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The Simpler Approach

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Bob Curtis has spent most of his professional life reinventing the way investment advice is delivered. In the early 1970s, Curtis worked for NCR in sales before starting his own minicomputer software company in 1977. Since his father was in the insurance business, Curtis got hooked on writing software to pitch universal life insurance. By the early 1980s, with the advent of the Apple and the IBM PC, Curtis opened a retail computer store and focused on selling PCs to insurance agents with software he designed to help the agents sell insurance and annuities.

By 1985, Curtis focused on showing banks how to sell annuities with computers, and closed his retail stores to start Compulife, a bank marketing company that morphed into a broker/dealer that trained and placed reps at bank branches selling annuities and securities. By 1993, Compulife had its reps in 100 banks and sold about $500 million of product. Curtis sold Compulife in 1999 to IFG, an Atlanta B/D that was later bought by ING. But Curtis kept the rights to his software, which by then had developed into a financial planning package. His Web-based software, which is today called MoneyGuidePro, is used by about 1,000 independent RIAs, plus reps at independent B/Ds like NFP Securities and Commonwealth Financial Network as well as non-independent B/Ds like UBS AG– which owns the former PaineWebber Group. Competitors NaviPlan and Financial Profiles are far bigger companies with more users, but Curtis’s devotion and loyal team of six developers has revolutionized the way people can plan their financial lives. While NaviPlan Extended has staked out a reputation as the most comprehensive planning software and remains the market leader in the high-end comprehensive planning category, Curtis has used a simpler approach requiring less data input to get output that can tell you if your money will let you do what you want to do. Now 55, Curtis has been thinking for so many years about how professionals can deliver financial advice and is so committed to getting it right that his ideas are worth listening to.

Where does financial advice often go wrong? Financial planning has had this great boom and with all the positive developments, I am convinced we have seen some real negatives as computer processors have become faster and software has become more sophisticated. As an industry, and this goes back to the Certified Financial Planner approach to planning, we have become completely enamored with the generation of numbers, with pretending we can generate accurate numbers out into the future. So much of the effort in planning is centered on the idea that, if we just get more data and smarter, faster computers, we’ll have better plans. That’s not true. We’re trying to predict the unpredictable. More data, more assumptions, more moving parts in a financial forecast don’t add to the usefulness of results. Think about a 30-year plan. I can assure you, almost every assumption we make, by the end of the plan, will be inaccurate. It does not mean that they are bad assumptions or that you should not make assumptions. It means that we should make as few assumptions as needed and focus on the stuff that really matters.

Give me an example of where advisors are so in love with their data that it obscures the bigger picture. Take returns. When you are planning for long-term retirement, one of the things with the most impact on your plan will be returns. Over 30 or 40 years, small changes in returns have huge impact. The best you can do is pick a portfolio and make some estimates about how it will perform. If we predict a return of 8% annually and the client gets close to eight, we’re doing great. But what planners often do is input every stock, every mutual fund, and every bond and predict what each of those securities will do over 30 years, with growth rates, dividend yields, tax treatment, sequences of spending the stocks versus the bonds and other complex calculations. That’s a different level of detail. It actually makes the end result of the plan less meaningful because you create this set of assumptions for things you cannot possibly predict with accuracy.

You think the planning process taught as part of the CFP curriculum is flawed. Why? The planning process CFPs are taught teaches budgeting, and you must do a detailed cash flow budget for a person. It is data heavy. Budgeting is not the way people live. It’s not the way they behave. You create assumptions, like let’s see what your income will be for the next 20 years, and how much you’ll be spending each year, or the tax you’ll pay each year. It’s just all too uncertain. Advisors and their clients get so caught up in their assumptions about their AMT liability in 20 years that they focus on minutiae instead of bigger things that will impact the plan. You pretend the plan is more accurate than it is. If you’re only saving $5,000, maybe I have to work with you on your budget today to save more. Forget five or 10 years down the road. An immediate budget for today is appropriate and hard for people to do, and that’s what planning should show–whether you are saving at a level today that gets you where you want to go.

Your scaled-down approach to planning also eschews making detailed cash flow projections about expenses and income. That’s heresy to many planners. You must believe that more data makes your plan more certain, more scientific, right? No. Does it make sense predicting income, expenses, and taxes for 30 years down the road? You don’t need that to do a good plan for someone. You’re adding things that don’t make the end result more useful. It’s better to focus on how much money you can save and invest each year and base that on where you are today. If you suddenly get promoted in three years, you can save more and you will also be spending more. But you cannot predict any of that now. Planning has tried to be like statistics or accounting–something with a right answer. In those fields, the more detail you get, the better. That is not true with personal financial planning.

What’s a better way? Focus on the biggest things. None of it is accurately predictable. So what is the minimum we need, and what’s most reasonable to predict? I’d argue it’s the long-term return on an optimized portfolio rebalanced annually for the next 30 years. That’s more meaningful than trying to predict performance of individual holdings. Focusing on what you currently can save and invest and relating that to your current lifestyle is more reasonable than trying to predict your actual income and expenses for the next 30 years. Most people cannot budget for a year or manage their life to a budget. It’s better to focus on what you save. Look at your income this year, what you’re saving, or putting into a 401(k) or IRA.

