Planning with Multiple Sets of Capital Market Assumptions

Not all financial planning software is created equal when it comes to how advisors incorporate the use of Capital Market Assumptions.  Planning tools need to have a growth assumption to run an analysis, and this is typically done with a collection of Asset Classes that make up a set of Model Portfolios.  Typically, calculations on Return, Standard Deviation and Correlations are used to run what most consider THE key performance indicator of Probability of Success via Monte Carlo Simulation.  There are as many flavors as there are planning technologies, which is why it’s very important to consider Capital Market needs when evaluating planning solutions.

Many advisors only use one set of Capital Market Assumptions for all of their planning and would do so even if they had the option otherwise.  However, some advisors do this because they don’t have a choice.  Their planning software only allows for one single set of Market Assumptions which must be used for every single household in the system. 

Why use Multiple Sets?

At PlantechHub, we believe planners have very practical reasons as to why multiple sets of capital market assumptions would be needed in the financial planning process.  We took the time to design these benefits into our digital experience. You may want to make sure your planning software can do the same thing.

Below are five reasons why Advisors would benefit from having multiple sets of capital market assumptions when building plans for their clients.

Differing Styles of Advisors

Anybody that has ever worked for a Financial Planning Software knows that Advisors, even if in the same firm, can have completely different styles of planning.  Among independent advisory firms, there are those purely working as a team, but that's not always the case.  Personality, experience, and the structure of the firm are all reasons that styles of planning may deviate.  During this age of consolidation, teams shack up with other teams to share resources, thus small groups of advisors form who want to use their own set of assumptions.  Advisors don’t mind sharing branding and support staff, but they want the flexibility to plan how they want to plan.

BD / Custodian / TAMP / Funds

Sometimes it's not the advisor's planning process that differs, but the umbrella the plan is created under.  It's typical to create plans as an RIA for one client and then another client under a BrokerDealer.  Maybe the Advisor gets around with multiple custodians and wants to have the option to switch assumptions back and forth.  Finally, more and more advisors are getting their portfolios from a third party such as TAMPS and Funds.  If there is only one set of capital market assumptions, using these technologies on top of planning for others is very difficult to do.

When evaluating your current planning software on this capability, check as to whether the different sets of Capital Market Assumptions are completely separate .  Having multiple portfolio sets that work on the same set of Asset Class Assumptions is not unusual.  It's also not useful for this purpose because your BD, TAMP, etc. set their assumptions on a completely different set of benchmarks and historical time periods.

Data Gathering

The ability to easily allow clients to participate in the digital Data Gathering process is something some advisors have sought since the advent of the client portal.  It saves them time and puts skin in the game for their clients that leads to greater emotional investment into the plan and respect for the process.  Having only one set of capital market assumptions puts Data Gathering at odds with the optimal experience for one obvious reason:  Advisors want Data Gathering to be quick, neat and easy for the client or prospect, however, they want a comprehensive listing of asset classes and an impressive set of portfolios to use in the actual plan.

It makes sense to use a more digestible set of market assumptions when prospecting.  Advisors should be looking for planning software that would allow a very simple set of assumptions, maybe cash, bonds, stocks and a few portfolios such as Conservative, Moderate & Aggressive.  This makes the experience much easier for the prospect, and, if the plan can be graduated to the more complex set of assumptions later, it allows the plan to move forward.  Advisors should look for planning software that allows them to start with that simple set and then have the option to switch to another set of capital market assumptions.  It's best if that can be done seamlessly so that the experience for the client is not interrupted.  This means that the system needs to have a mapping feature built in so that advisors can define ahead of time how one would morph into the other.

Pro Bono

In a recent article by the Foundation for Financial Planning, advisors felt like they needed another planning software for Pro Bono, or at least another license of their planning software.  It may have something to do with how most digital planning experiences are not designed to handle the real world problems of people in need.  However, in the context of this article, they recognized that they would rather use a very simple set of capital market assumptions for their Pro Bono clients who are not currently investing, making an expansive looking list of Asset Classes and Portfolios unnecessary for their digital planning experience.  Just as discussed in Data Gathering, you would want your software to give you the ability to graduate to a more complex set of assumptions if needed.

Legacy Retention

Advisors have not traditionally done a great job holding on to their clients' kids after the transfer of wealth.  There are several strategies out there to assist Advisors in helping their future selves hold onto AUM, and we believe the most effective is getting Legacy prospects involved in their own financial plan early.  Just like Pro Bono and Data Gathering, there are reasons to start simple and then upgrade the Asset Classes and Portfolios at the appropriate time.  Of course, the need to graduate the experience to a more complex set for investment management purposes may be desired.

For this particular strategy, advisors are looking for planning software that not only allows them to utilize a different set of assumptions, but also to give the prospects access to a plan in DIY mode so that they can play with the process themselves.

Conclusion

There are a lot of features you are looking for when evaluating planning tools, and many advisors are fine with only one set of assumptions.  However, advisors have the ability to choose their planning technology, so they should consider the reasons that the ability to use multiple sets of portfolios would be sought after.

PlantechHub does allow multiple sets of Asset Classes and Portfolios.  Each set is completely independent from each other, though you can still have multiple portfolio groups using the same set of assumptions if desired.  Additionally PlantechHub allows you to change assumptions seamlessly with our mapping features.  If your planning software does not allow multiple sets, feel free to stop by www.plantechhub.com and check out how this feature could greatly benefit your firm and your clients’ experience.

Happy Planning!