Proactively Identifying and Communicating Financial Planning Disruptions

[One of the greatest benefits of financial planning is its ability to map out and be proactive in building, guiding, and protecting a family’s wealth and directing it to achieve important goals. The value proposition of providing clarity and prioritizing next best actions to mitigate negative household impacts is game-changing. It is a great challenge though for financial professionals to be able to “see” and diagnose potential financial events that can knock a client off course from their financial goals. That is why financial technology has become such a vital part of advisors’ tool kits and their greatest engine for delivering that value.

The diverse nature of a modern-day client portfolio and managing it in a VUCA environment of volatility, uncertainty, complexity, and ambiguity can get confusing and requires an efficient and encompassing level of vigilance. The military origins of the VUCA descriptor are apt here as the advisor’s role in this scenario bears a strong resemblance to the role of military logistics in preparing, strategizing, and supplying resources for the battle at hand. Financial technology becomes an indispensable resource that can level the playing field and alert advisors to potential perils before they can damage a client's financial well-being. FinTech tools can efficiently and thoroughly analyze a household’s financial data and help advisors communicate clear financial risks.

To explore this further, we reached out to Institute Founding Innovator Member H. Adam Holt, CEO of Asset-Map - a Software-as-a-Process FinTech company for financial professionals who provide in-person and remote advice in the wealth management, investment, and insurance markets. The recent enhancement to their visual, financial planning software with their algorithmic tool Signals ™ uses attractive and easy-to-understand graphics to proactively help advisors identify and communicate to their clients the risk of disruptive financial events.]

Hortz: What was the motivation behind the expansion of your advice platform with Signals™?

Holt: This was actually a really interesting project because the foundation of Signals is based on a framework we have been teaching financial advisors for many years called the “Six L's Financial Fire Drills.” They are a set of questions that challenge a household member to ask themselves ‘What will we do if we experience a financial disruption event?’

The phraseology tends to start with ‘What is the household plan to deal with the following six events that will typically seriously interfere with all our good financial planning?’. It’s a way to address this typical idea of going on a road trip and someone needs to check the level of oil, the gas, the tire pressure, whether the car is in good order, all before you leave the driveway, and someone has confirmed that they have checked the critical safety systems.

The Six L's were framed around disruptive life events. Interestingly enough, we got them to all start with the letter L because people need mnemonics to remember these events. And these questions are typically asked at the end of an early engagement around advice or an annual review meeting for those advisors who do deliver holistic or comprehensive financial planning or guidance. The six L's are ordered from short-term to long-term scenarios including a liquidity event, long-term disability, loss of life, long-term care, longevity, legal or liability, and in some cases, legacy, with the idea that the last is the longest term scenario. We knew that financial advisors know inherently that they have to bring up these topics, but many are having a hard time weaving them into the typical investment management conversation or financial planning/retirement planning conversation because there is so much usually to go over when you have these discussions with clients…and performance and allocation tends to be more interesting to many people.

However, even having taught these frameworks to thousands of advisors using Asset-Map, the data shows there are a significant number of under-protected individuals along several of these different categories. And we do not understand, if they are working with financial advisors, why these areas are not being addressed. It would be literally like learning that most of the auto mechanics out there are allowing cars to leave the shop without air in the tires or checking the air filter and all fluids. That is not an auto inspection that I would feel confident about.

So, the goal with Signals was to try to create an automatic feedback system based upon the premise of the Financial Fire Drills that gave an advisor, at the point in time of advice delivery, an indicator set of red light - yellow light - green lights as to whether a household could mathematically withstand these challenges without massive financial disruption. It does not ask the question of whether someone has too much or too little life insurance. It simply asks the question “Can you financially live the current lifestyle you are living without a major financial impact?”

Hortz: What does the Signals algorithm look for? What exactly can it identify?

Holt: The algorithm looks for the relationship between the current level of household income (as a barometer of lifestyle) and matches it against the expected cost that it would take to fund these disruptive events, less any existing insurances or assets that you might have to cover those replacement costs. Think about it like this - If I know that you have an expensive car, I can estimate how much those tires likely will cost to replace a flat tire. Now the answer is based upon the information you give me. Can you handle the cost of replacing those tires?

