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Financial Planning > Tax Planning

Part 1: Planning to Go

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MoneyGuide Pro from Pie Technologies, a leading contender among the new breed of Web-based planning software applications, delivers the benefits of such applications, including slick graphics and goals-based financial planning. The program is priced right, and its new version includes features likely to please most advisors. Comprehensive planners, however, may not be as enthusiastic about it.

Bob Curtis, the president and founder of Midlothian, Virginia-based Pie Technologies, took a panel of four financial planners and me on a 75-minute tour of his software. Before detailing what we saw and the responses of the planners, some background is in order.

Financial planning software is in the throes of radical change as technology shifts the focus of developers from traditional software to Web-based applications. New companies that many planners probably have never heard of are suddenly challenging the handful of longtime vendors. Forrester Research analyst Jamie Punishill gives prominent mention to the new breed of planning tools in a September 26 report, “Grading Advisors’ Planning Tools.” Those tools, all Web-based, include netDecide, RiskMetrics, Direct Advice, Financial Engines, and eMoneyAdvisor, as well as Pie Technologies.

With the exception of EISI’s NaviPlan, which is best known for its traditional, locally run software package that has the largest market penetration of any planning software, Punishill’s report deals exclusively with Internet software companies that started out making Web applications and that have never made a traditional planning software application for advisors. His universe thus does not include stalwarts such as ExecuPlan, Financial Profiles, Lumen, and MoneyTree. Why are there so many new entrants?

One reason is that, with a long-term bear market and people feeling increasingly insecure, financial planning is more important than ever. Advisors who once could focus their practices only on investing are suddenly in need of tools allowing them to do more–like college planning, retirement cash flow analysis, and estate planning. Comprehensive planners have “stickier relationships” and are more involved in their clients’ lives, which makes their businesses more stable and less correlated with the ups and downs of the stock market. That’s why financial planning is more popular these days.

But the second, and perhaps more important, reason why these new Web-based financial planning applications are attracting all these new entrants is because they convert the sell-one-at-a-time business model of traditional planning software companies into an enterprise solution used by hundreds or even thousands of advisors scattered at remote locations across the country.

These Web-based applications can run on a Web server in a B/D’s home office and reps at locations around the country access the application from a browser. All client financial data is centrally stored. Plans can be created or merely approved by a central planning desk at the home office. A B/D gains greater control over the rep’s practice than it had when reps stored data for client plans locally on their own desktop machines. The rep can share the plan with a client, create “what if” scenarios in real time that tweak his or her plan and instantly show the results. In addition, all of the assumptions about inflation and asset class returns can be determined by the B/D, and account data can be downloaded from a brokerage system directly into a plan to reduce the data input required of a rep and get a client up and running on a planning package more easily. And, most importantly, the B/D’s compliance department can monitor all of it.

The implications of the shift toward development of Web-based planning applications on the fragmented independent financial advisor business are beginning to become clear. The Web-based applications I’ve looked at–which include Financeware, Financial Engines, Cofiniti, Morningstar Advisor, and MoneyGuide Pro–are less comprehensive than the traditional planning software packages. They provide plans that are superficial or they focus exclusively on investment planning and do not provide estate planning, insurance advice, or tax planning.

That’s because the great majority of reps affiliated with B/Ds have not been comprehensive planners. While a small number of reps at most B/Ds have provided comprehensive planning services, most reps focus on investments or provide a partial or “lite” plan to their clients. Since an advisor needs to charge at least $3,000 or $4,000 to create a comprehensive plan and make money on it, the cost cannot be embedded in an investment management fee or made up on sales commissions. Only the most wealthy clients are willing to pay steep prices for detailed plans, which means few advisors provide comprehensive planning services, and that is even more true of reps affiliated with B/Ds who often focus on the middle-market.

For reps then, most of whom, according to Forrester Research, do not currently use any planning package, adding one of these Web-based planning tools–even if less comprehensive than a traditional software package–is a big step forward. For advisors who provide comprehensive planning–a relatively small segment of the profession that is comprised of a couple of thousand fee-only advisors plus perhaps about 5% to 10% of reps affiliated with independent B/Ds–these Web-based planning applications will be less attractive.

