is dealing with an actual or potential downsizing, for example, Linda Shick, senior vice-president, portfolio manager at the Angas Shick Group Private Wealth Counsel at Raymond James in Toronto, will — with both parties’ permission—connect her to others who have made that transition or have similar plans. “If someone wants to start an elder-care business [next], for example, I can find someone who’s done that and put them in touch.”

That networking extends beyond the financial to the practical and emotional. Maybe a client’s elderly parents are in Hong Kong and she’s wondering how to take care of them, or she’s been diagnosed with Parkinson’s and needs the name of a good neurologist, or has found a fantastic counsellor to help as she struggles with her partner’s dementia. Again, with permission, Shick can pass that information to clients in similar situations.

Facilitated properly, clients can even network amongst themselves. Shick’s group, for example, hosts quarterly roundtable discussions for clients on a variety of life transitioning, financial- and estate-planning topics. These often serve as informal gatherings for people with similar concerns.

Since Shick also deals with a relatively large group of widowed women, she connects them. “Occasionally, after the initial grieving has passed, I’ll bring in a group of older ladies in the same situation for a lunch. And they can talk about what they do, how they keep busy, the lectures they go to and the classes they take; what it’s like to be at that stage.”

For her part, Woodhead prefers to let clients drive the conversations, listening for cues as to when some intervention might be welcome. “You can check in [by] asking, ‘How’s it going, financially and emotionally?’ You don’t want to come off as patronizing or condescending. If a client is open, I’ll sometimes ask, ‘What’s been the biggest change you didn’t expect?’”

One client—a woman whose husband had recently died—was wondering, “How is the driveway going to get shovelled?” says Woodhead. “For others, it’s ‘How do you program the PVR, or get Netflix on the TV?’ It’s the little things that have the biggest emotional impact.” To help with these situations, Woodhead may ask if there’s an enterprising teenager in the neighbourhood who’s willing to act as a tech troubleshooter or snow shoveller, or she’ll find out if the client might be interested in a community college course in basic computing, or suggest hiring a service.

For James Hargan, a Toronto-based insurance and financial advisor, these kinds of discussions come up in the course of life- and critical-illness (CI) insurance planning. For instance, he explains CI’s value to clients as “having your spouse beside you when you need them. And having the flexibility and the options for them to take time off work and cover basic expenses month-to-month.”

Hargan will discuss the day-to-day impacts of a critical illness with clients in advance: “You have to get to the hospital every day or every second day. How do you get there? How do you pay for travel, taxis, parking? Who takes care of the kids? Chemo and radiation take their toll: Who does the grocery shopping when you can’t? How will you pay for a drug that isn’t covered and costs $1,000 a pop?” Raising these kinds of scenarios, he says, makes people more aware of their need for coverage, and of the financial and emotional stress they could be under if they become ill.

But advisors need to know their own limitations: if you’re not a qualified elder-care expert, career counsellor or couples’ therapist, it’s probably not a good idea to act like one. Instead, arm yourself with handouts and website links, as well as a list of qualified professionals, and refer clients accordingly.

The advisory role, says Woodhead, is to be a pressure release. “You’re a filter to the client’s emotions and expectations, a place where they can talk about things.”

Bringing in technology

Nothing can replace the connection between an empathetic advisor and a distraught client, but technology can provide additional support.

Stress-testing software now incorporates an increasing number of analytical tools and data sets that let financial professionals — and even individual investors — take into account the potential impact of dozens or even hundreds of factors on their portfolios.

Eventually, says CFP Dave Faulkner, more holistic kinds of resources will be built directly into stress-testing software itself, using artificial intelligence, Internet connectivity and social media, so that “the advisor will gain a holistic understanding without having to try.” Faulkner is CEO of Razor Logic Systems, which provides financial modelling and stress-testing software.

If a client, for example, might lose her job, stress-testing software should eventually be able to not only recalculate the impact on her retirement goal date and suggest how to allocate her severance package, but also automatically generate a list of recruiters in her field, provide links to career counsellors, and mine career websites for job opportunities.

A client pondering long-term care for his aging mother would get information not only on how much she could afford per month and for how long, but also a list of the top-ranked long-term care facilities in her region, along with their availability and contact information, and (if privacy laws permit) the names of three of the client’s Facebook friends who “liked” those facilities’ pages so that he can ask for their unbiased opinions.

Even if that day comes, advisors would do well to continue to listen intuitively, ask questions and provide information, referrals and a safe space to vent. The final item, for example, on Hargan’s agenda for all client meetings is called “the sounding board.”

“I say to clients, ‘Never hesitate to call me to ask me questions, throw something by me, whether it’s financial or non-financial. And I’ll give you an honest, third-party opinion.’” The result? “People tend to call when they’re facing big life changes.”

Susan Goldberg is a financial journalist based in Thunder Bay, Ont.