BEING PREPARED
We're improving our forecasting skills and building a sense of urgency to act by engaging in a scenario analysis I call Evolutionary Systems. It includes how we think future events could affect clients, our firm and or industry, along with a quick synopsis of what we intend to do about it. I've divided these events into four categories: disasters, company problems, the economy and markets, and business trends.
Disasters. Disasters come in two flavors, geopolitical and natural. Our plan includes issuing a customized shelf memo and immediately holding a meeting of the investment committee (IC) to decide on any action. A shelf memo is a pre-drafted memo, customized to the event, that outlines the problem, its likely impact and our response. If a disaster occurred, we'd immediately transmit and mail the appropriate memo to every client. We're creating shelf memos for a wide variety of potential situations.
For example, terrorist attack could have a significant impact on clients, as could a major hurricane. We've put disaster plans in place for these events. For instance, part of our plan for a dirty bomb attack is moving staff to our Florida office, and taking the necessary steps to transition administrative and planning functions.
Company problems. There are many possible scenarios here. Suppose, say, our office technology is destroyed by a fire. We follow our disaster plan and send out the shelf memo. Or, if our technology goes down for one to five days owing an extended power outage, we institute a backup office plan, which keeps staff local.
What if the major stockholder (me) involuntarily departs the firm, through death or disability? A written succession plan is activated. It details the functions to be filled by remaining key employees, lays out what additional capabilities must be brought on board for the long-term viability of the firm, and activates a long-term plan to liquidate the majority stock position in the company.
Should other key employees involuntarily depart, a written plan to replace each one is activated, including complete job descriptions with a narrative by each key employee. The liquidation plan for their stock in the company is activated too.
The economy and markets. A wide variety of events will trigger essentially the same response: Convene a special meeting of the IC to discuss the situation, execute our planned response and release a customized shelf memo. Here are just a few of these events:
- Markets experience extreme volatility greater than 25% in a week.
- Market volatility leads to very high correlation between asset classes.
- Markets experience continued de-leveraging, leading to an accelerating downward price spiral.
- The U.S. economy stagnates.
- Continued rampant government spending triggers significant inflation (more than 10%), leading to tax and interest rate increases.
- The dollar reaches a new low or high against a foreign basket of currencies, especially the euro.
- The stimulus package doesn't work. Unemployment increases.
- A foreign government freezes significant U.S. assets.
- During a period of stagflation, more than 10% of clients lose faith in the markets and the firm, and leave.
- More U.S. companies are nationalized; their common stock goes to zero.
- Significant inflation (more than 4% annually) increases unabated for the next 20 years.
- Due to fear, many individual investors pull out of the domestic stock market, causing it to drop by 50%.
Business trends. This category, which includes competitive and client issues, encompasses a range of what-ifs-many more subtle than a disaster, but holding far-reaching consequences:
What happens if market forces driven by technology threaten our core business? Our CEO constantly scans the competitive environment, assessing technical innovation and competitive service offerings, and stays connected with ZAG, our advisor consortium, for best business and marketing practices.
What if there is significant competition from branded regional and national firms? We continue to work on our brand image, our value-added services and our differentiators, and then align as closely as possible with our ZAG consortium for size advantages. What if asset allocation is commoditized? We position the firm based on our competitive advantages, communicating our value-added proposition and brand differentiators. We survey clients, prospects and the broader industry to see what differentiators are most attractive, valuable and viable going forward. Then we reexamine our business model and consider alternate sources of revenue.