Comprehensive planners, however, may not all be less sanguine about these Web-applications. Some may indeed welcome a trimmed-down version of their comprehensive planning software, but most will see the new breed of tools as a step backward. For them, the Web tools will take another year or two of development, maybe three. By then, the Web tools will be more comprehensive and rival the traditional planning software applications they now use.

Which brings us back to MoneyGuide Pro and the reactions of our panel of planners who looked at the program. First, let’s talk about the comprehensive advisors who like the program: they say MoneyGuide Pro has great potential but that it is not high-powered enough for their practices at this stage.

Dick Potter, whose Chicago firm, Antares Capital Management, provides comprehensive planning and investment management to less than 50 high-net-worth families, says he was impressed with the program. But he would not use it in his practice. His main reservation: the program does not provide a way to model cash flows while saving for a goal, such as retirement.

While MoneyGuide Pro does allow for some cash flow modeling post-retirement, it does not do so in the accumulation phase of a plan. Just how important it is that the program does not include comprehensive cash flow analysis is the subject of debate among expert planners.

“The system we use now lets you look at whether someone will meet his retirement goal in 2013 and will show you that between now and 2013 you have a $500,000 shortfall and that you need to save another $20,000 a year to reach your goal,” says Potter. He wants to be able to give his clients actionable advice on how much more they need to save, and doing that requires tracking their cash flows, which MoneyGuide Pro does not do. “Given the level of sophistication of this program and its great graphics and its ease of use, I’d expect this hole will be plugged in coming months,” says Potter.

Potter says cash flows are needed in making comprehensive plans. “You cannot advise a client on estate planning and an annual gifting strategy without detailed cash flow analysis,” he says.

Mehmood Nathani of Altius Financial Advisors in Chevy Chase, Maryland, has also been impressed by MoneyGuide Pro’s capabilities. Nathani, a CFA who founded his planning business early this year, wanted to try MoneyGuide Pro because it offered the hope of letting him replace the two programs he relies on for creating financial plans with one product. Plus, at a price of $695 a year after a $300 discount for Financial Planning Association members, Nathani felt the price was right to allow him to experiment. Nathani signed up for the MoneyGuide Pro early this year and sees a marked improvement in functionality with the release of the new version.

Nathani currently uses NaviPlan for financial planning–doing cash flow projections on clients, tax planning, and estate planning. But he does not like the way NaviPlan handles investment management recommendations and he uses Ibbotson Associates’ Portfolio Strategist for asset allocation and portfolio optimization. He says that MoneyGuide Pro is not quite comprehensive enough yet for him to rely on it as his sole planning software package and he is therefore likely not to renew his license. At this point, Nathani thinks he will stick to using Portfolio Strategist in combination with NaviPlan, despite the need to enter his client data twice.

“MoneyGuide Pro is designed by financial planners and you can tell that is the case,” says Nathani, referring to planners Harold Evensky and Deena Katz of the Coral Gables, Florida firm, The Evensky Group. Katz and Evensky, leaders in the financial planning industry, have helped guide the development of MoneyGuide Pro as technical consultants to the company. “MoneyGuide Pro has great possibilities and I like its goals-based approach and the fact that you can work collaboratively with clients,” says Nathani, “but being able to document cash flows in the accumulation stage of a financial plan is very important to me.”

Not all planners feel that way, however. Andrew Novick of Condor Capital Management believes that modeling cash flows is a waste of time and energy for advisors and their clients. “I don’t think a client wants to see line by line every budgetary item in a plan,” says Novick, “because an individual’s ability to project that on a long-term basis is very questionable.” Novick says Condor Capital, which is located in Martinsville, New Jersey, has developed its own Web-based tool for planning, which includes a Monte Carlo simulator and other sophisticated features. He says MoneyGuide Pro is the first planning software he has seen that provides the functionality and uses a methodology similar to what he has created in designing his own planning software.

