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Bryce Sanders

Practice Management > Building Your Business > Prospect Clients

How the Monte Carlo Simulation Helps Close Business

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What You Need to Know

  • Above all, respect the client's risk tolerance.
  • Once the advisor gathers the data and determines the client's expected retirement lifestyle, they can suggest viable alternatives and rerun the simulation.
  • When you have reviewed the data, costs and other details, ask for the order.

There are people out there who save but do not invest. How can you make the case they should get involved in the stock market, even though it means volatility and the possibility of losing money? Understanding and using the Monte Carlo simulation can help.

Let’s add a cautionary note. Advisors must respect the client’s risk tolerance. If they absolutely, positively don’t want to take the chance of losing any money, you must respect that. They may be best off with a bank account. In this article, we are considering the client who is familiar with investing.

What Is the Monte Carlo Simulation?

In simple terms, the Monte Carlo simulation is a projection of what your money might do in the future based on a set of assumptions. These include projected returns from different asset classes and projected rates of inflation. Several different simulations can be run for “what if” scenarios such as a strong stock market or a weak one. A major outcome is a probability or percentage for success.

Utilizing the Monte Carlo Simulation

This conversation, which takes place over time, would involve several steps:

    1. Step One: Gather the data. You know what the client or prospect owns both here and away. They have shared their 401(k) balance and asset allocation. They have told you how much they put away annually. All this data gets entered.
    2. Step Two: Determine what lifestyle they anticipate in retirement, This is a number. They might base it on what they spend now. It might be more if they plan to travel. It might be less if all the weddings and college educations are out of the way.
    3. Step Three: Ask the question. Based on what you have put aside, are you confident you can live the kind of lifestyle you want in retirement? How confident? You are looking for a percentage. One hundred percent confident? Sixty percent  confident?
    4. Step Four: Run the Monte Carlo analysis. This projects investment returns and expenses. They might be fine. More likely they will see a shortfall. Their money would run out while they are still alive.
    5. Step Five: Ask more questions. There are possible solutions. Are you prepared to work longer so you can save more? Are you prepared to increase your retirement savings substantially now? Are you prepared to live on a lower income in retirement? Often the answer is no, no and no.
    6. Step Six: Ask if they would consider an alternative if it had a higher probability of success. You have done further analysis that has become your proposal. There is a different asset allocation and other investments. Are they interested in seeing it? The answer should be yes. You show them your proposal.
    7. Step Seven: Rerun the Monte Carlo analysis. These numbers show a higher probability of success. It’s not guaranteed. There are costs, but their desired lifestyle may be within reach.
    8. Step Eight: Ask for the order. You review details, investments, costs and other factors. You ask for the order.

The Key Factor

You have identified a problem. They might not have known they have a problem. They might not say yes to your proposal. Regardless of their decision, they still have a problem. Once identified, it doesn’t go away. Hopefully, they come around to your way of thinking.

Bryce Sanders is president of Perceptive Business Solutions Inc. He provides HNW client acquisition training for the financial services industry. His book, “Captivating the Wealthy Investor,” is available on Amazon. 


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