Financial planning software programs are better than ever, there are more of them, and the landscape of this key technology area is changing. The industry leader, NaviPlan, has undergone a major facelift and simplified its software. Upstart MoneyGuidePro, a Web-based application, has stepped up the competitive pressure with its innovative approach. Meanwhile, traditional competitors like Financial Profiles remain very much in the running.
Yet when it comes to financial planning software, the one thing that has not changed and remains a challenge for these software companies is the market itself: Independent financial advisors continue to have such different approaches and want so many different things. While one advisor may say MoneyTree is imprecise and not comprehensive enough, another may like it because he believes minutely detailed cash flow projections stretching 20 years out are folly. While one advisor may see a Web-based application as a shackle holding his firm prisoner to a technology provider, another sees Web-based applications as liberating.
What seems clear after tours over the past six months of numerous planning programs–including eMoney Advisor, Financeware, Financial Profiles+ Professional, MoneyGuidePro, Money Tree, NaviPlan Extended–is that the independent advisors being targeted by planning software vendors are segmented into two distinct markets. There are a couple of thousand sophisticated planning firms that mostly do business under an RIA, and then there are many thousands of less-sophisticated advisory firms that are usually run by registered representatives of a broker/dealer.
The sophisticated planning firms–those with a CFP or multiple CFPs and other credentialed staffers that create rigorous in-depth plans and update them annually–tend to be different from one another. Yes, all of these firms are investment advisors doing planning. With respect to planning, however, some want goals-based plans, while others want cash-flow oriented plans. Some want detailed tax projections, while others do not get mired in those details. Some demand a stock option analysis tool that is integrated into their software, while others will only be satisfied with a dedicated stock option planning software package that is powerful enough to advise top corporate executives. Some want to model an estate’s cash flows, while others don’t need such precision or leave estate planning entirely to attorneys.
In addition, sophisticated planners often are uncompromising about the tools they wish to use, preferring two, three, or even four applications for planning. They use one program just for tax planning, another for investment analytics, and yet another just for Monte Carlo simulations, all in addition to a traditional planning program. Using just one application that won’t yield the reports exactly the way they want but that can get the job done quickly is simply not an option.
The Fussy Planners
The idiosyncratic nature of sophisticated planners is good for smaller software vendors. Fussy planning shops keep these vendors profitable. It also promotes competition among the vendors.
Since sophisticated independent advisory firms are so opinionated and their business processes are so diverse, it’s impossible for any single program to completely dominate the market. As a result, EISI NaviPlan and Financial Profiles, which respectively have 230 and 75 employees, must compete with much smaller shops like Money Tree and MoneyGuidePro, which respectively have 14 and 21 employees.
Keep in mind that the financial planning software field is still in its infancy. A majority of the less-sophisticated part of the independent advisor market, the independent registered representatives, don’t regularly use planning software. Based on my own informal polls when I speak at trade conferences, it’s pretty clear that most independent registered representatives do not use financial planning software. According to a large broker/dealer that I checked with and that wishes to remain unnamed, only about 40% of its reps currently use planning software. The number of reps using planning software on a majority of clients is, of course, much lower.
Most reps are focused on investing and selling because it’s hard to get paid for doing financial planning. Basically, financial planning is a professional service that clients ideally pay for by the hour or by retainer. Not many advisory firms charge a separate financial planning fee or retainer for planning. It’s often a freebie that comes when buying investment products, so advisors don’t put much labor or thought into it. Because planning is difficult to get paid for, it has historically posed a major obstacle to the growth and scalability of independent investment advisory firms. Planning itself has not been a scalable business because it is labor intensive and requires skill and time, precious resources.
However, planning software is making the service more scalable and the software is likely to be used by many more reps in the next few years. The programs are being simplified so that any rep can use a planning application. They are moving to the Internet and being integrated into independent B/D platforms. Plus, the applications are now more sales oriented and can be used as tools to discover assets in prospects. These technology trends will have a big influence on the growth of financial planning in the next few years, and on independent advisors.
Planning Software Available to Reps
With the B/Ds now cutting deals to integrate planning software packages into their online platforms, many reps that never before bought planning software will find it is provided for free by their B/D or at a low cost. The B/Ds are making the software available because it makes their reps better at what they do and because compliance can be monitored over their online platforms. Plus, the B/Ds like the idea of having rep data reside on their servers. The confluence of these factors is likely to mean an upsurge in financial planning services over the next few years, a trend that has been predicted for years but seems to finally be coming to fruition. With some of these new planning applications, it will take less time and skill to make plans, and the programs will help you sell your products and services.
But enough about the big picture. I have spent many hours in recent months getting tours of planning packages, so that I can report on them to you. I waited to see about six of them before writing this story to gain perspective. I’ll be reporting my findings on specific packages in the next few months. This month, we’ll cover four of the leading planning packages. Please understand that I could not have done this reporting and known what issues to focus on without the help of a group of experienced planners who attended online demos of these packages and took advantage of free trials that the companies offer.
