In-depth guide · Wealth
Stress testing family wealth
Updated: · Leutrim Miftaraj, FLIORE · Editorial standards · Other languages: Deutsch · Français · Español
Short answer
A stress test shows what happens to family wealth and liquidity when several adverse developments coincide – for example an equity crash, rising interest rates, missing distributions while capital calls continue, and a large tax bill. It applies the shocks through all structures, checks liquidity coverage and sets in advance which measures apply at which thresholds.
What a stress test is for
Averages and volatilities describe normal times. Families, however, get into difficulty in unusual times: when prices fall, banks cut Lombard loans, funds call capital and an inheritance tax falls due at the same time. A stress test makes these combinations visible before they happen and answers two questions: how far does net worth fall, and is there enough liquidity without having to sell at the wrong moment?
Typical scenarios
- Market crisis: equities markedly lower, credit spreads higher, private market valuations lower with a delay.
- Rising interest rates: bonds and real estate under pressure, higher costs for variable-rate mortgages.
- Currency shock: strong appreciation of the reporting currency against the investment currencies.
- Liquidity shock: capital calls continue, distributions stop, Lombard limits are reduced.
- Concentration event: a slump at the family business or in a large single position.
- Family event: a death with tax consequences, a divorce, a payout to a family branch.
Approach
- Define scenarios with concrete shocks per asset class and currency.
- Apply the shocks through all structures to the individual positions (look-through).
- Calculate the effect on net worth, debt and allocation.
- Determine the liquidity needed in the scenario: calls, taxes, living costs, interest, margin calls.
- Determine how long the available liquidity lasts and name the bottlenecks.
- Set triggers and measures in advance, such as limits for Lombard loans or a sequence for sales.
Worked calculation (simplified)
A family's wealth comprises 40 million in equities, 20 million in bonds, 15 million in private market investments with 10 million in open commitments, 20 million in real estate with 8 million in mortgages, and 5 million in cash – 100 million of assets in total and 92 million of net worth. In the crisis scenario, equities fall by 30 per cent, bonds by 5 per cent, private market investments by 20 per cent and real estate by 10 per cent. Assets fall by 18 million to 82 million and net worth to 74 million – a decline of almost 20 per cent.
Liquidity matters more: over the next twelve months, 4 million of capital is called, distributions stop, and living costs and taxes cost 3 million. A need of 7 million faces 5 million of cash. Without a countermeasure, 2 million of bonds would have to be sold in a falling market. The family therefore decides to raise its liquidity reserve to cover twelve months of needs under stress.
The reverse stress test
Instead of asking what a scenario does, the reverse stress test asks: which development would endanger the family's goals – such as preserving purchasing power, financing living costs or continuing the business? It reveals dependencies that standard scenarios miss, for example when the family business is at the same time the source of income, the most valuable asset and the collateral for loans.
Frequency and governance
A stress test belongs in front of the investment committee or family council at least once a year, and additionally before major decisions such as new fund commitments, real estate purchases or distributions to family branches. The results should lead to limits set out in the investment policy statement, such as a minimum liquidity or a ceiling for Lombard loans relative to the portfolio value.
Common mistakes in stress tests
Many stress tests underestimate the situation because they look at effects in isolation. These mistakes are particularly widespread:
- Only one shock: crises usually combine several developments, such as falling prices, widening credit spreads and missing distributions.
- Private market investments at the last reported value: their values react with a delay, but they do react under stress.
- Forgotten liabilities: Lombard loans, mortgages, guarantees and open commitments often change the result more than the price losses.
- Ignoring taxes: sales in a crisis can trigger taxes, and planned tax payments are due regardless of the crisis.
- Ignoring family events: a death or a payout to a family branch can coincide with a market crisis.
- No consequences: a stress test without limits and measures remains a calculation exercise.
In FLIORE
FLIORE provides the data basis: consolidated positions with look-through, currencies, liabilities, open commitments and capital calls. The free liquidity planner in the German editions shows how long liquidity lasts given the expected outflows; scenarios can be calculated transparently on this basis.
At a glance
| Two core questions | How far does net worth fall, and is liquidity sufficient? |
|---|---|
| Method | Shocks per asset class, applied with look-through |
| Supplement | Reverse stress test starting from the family's goals |
Terms on this page
- Capital call
- A request by a private equity or infrastructure fund to its investors to pay in part of their committed capital.
Frequently asked questions
How severe should the shocks be?
Severe enough to be uncomfortable, but plausible. Many take historical crises as a guide; it is important to assume several shocks at once, because in reality they occur together.
How often is a stress test needed?
At least annually and before major decisions such as new fund commitments, real estate purchases or larger distributions.
Why do private market valuations fall with a delay?
Because funds usually report their values quarterly and with a lag. The stress test should therefore assume a discount for private market investments too, even if the report does not yet show it.
How are Lombard loans taken into account?
With the loan-to-value after the shock. If the portfolio value falls, banks may demand additional collateral or sell positions – that belongs in the liquidity need.
Who should see the results?
The investment committee and the family council. The results should lead to concrete limits and measures, not merely be noted.
Does the stress test replace the asset manager's risk assessment?
No. It adds the view across the entire family wealth, including the business, real estate, liabilities and family events.
How is a family business treated in the stress test?
With a scenario of its own: lower distributions, a lower valuation and possibly a capital need of the business. Especially where the business is both a source of income and collateral for loans, this scenario often reveals the decisive vulnerability.
How is the stress test documented?
With the assumed shocks, the data basis and its reporting date, the results for net worth and liquidity, and the measures decided. This makes it possible to compare at the next run whether the vulnerability has changed.
Sources
- Basel Committee (BIS) – stress testing principles
- European Banking Authority (EBA) – guidelines on stress testing
- CFA Institute – standards and research
- Global Investment Performance Standards (GIPS) – CFA Institute
- Institutional Limited Partners Association (ILPA)
This page provides orientation and does not replace legal or tax advice. The cited legal sources in their applicable version are authoritative.
Read more
More on Wealth & reporting
FLIORE in your family office
See structures, compliance and consolidated wealth with your own questions – in a personal demo.