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.