Part 1: Planning to Go

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].