It is not a great analogy. But what it does is, if you can apply that, let's say to a loss of life scenario or a disability scenario, you can see that that most people experience significant disruption in their finances when they lose the ability to generate income. So, the question is, are there adequate insurances and resources in place to replace a certain level of one's pre-event earnings, and if that replacement goes below 60% of your pre-event earnings, we know we are going to get a yellow sign and a red sign if we are less than 30% funded, a massive disruption. Most people cannot manage a 70% reduction in household income for life. And yet, we still see an under-awareness of this risk significantly across the board. Tens of thousands of households still are coming up as red lights in these income-loss indicators.

Hortz: How exactly do you create and design an algorithm to perform specific functions like this?

Holt: This is actually the hardest challenge with artificial intelligence. And the reason is because you have to make certain assumptions to make it consistent across the board for all households that still has relevance and is not going to create an enormous number of false positives. Once an algorithm gets discredited, it is really useless in the field as professionals will look over and say, Oh, that's not a real issue. It's just a false light. Let's ignore it. So, the key is to create an algorithm that works with the most basic level of data that, oftentimes, is populated by direct-to-consumer profiling that they do on their smartphones or computers. This level of data is sometimes rounded or very vague. And, we needed a way to give immediate feedback no matter what the level of data, whether provided from a validated source or whether anecdotally provided in a survey or Fact Finder experience.

This is really critical because when you onboard a new prospect or potential household, you want to get that feedback right away as to warning signals based upon the current information that you have on them, as opposed to waiting for them to give you all the data perfectly when they are an existing client three, six, twelve months into the relationship - and we still have not talked about glaring red lights or big holes in the financial plan that are potential pitfalls they can fall in and never come out of. Therefore, the key is to provide something that is high level enough that does not pretend to be so accurate that we argue over the details, and rather, gives you an indication that this is perhaps something that you want to “check out”. Contrast this with something that has an actual valuation score, like the risk tolerance systems of today, including Riskalyze, giving a specific numerical score. We found that it was better to give that information graphically as an indicator and a range.

Hortz: How does this help create a better working relationship and better financial decisions between financial professionals and their clients?

Holt: The most important part about this is that it helps the financial advisor focus and tell a story. A story that we can all relate to by our experiences or because we have lived some number of years and we know other people (or our own family members) that have had calamities and, so therefore, we need to create an opportunity to bring up the relevance of those scenarios in their lives.

Often, we find that financial professionals are focused on the areas that they have expertise on, or the products that they sell, and they spend their time talking about those solutions, as opposed to problems that they may not be comfortable with. As an example, life, disability, and long-term care tend to be under-addressed calamities until they happen to you. The depth of relationship building in bringing up other topics of conversation with a household is really critical to proving that one has industry credibility as a holistic advocate. They do not simply talk about investment management all the time, or life insurance, or banking but rather talk about the bigger calamities we all know that are possible and also bring ideas to the table that might help serve them. Our Target-map financial progress funding module, which looks very much like a financial planning tool, is the next obvious step for someone who indicates a red or yellow signal. It is intended to then quantify the specific capital exposure of an event and what we should do about it- either financing it or funding it in a way that makes sense for their household.

Hortz: Any particular examples of how advisors can apply this tool with their clients?

Holt: We have already heard feedback from financial professionals using Signals in the prerelease. They have been showing clients their Signals and framing the conversation in a very similar way a doctor might when you go in for medical advice. A doctor might say to you, “Let’s look at your X-ray and review your preliminary bloodwork.” The X-ray, in this case is the analogy of an Asset-Map visualization of all your financial instruments and decisions laid out on one screen so we can get true transparency on what people are choosing to do, the decisions that they are currently making, and whether that serves them.

The second analogy of the blood test comes from Signals, which is financial feedback relative to acceptable ranges, for example, ‘your blood work indicates that your cholesterol is high, or your BMI is in a good range’. And so, the key is that it enables an advisor instantly to create both the map (or X-ray) and Signals (blood work) that gives us feedback towards the direction we should take the financial wellness conversation.

