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Financial Planning > Tax Planning

Preparing for the Worst: Disaster Planning 101

By Jeffrey Phillips

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The business world is unpredictable, and so too is the world we live in.

Minor and major events seem to appear out of thin air and can turn a business — and its financials — on their head. As with most financial situations, creating a plan is the most practical step in shielding for life’s myriad of curveballs, but how do you begin to prepare for the unthinkable? How can financial professionals offering help with life insurance and retirement planning advise a client to prepare for a life-altering event?

The reality is there are rarely indicative warning signs leading into a financial disaster  — if there were, you would have avoided financial disaster in the first place. A financial disaster is often associated with feelings like ‘we never thought this could happen to us.’

(Related: Weighing the CMBS Impact of Harvey and Irma)

Instead, what you can do is put a plan in place to ensure you’re prepared to respond when disaster hits.

First, let’s explore the circumstances that may require the execution of a financial disaster plan. A financial disaster is any impact that requires the immediate need of monetary outflow that goes beyond the scope of cash reserves, or anything that impacts inflow resulting in the depletion of cash reserves. This can be anything from a natural disaster to an uninsured death or a sudden, sharp market decline.

When advisors talk with clients about having a disaster plan in place, the discussion should center around risk. The first step is identifying if a client has a general plan, either for cash flow or retirement. Assuming the answer is yes, determine if they can self-insure for a financial disaster. Many individuals and businesses believe this just means holding six to 12 months of cash — but that’s not always the case. It’s important to challenge clients to have a plan for a situation like a natural disaster, where they may not be able to operate their business or may be required to uproot their home.

Next, you will need to identify the areas of potential risk. Business-oriented risks include IT vulnerabilities, a public relations disaster, marketing and operations crashes, and more. Has your client thought about what could happen to the business if their lead sales manager dies unexpectedly? What if a hacker tapped into client data? Once the risks are identified, determine the potential loss, as well as whether or not the client or business is able to self-insure or if they should obtain insurance.

Man with umbrella looking at a storm (Image: Romolo Tavani/TS)

(Image: Romolo Tavani/TS)

When obtaining an insurance policy and choosing a plan, the safest is one with as few limitations as possible. Clients who prioritize cost of the policy over the coverage provided may end up paying the price in the long run, when coverage limitations prevent receipt of benefits. Upon reviewing the conditions, a business should consider which disasters they can self-insure and which ones they cannot, and use that judgment to determine a policy that covers their needs.

If the financial disaster is not an insurable event (i.e., death, disability, fire, etc.) self-insurance is the primary option to manage the impact of the disaster. I advise clients to ensure access to their investments and have a pre-determination of what they can sell or liquidate in the event they have an immediate financial need. For this reason, it is recommended to have a fixed income in your profile and an asset that can be easily tapped to bridge the gap during a broad, macro financial disaster like a market decline or job loss.

When planning for both individuals and business owners, financial advisors should quarterback a full team of asset managers, legal counsel and tax advisors to coordinate a plan to address all angles of a potential financial disaster situation.

Financial disaster plans should be revisited at least annually — more frequently if there are changes in the financial status of an individual or growth or decline in a business. Types of disasters and their causes are constantly evolving and financial plans should adjust accordingly. Take, for example, a data breach — it’s a potential financial disaster not too many individuals or businesses worried about until only a few years ago. At a business level, organizations should now consider if they could withstand a data breach of client or financial data. On an individual level, considerations should be made to determine whether they can withstand identity theft.

Planning for the unexpected is an essential aspect of responsible advisers and is another opportunity to add value for clients. The level of service and amount of planning in place should be the same for a business that is skyrocketing as it is for a business that has been rocked by a natural disaster. Be at the ready when disaster strikes, and your clients will be sure to thank you.

—Read Sandy Knocks Out 2 of Lower Manhattan’s 3 Hospitals on ThinkAdvisor.


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