INCREASE CLIENT TOUCH
POINTS AND BUILD STRONG
RELATIONSHIPS WITH FINANCIAL
PLANNING TOOLS
OvErviEW
Financial planning is a growing need, especially for today’s retiring or retired baby boomers who require planning to sustain their lifestyle as well as for the members of the X/Y generations who are facing higher education costs and less certain retirement prospects. Advisors who use planning tools find they play an increasing role in attracting and retaining clients. They are better able to understand their clients’ ever-changing situation; can provide sound, valuable advice; and bring a level of trust and continuity that helps maintain relationships.
Using tools that bring increased value as time passes, and that enable clients to be actively involved in the process, increases the amount of contact clients have with their advisors. More touch points lead to stronger and more stable client-advisor relationships.
More than ever, clients want to know (and be able to track) if what their advisor said in one year holds true in the next several. This requires the industry to move away from straight-line assumptions and forecasting to probabilistic scenarios and tools that support forward-looking advice.
Probabilistic forecasting (aka Monte Carlo) provides two main benefits: • Risk/liability reduction to the firm for forecasts that do not come true
• Improved advice to clients (e.g., a gifting strategy that makes sense if a portfolio grows and might need to be reviewed and revised during times of market volatility; therefore, creating a strategy that factors in that volatility from the start would obviate the need to revise the strategy)
As firms increase their client offerings, many tools are becoming minimum standards of practice (though, still not available at ALL firms) while other cutting-edge tools allow firms to distinguish themselves as being at the head of the pack.
This paper will discuss several leading-edge tools that are being made available to clients as well as the benefits of staying up-to-date and offering value-added services.
Finally, we conclude with a framework on how to determine, prioritize, and implement new functionality at your firm or practice, as well as considerations for “buy,” “build,” and “buy and build” options.
stAtiC vErsUs PrOBABiListiC FiNANCiAL PLANNiNG
Static advice and reporting are no longer acceptable to most clients. As account values change, clients demand to know the impacts to their goals in future years, and what realistic changes are needed to stay on track. Clients are also more skeptical than ever regarding straight line, non-volatile assumptions that do not account for real world events.Increasingly, advisors are being required to provide advice that takes into account volatile investment types and markets. Using straight line assumptions (e.g., U.S. Large Cap stocks will go up 10 percent each year with no volatility) does not provide a realistic example of the investment world. It will almost undoubtedly provide an overly optimistic outcome as the only way an account value goes down is if spending is higher than the combined income and growth of the portfolio.
Financial planning tools that incorporate integrated data and a probability of success for individual goals allow advisors to provide strategic planning advice. Advisors can track the probability of success when the plan is established as well as on an on-going basis as actual income is realized, expenses are paid, and investments change in value. Assumptions still need to be made regarding the expected growth of investments, the volatility of those returns, and their correlation to each other. However, probabilistic models will output potential long periods of negative returns in the short/mid and long-term and create a framework for discussion and consideration with clients.
Monte Carlo models rely on reasonable assumptions regarding the market return, asset class volatility, and correlation, and not all models are considered equal. The most accurate models will consider mean reversion, the non-normal distribution of returns (e.g., fat-tails) and the ability to stress test a strategy using actual “black-swan” (i.e., extraordinary) events. A detailed description of these concepts and their application to financial planning models is beyond the scope of this paper. The point is that some Monte Carlo is better than none, but actual tools and assumptions are important factors.
Advanced tools allow for the prioritization of goals and alert clients when/if material changes impact their plans. Alerts can be set to track the value of accounts, spending versus budgets, allocations to specific securities or asset classes, and a multitude of other areas. Best-in-breed financial planning tools allow advisors and clients to see how these occurrences impact the initial retirement goals and whether revisions are necessary. The client can “play” with several options using “what-if” scenarios (e.g., save more, assume to spend less in retirement, work longer, etc.).
Strategic planning is not something that can be fully programmed into a computer. An advisor must understand the client’s situation and goals and come up with creative strategies that meet their individual needs. Software helps this process, but one must never forget or discount the importance of human factors in the financial planning process.
vALUE-ADDED tOOLs
Services offered by financial advisors are now more broad than pure investment and financial planning and have expanded to include account aggregation, online collaboration, vaults (for storage/sharing of important documents), money transfer/bill pay, mobile apps, and expanded advisor/client communications. Out-dated reports and limited services lead to the assumed (and real) perception that the advisor is not offering best-in-class tools. Advisors who offer those services distinguish themselves from those who do not. Firms need to ensure they are not lagging behind competitors in their ability to provide tools—which should be considered minimum standards of practice for financial advisors.
