This blog explores the importance of stress testing for consistent and suitable financial advice, how financial stress-testing software can optimise your planning processes and the suitability of advice you offer clients.
Effectively planning for a client’s financial future can’t be done in isolation - it needs to take into account market factors and performance, and various other external factors beyond your, or your client’s, control. This is where the importance of stress testing comes in.
To ensure the suitability and consistency of the financial advice you offer, comprehensive stress testing should form part of your planning process. We explore the impact of robust stress testing and how efficient financial stress-testing software can help you to deliver consistent and suitable advice, every time.
The importance of delivering consistent advice for clients
The written processes financial advisers use to provide advice for different scenarios typically includes establishing the various minimum requirements for generating suitable advice, listing recommended products and funds, and preparing checklists of items to consider during the advice process.
While standardised risk benchmarks and portfolios are used, and advisers review files to check the consistency after advice is given, this process is hard to maintain and difficult to apply to a range of different client situations. This can lead to inconsistent advice and unsuitable plans that may be subject to adviser bias, such as discounting annuities for secure income in retirement. Clients could get different outcomes recommended to them depending on the adviser they see, and the differences between options available to them may be unclear, further complicating the process of achieving their financial goals.
The role of stress testing in financial planning
Stress testing is key for advice consistency as it allows for consistent checks across all clients at a sensible level. Financial stress-testing software provides a baseline for planning which is the same for all clients, no matter what their goals are, but it can be customised to account for unique client circumstances and goals.
Usually, a market drop or two is considered for checking if a plan would work in the event of market disruption, but more in-depth planning also considers various what-if scenarios for other factors that could affect outcomes for clients, especially in retirement.
Stress testing in the financial advice process analyses the following scenarios:
- Market risks, including:
- Diversification
- Dynamic correlation
- Sequencing risk
- Pound cost averaging
- Inflation
- The cost of buying an annuity
- Permanent market corrections
- Longevity
- Additional long-term care costs at end of life
- Essential and one-off emergency expenses
- Final salary employers putting their schemes into the PPF with the associated reduction in benefits
As more advisers move towards financial planning rather than investment choices to help their clients’ financial goals, stress testing financial plans gives confidence to clients and advisers that the plan is sound.
How does financial stress-testing software help to improve advice consistency?
To ensure your financial planning advice is consistent and suitable, consider whether the market risks identified are thorough enough and take into account other factors, beyond investment returns, that are outside of their clients’ control, such as higher than expected living expenses.
When looking at market factors, you need to assess the following:
- Prolonged low returns
- Market volatility, putting greater strain on assets, particularly in retirement
- Poorly timed downturns in markets, which lead to sequencing risk, even if overall returns have been sufficient
- Inflation, affecting not only expenses but the cost of securing income
By using financial stress-testing software, and listing all stress tests you want to run and ensuring clients have alternative what-if scenarios created and checked, your firm can be confident that all financial plans are comprehensively stress tested and that advice is consistent.
Introducing EVPro’s advanced financial stress-testing software
EVPro is an end-to-end financial planning solution that creates what-if scenarios for stress tests that check the probability of a financial plan still meeting core expenses in the event of a change in the market. This means running 1,000 different market simulations, as well as other factors that could change, and checking to ensure client expenses can be met year after year. The test is passed only if essential expenses are met in more than 95% of the market simulations.
By running extensive marketing scenarios and factors, each of EVPro’s 9 stress tests (2 of which can be run twice for each client in the event of a joint life plan being considered) cover up to 12,000 different scenarios to check a plan’s robustness across scenarios. Since the current level of stress testing usually only looks at a single drop in market rates, EVPro’s stress tests are more comprehensive by a factor of around 10,000.
Opting for a comprehensive financial planning software tool that has stress testing built-in, like EVPro, can optimise your stress-testing processes further by saving time and money that is usually wasted running manual stress tests. Within 10-20 seconds, an hour’s worth of work can be completed.
Key benefits of our financial stress-testing software
Below are the main benefits you can expect from using EV’s advanced stress-testing software:
- Advisers can deliver vigorous stress tests with minimal time or cost required.
- Firms can be sure that financial planning processes are backed by consistent advice checks.
- Clients get simple to understand confirmation that their plans are suitable and have been thoroughly analysed and stress tested.
- Advisers can confirm plans within seconds and rerun tests swiftly if a client needs an alternative plan to be run.
A core characteristic of EVPro is its simplicity of use. Our powerful financial planning software provides a summary of whether stress-tested outcomes have passed or failed, and in instances where failed, the tool shows exactly which tests have not reached a sufficient level and by how much. This helps set the expectation of how much money is available to cover the plan as set out by the tool, incorporating key market and external factors, client objectives and funds. This allows clients to either accept the risks associated or change their plan before anything happens that they can’t then afford.
Requiring no additional information to be entered by the user to run, the stress-testing process enabled by EVPro offers a much more robust experience for clients. Simply a single click away once a plan has been set up, EVPro’s stress tests ensure that clients and advisers can be confident there is room in their plans for emergencies that can’t be controlled.
Learn more about EVPro and how it helps advisers improve advice consistency
EVPro is a holistic financial planning solution covering goal planning, investor risk profiling and fund risk profiling, over and above its stress-testing capabilities. Each of EVPro’s modules works together to help ensure advice consistency, leveraging its range of functionalities.
Here are the other key features of EVPro that can help you improve your advice consistency:
- EVPro’s Goal module metrics allow advice to be assessed and compared over time, and between clients when looking across a business.
- EVPro’s risk assessment gives a holistic view of the investment risk of a portfolio based on a client’s objectives and the term, ensuring the right level of risk/reward is obtained and that consistency across all types of products and funds, as well as between advisers, is achieved.
- EVPro’s modelling helps remove bias by showing realistic forecasts not affected by the views of advisers, but by showing the benefits or risks of a proposed plan objectively.
- Backsolves are also provided to help solve problems identified in the planning process more quickly, without needing to use an additional tool.
Summary
Stress testing is an effective way of gauging how financial plans will fare in various market scenarios and how these scenarios will affect a client’s overall financial goals. Ensuring financial advice is consistent and suitable amidst these conditions should be a priority for all advisers, so drawing on the benefits of modern financial stress-testing software, like EVPro’s, can enable better financial planning and optimise your time spent serving clients.
