Last week I wrote about one of the benefits of financial planning—managing client expectations when the markets are out performing. This week, I'd like to stay with the topic and discuss a slightly out-of-the-box idea that I have been developing for a few years. Let me explain.
Financial Planning = Risk Management
I believe the concept of financial planning is rooted in risk management. In other words, the primary purpose of a financial plan is to assess an individual's situation and identify areas where the potential for loss exists. With this as a backdrop, I'd like to introduce you to what I call, "The Five Categories of Risk."
In my estimation, with the exception of a few outliers, every potential problem that we could encounter falls under one of five risk categories. They are:
1) Premature Death
2) Living Too Long (Extended Life)
3) Unfavorable Lifestyle Change
4) Loss of Important Data
5) Identity Theft
As mentioned, outside of a few outliers, every problem our clients may face which could have a negative financial impact will fall under one of these categories.
Over the past few years I have developed a series of supporting questionnaires to help determine an individual's exposure to these risk categories and their respective subcategories. However, due to the proprietary nature of this, I will keep our discussion at a high level for now. Here's an example.
Risk 1: Premature Death
Although this concept is not new, and in fact the life insurance industry has been the purveyor of answers to this risk for years, what would be the effect on the survivors if the chief bread-winner were to die suddenly? Moreover, what factors might lend insight to this possibility? Although no one can say with certainty if a particular individual is going to die prematurely, we can look at lifestyle, environmental and genetic factors to surmise if the risk is elevated.
For instance, there are certain high-risk occupations that result in a lower life expectancy than that of the population at large. If we have a client in such a vocation, we should be acutely aware, better yet, make the client aware of this potential and plan accordingly. Although this is a very obvious risk, some of the other categories delve into risks which are far less obvious.
This is just one sub-categorical risk in one of the five main categories. In total, there are numerous such risks which should be addressed, and I believe financial planning provides the best option for such an analysis. Even though the example noted here is a very basic, obvious risk, I hope it provides some insight into this potential new approach to financial planning. If you would take a moment, I'd love to get your thoughts. However, I realize this brief post may not provide enough data to render a meaningful commentary. That said, any views would be appreciated.
Thanks for reading and have a great week!