And this has been really interesting, because once somebody sees that they are a green or a red or a yellow under each of these scenarios one might say: Well, why am I green? And what should we do to make sure that it stays green? Or why am I red and what do we need to do or take action on in order to fix that? What would you add to the financial Asset-Map in order to make that green? In fact, what we have enabled is that as soon as you solve the problem by making a decision, it instantly recalculates the signals to give you feedback as to whether you are now yellow, red, or green. And that's important because people want to see that their choices and decisions have an actual impact on their overall health financially.

Hortz: Does the continuing addition of financial technology get progressively more complex and harder to use or apply for advisors?

Holt: The answer is it really depends on how the advisor adopts technology. Are you using it as a client presentation layer or as a back-office operational layer? In the latter case, you can delegate most of the actual technology work to those who are best suited for that back-office work. Financial advisors should spend more of their time in client-facing environments. And if you are increasingly using these technologies live with a client, we call this “participation over presentation”.

If you are heavily in the presentation/participation mode, then you really want to understand how the tech works. And that is why it is critical that you only have one, two, or three tech platforms that an advisor really knows well. In the financial planning modeling of those platforms, their design, like Asset-Map’s, should be really geared for collaborative participation, as opposed to a technical presentation. And the reason is because the barrier between advisor-client should be as thin as you can make it and still stay consumable to clients and common sense to a professional.

Thoughtful design needs to be focused on user experience that people can just understand, “get it”, and then ask important detailed questions as opposed to asking the questions: How does this work? How is it calculating? It would make more sense to ask why are we investing here? Or is this insurance serving us? Or is it time to move this money to a trust? And that alignment of good questions can be achieved when the technology is simple enough for all parties to understand and comprehend.

That is the big challenge for technology; to make it not overly technical, but rather, make it more consumable. And that takes a lot of thoughtfulness and empathy for the customer journey, for consumers and advisors alike.

Hortz: How else can the industry continue to heighten client engagement and better financial decision-making?

Holt: I think the real next step is going to be getting the consumer more empowered. There has been a huge shift over the past few years enabling the consumer to have more access to technology and decision-making tools and even implementation capabilities, unlike ever before. That is causing massive disruption to the established system of financial services products and financial advice delivery.

I would say going forward the big innovation is going to be data ownership, with respect to the GDPR movement in Europe, showing that the client must own their data for purposes of privacy. We think that in order to empower somebody to make long-term financial decisions, we need to give them the responsibility and the oversight of their own financial data and not have it tied to a financial institution with whom they may have one or two lines of business. We are moving towards an idea that the consumer can be empowered by owning their own financial data and, in reverse to the norm, sharing it with the professionals they deem appropriate to come work on their financial information with them; where a client or consumer can build their own financial dream team revolving around their data.

Within this next stage, there is a great need for getting good contextual advice on one's current decisions, especially in a holistic environment where so much information needs to be shared before you can get that context. In many ways, that is what Asset-Map has been about – providing a financial inventory statement that is visual in nature. What actually happens then is that once the proof or the truth is revealed, in a way that is now shareable, it can allow a conversation on how we can improve the current situation as opposed to thinking “It's good enough. Don't mess with it.” because nobody else sees the totality of the client’s disparate financial information.

In order to empower the next generations financially, we need to provide comprehensive access, personalized education, and holistic enablement to manage long-term decisions. 

The Institute for Innovation Development is an educational and business development catalyst for growth-oriented financial advisors and financial services firms determined to lead their businesses in an operating environment of accelerating business and cultural change. We position our members with the necessary ongoing innovation resources and best practices to drive and facilitate their next-generation growth, differentiation, and unique community engagement strategies. The institute was launched with the support and foresight of our founding sponsors – Ultimus Fund Solutions, NASDAQ, FLX Networks, Pershing, Fidelity, Voya Financial, Advisorpedia, and Charter Financial Publishing (publisher of Financial Advisor and Private Wealth magazines).