Mark Jongewaard, of Playa Financial Advisors in Playa del Rey, California, says he has been using his own spreadsheets in Excel to handle financial planning tasks for clients. “We’ve not had to produce a book-sized comprehensive financial plan,” says Jongewaard, who likes MoneyGuide Pro’s simpler approach to planning. “I like starting with a terminal amount instead of being cash-flow based,” he says. “I’ve never had a client who wanted to go through all the cash flows and simulate that.”

Harold Evensky says that after insisting on detailed cash flow analysis for more than 20 years, he came to the conclusion that planners need such detail in only about 5% of the cases they handle. Evensky says that modeling the cash flow that you get on a portfolio is flawed because the software programs do not rebalance a portfolio. So, if you are using NaviPlan, for instance, and you have a portfolio of 50% bonds and 50% stocks, after 20 years the portfolio will be throwing off cash flow as if you own more stocks than bonds because of the better returns on stocks. But the software will not reflect the cash flow change due to rebalancing. And if you have two IRA accounts and a taxable account for each client, he says, “you’d need a supercomputer to accurately model the cash flows after periodic rebalancing,” says Evensky.

Evensky also says detailed cash flows require so much data entry that they almost ensure errors. Invariably, he says, a planner will record a $10,000 expense as $100,000, for instance, or make some other mistake. If the client discovers the mistake, you are embarrassed and may have to redo the plan. More likely, input errors won’t be discovered and clients will make decisions based on flawed data, says Evensky.

Potter disagrees. While he concedes that long-term cash flow projections can be flawed, attempting to see the future by planning carefully gives clients a better understanding of their possible outcomes.

Evensky argues that high-net-worth individuals–those most likely to buy comprehensive plans–ironically don’t have as much need for cash flow analysis as ordinary folks. High-net-worth individuals, he says, won’t be running out of money, while middle-market clients with less resources who are less likely to pay the fee for a comprehensive plan, would stand a greater chance of running out of money and would therefore benefit from detailed cash flow analysis and budget projections. They just can’t afford to employ a planner to do it.

Evensky says a planner’s ability to predict tax rates, spending, inflation and returns over anything more than a five-year period is tenuous. “Comprehensive long-term cash flow projections focus on details and not results,” says Evensky, who has helped MoneyGuide Pro design its goals-based approach. “And the results I have been getting when I use the program with my clients makes me passionate about how powerful a planning tool it is.”

However, planners should not expect to eliminate use of NaviPlan in favor of MoneyGuide Pro, he says. “I gave up the dream of using just one program for planning,” Evensky admits. “I have NaviPlan, I have Ibbotson’s Portfolio Strategist, as well as MoneyGuide Pro, and the bottom line is that a professional needs them all.”

For most planners, MoneyGuide Pro’s ease of use will be a great benefit. You can show clients a plan over the Web and then easily perform “What ifs?” showing the client what might happen if they save a little more or retire a little later. This feature is very powerful because it lets you see how radically plans change when returns are tweaked, or other factors change only slightly. And being able to model different possible outcomes so quickly exposes a client to how vulnerable the planning process is to life’s twists and turns.

Instead of using the traditional approach of funding goals chronologically–with the first goals you are facing getting funding first–MoneyGuide Pro lets the client prioritize goals. So you can make retirement planning your most important goal even though you may want to buy a vacation home before you retire. Your retirement planning goal will be fully funded before the program forecasts funding purchase of your vacation home.

MoneyGuide Pro’s new version lets the planner “stress test” a portfolio, so you can show a client how his retirement plan would have fared if he retired in 1970–just before the last bear market. You can also run a Monte Carlo simulation to calculate the probability of meeting your goals.

In addition, the program has added a module for advisors on long-term care insurance products. This new feature illustrates the value of owning an LTC policy, and can automatically add on the cost of home care or a nursing home in a what-if scenario, or tack on the cost of an LTC policy in retirement.

Advisors who are looking for a new planning package should consider MoneyGuide Pro. While it may not yet be comprehensive, I suspect that over the next year estate planning may be added as well as some sort of cash flow and budgeting tool, and its goals-based approach and online modeling capabilities make it a contender. I’ll be looking at more of these planning packages in coming months and would appreciate your views. E-mail me at [email protected].


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