Your notion of long-term planning seems less comprehensive and only valuable for a limited time. Doesn’t that diminish the value you give to a client? No. It’s the opposite. Harold Evensky, who has helped me a lot, usually doesn’t give clients printed plans anymore because a plan is ongoing. A financial plan is a living thing. You want to show the plan as a range of possibilities that needs to be constantly updated. A plan helps a client make more appropriate decisions because he has better information. You need to emphasize that with clients. One of the things that’s killed advisors in the last few years was that they got clients used to judging their progress based on a quarterly statement of portfolio performance. When returns go down in a quarter or for a year, you see you lost money. But if you look at how a loss impacts a 30-year plan, it’s dampened. That’s the context you want when you have a discussion with clients about their progress–not selling quarterly returns in isolation but in the context of a long-term plan.

A lot of investment advisors are not at all interested in doing long-term plans for people, and many believe that the only thing that matters to clients is performance. Should investment advisors get dragged into this messy business of planning? It’s a lot easier to just manage someone’s money than help them plan. If all I have to do is pick a few funds for your portfolio, that’s pretty easy. And most advisors make their money there. Planning is more difficult.

I’m pretty convinced, however, that the business model where you give investment advice alone won’t work, and that more and more investment advisors will get into planning. It will take time, however, because there is such an entrenched, proficient sales force out there. Plus, clients are bad at discriminating among the services they are getting. The push must come from the customer. The fee-based planning orientation is growing though, and will accelerate. With goal-based planning tools like ours making planning easier to create–a basic retirement plan can be done in 20 to 30 minutes–and easier for clients to understand, we’ll see more brokers and investment advisors moving toward planning.

How do advisors explain risk to clients now and how can they do it better? It is flawed to build a portfolio for someone based on his risk tolerance without considering whether investing in that portfolio allows him to accomplish his goals. The bottom line is not whether you are in the right portfolio. It’s whether you can reach your goals. People should take the least amount of risk to accomplish their goals. Risk needs to be looked at in the context of an overall plan. A risk tolerance questionnaire is only a starting point. It’s not absolute. It’s not like I give you a questionnaire and you score 28 and should, therefore, be 60% in stocks. That 60% stock portfolio may not be what you need to meet your goals. The most important risk is that you won’t meet your goals.

You think advisors should not rely on historical returns to make assumptions about the future and would be better off using projected returns. Why? It used to be that almost all advisors used historical returns in their plans. Now about half make projections. There was a dramatic change over the past year. Historical returns are harder to work with. Most advisors don’t expect returns to be as high as they were historically, and almost all expect inflation to be lower. It’s wise to start with historical returns as the basis for a projection and adjust it. Price-to-earnings ratios are far different than 10 years ago; the inflation rate is different. Inflation since 1970 is about 4.8%. Projecting that forward on all your expenses would overstate future increases in your costs. Similarly, the historical real risk premium on stocks above the inflation rate has been about 7%, but few people think that is a reasonable return expectation going forward.

Monte Carlo simulation is part of your software, but not a big part. Why? Monte Carlo simulation is a great tool to get people to focus on limitations of single average return projections. Interestingly, it was used a lot and still is for people in pre-retirement, but it is more important in retirement because the sequence of returns affects you more. When accumulating savings, you’re actually better off sustaining losses in your portfolio early rather than late. The place you get affected tremendously is in the withdrawal phase of life. The value of Monte Carlo is that planning looks at a range of possible outcomes. A lot of advisors, however, have latched onto Monte Carlo as the answer to a plan. They think that telling a client that she has a 78% chance of success is all she needs to know when it’s actually only one more piece of information. What happens to her the other 22% of the time? Is she broke? Monte Carlo gives you no understanding of the magnitude of what the failure is. It also creates extremes. Many Monte Carlo software calculators show the range of ending values. They show that you might run out of money at age 80 or have $5 million left when you die. There is a range of outcomes. How is that useful? It also hides risks for you. For instance, say someone who is retiring now has an 85% probability of success. But if next year or the year after he gets very bad returns, his plan may fail. The 85% made it look very good, but you still need to educate him about the risk of a bad period. So you cannot just use that success rate number alone. You can use it with a bad timing scenario instead.

We like to show a bad timing outcome, where you have a loss equal to two standard deviations in one year in your portfolio followed by a single standard deviation loss in that portfolio in a second year. That’s a simple way of educating clients about that particular risk, and it is the major risk to retirees.

You recently added estate planning capabilities to your software. What did you learn in doing that? That when you show the benefit of an estate plan, you should also show the long-term effect of implementing it. When showing an irrevocable life insurance trust, for instance, and the great benefit heirs will get from the insurance, you should also show the impact of paying the premiums on the client. The estate planning analysis has to be a part of the overall goal plan for a client. It’s not something separate. A lot of estate software will just enter assets and do a calculation showing you what the assets will be worth and your estate taxes at the end of your life. But clients need to see their estate plan in the context of their overall plan and see how the estate plan affects their ability to achieve their goals. You need to see how the $15,000 insurance premium paid for the ILIT affects the client’s plans for a vacation every year. An attorney will draw up the documents for the estate plan but as the advisor you can add value to your relationship with a client by giving him this information.