This is the granddaddy of Web-based planning applications. When I first wrote about it in the late 1990s, Financeware was called Financial Plan Auditors, and the Internet boom made its founders giddy with thoughts about how they could retool the financial planning industry to use a proprietary probability analysis method and collaborative online planning. They had grand plans. Consider this press release from the company issued March 23, 1999: “Management stated that the unique mathematical method being licensed from Online Financial Planning, Inc. could allow them to potentially dominate the online financial planning market using tools and mathematical methods not currently disseminated throughout the financial industry.”
At the time, the idea of an advisor sharing a browser with a client, working collaboratively online live together, was revolutionary. This was also one of the first planning applications to integrate something akin to Monte Carlo simulations, applying a powerful statistical method to show how likely a client’s portfolio was to succeed. I bought into it. So did the venture capitalists, with the VC arm of TD Waterhouse leading a group that made an $8 million investment in Financeware and Northwestern Mutual Life Insurance in August 2001 leading a second round of $8 million financing.
The bursting of the Internet bubble brought Financial Plan Auditors back to earth. But this classic dot-com story does not entirely diminish Financeware’s significant contribution and standing.
Financeware says it has 1,200 advisor customers that pay for its application independently (not as part of an enterprise deal through a B/D), and another 28,000 advisors who have signed up through institutional-level sales. Financeware has been successful because it is easy to use, provides an array of reports, and lets you quickly provide an assessment of a client’s retirement plan while showing the client’s risk/reward tradeoff. The company has added to advisors’ understanding of using probability analysis and Monte Carlo simulations, and does a good job of educating advisors about how to use its software.
With its goals-based approach, advisors do not spend time collecting data from clients about budgets. It allows for side-by-side comparisons of up to four different plans, takes an import of data from Schwab PortfolioCenter software, makes projections based on average federal tax rates and lets you model the effect of state income taxes on a plan.
You can run as many different portfolios as you’d like in a projection, shifting asset allocations annually, if you’d like over the course of a client’s lifetime or just creating a pre- and post retirement portfolio to reflect the client’s changing risk profile. You can also easily alternate the order of death for a married couple’s plan to see how that would affect a plan for a surviving spouse. The report-builder gives you flexibility to add or subtract sections to a report package.
But Financeware has failed to keep up with it competition in a few key places. It has no way of modeling estate planning, for instance.
Scott Yang, a planner at Weil Capital Management in Palo Alto, California, whose firm has been using Financeware for years and is happy with it, does express some frustration over Financeware’s inability to model the impact on a plan of buying a long-term care policy. While you can work around the problem by inputting the cost of the policy as a major expense coming out of the portfolio, Yang notes that other planning tools have done a better job of in this area. Yang says the program is also missing the ability to easily model disability insurance costs.
Another limitation is that Financeware does not include a classification engine to model current portfolio holdings. Financeware’s planning philosophy puts little value on the traditional notion that advisors must show clients how their recommendations add value by projecting a client’s current portfolio against a proposed portfolio. The Financeware planning methodology is instead focused on how much risk is involved in achieving your financial goals.
“It’s a good tool for limited circumstances,” says Karen Spero, a veteran financial planner at Spero Smith Investment Advisers in Cleveland. “But it is not a comprehensive planning package.”
Spero, one of about a dozen advisors who attended several of the online demos of different planning packages that I’ve arranged in recent months, says her firm has used its own spreadsheets for planning, but is now seriously considering buying a program instead. “There’s been so much improvement in planning software that we’re rethinking,” says Spero, a CFP whom I’ve known for years.
Spero likes Financeware for what it is good at–probability analysis on retirement portfolios–but says it comes up short in other areas. “It would work well for investment managers who do not write full-blown comprehensive plans,” she says. But in a reaction that is typical of sophisticated planners, she would not switch from her spreadsheets to Financeware because it is not comprehensive and is not as detailed as she wants in the data it collects.
Financeware costs start at $1,250 annually for a single-user bronze license and rise to $3,500 annually for a platinum package. The packages differ in the data they draw upon when running a probability analysis, the number of side by side comparisons that can be run and in other significant ways.
While Financeware is a good program and was way ahead of its time, its core functionality–Monte Carlo simulation–is now offered in many other planning packages while it has failed to build out additional features that planners want.
Carlsbad, California-based Financial Profiles is the second largest supplier of planning software to the industry. According to the company, 50,000 advisors are licensed to use its products. Likes its larger rival, EISI, Financial Profiles has two planning software applications, Profiles + Forecaster and Profiles + Professional, which is what we are focused on, and 30,000 of the licenses are for the flagship FP + Professional.
Financial Profiles is focused primarily on the enterprise-level institutional market of B/Ds but also sells direct to advisors unaffiliated with a B/D, and Professional is the package that would appeal to these more sophisticated planners. The company estimates that 65% of its users are independent registered reps, 25% are employee registered reps, and 10% are independent advisors affiliated with RIAs or CPA firms but are not NASD-licensed to sell securities.