EXPECTED TOOLS FOR FINANCIAL ADVISORS
Aggregation is the process by which investors and their financial advisors collect all of the data needed to create a complete and accurate picture of an investor’s entire portfolio–for purposes of advice giving and reporting. There are four ways to aggregate: Do-It-Yourself, Basic Feeds (screen scraping), Enhanced Tools (screen scraping with enhancements), and Advanced Aggregation (reconciled data received through custodial feeds and/or manual entry).
Mobile tools should incorporate the relevant information and functionality that clients want to have on-the-go. This includes their ability to see account values and recent transactions as well as the ability to trade, deposit checks, and transfer money. Functionality is typically a subset of what is available on the client website.
Account Aggregation
Mobile Applications
Additionally, leading-edge tools portray to clients that their advisor is offering them the best possible service. As an integrated whole, they establish a strong product/service offering that adds tremendous value to an advisor/client relationship. As advisor usage of tools increases, more touch points with clients are established, which results in stronger and more lasting relationships. As clients use and receive benefits from these tools, they become more involved in the financial planning process and discover a more value-added
LEADING-EDGE FINANCIAL ADVISORY TOOLS
In addition to the standards of communication (phone, email, letters, and in-person meet-ings), new communication tools should be explored.Instant messaging tools that show if an advisor and/or their assistants are available provide clients with greater than 9-5 support without an unacceptable burden on the adviser. Communication through social networking can be an effective tool in communicating non-client specific information (e.g., a weekly newsletter) and gaining references.
Advisor / Client Communication
Online collaboration enables the live sharing of up-to-date data between the financial advisor, a client, and the client’s other advisors (e.g., attorneys, accountants) incorporated within a flexible entitlement system for multiple user types. Advanced tools also allow for users to create and foster discussion.
Online Collaboration
A vault allows advisers and clients to store documents for access and sharing as appropriate (e.g., wills, trusts, powers of attorney, tax returns, statements, and client reports). As opposed to existing static document repositories, a vault should enable both the client and the advisor to store, share, edit, and/or hide documents as desired.
Vaults
Relationships and performance will always be paramount. However, tools and output cannot be ignored and have a significant impact on the growth of an advisor’s practice.
DEtErMiNE AND PriOritiZE DEsirED tOOLs AND
FUNCtiONALitY
Firms that understand the value of tools, but lack them, must first determine what functionality is required and then prioritize development.
Building a roadmap for development should occur after understanding the needs and desires of their advisors and end-clients. Knowing what competitors are offering and the difference between a firm’s own systems is critical. Firms should not wait until they are already lagging behind and should be continuously speaking with their clients (e.g., FAs and end-clients) and industry experts about current and forward-looking innovations. Tools should be prioritized in terms of the importance to their business and the gap between where they are and where they want to be. For example, something that is very important, but the gap to current functionality is small may be a lower priority than something that is slightly less important to a practice where the gap is larger.
BUY vErsUs BUiLD Or BUY AND BUiLD
Many firms have invested heavily in their existing, fully customized tools. At the same time, third-party vendors who focus solely on financial planning are generally more innovative and are typically first to market with advanced features.
There is no single correct solution. Below are several considerations:
Pros:
· Leverage external firms R&D · Ability to switch vendors to stay competitive (price and functionality)
Cons:
· Less (or no) differentiation from competitors
· Non-custom solution · Long-term costs may be higher
Buy & Build
Pros:
· Leverage historical investment · Buy core components and customize/integrate key areas for differentiation
· Leverage external firms R&D · Ability to switch vendors Cons:
· Could be expensive to build and maintain
· Integration of legacy and new presents unique challenges
Pros:
· Leverage historical investment · Full customization · Unique tools can provide differentiation
Cons:
· Could be expensive to build and maintain
· May be slow to market · Firms may not be as innovative as focused industry vendors
Buy Build
A methodical approach to application develop-ment should always be followed to ensure that business needs are met and that dollars spent are dollars spent wisely.
Requirements should be gathered and prioritized from a variety of users (e.g., advisors, assistants), end-clients (e.g., by age, AUM, and technical acumen), and subject matter experts. A Competitive Analysis should be created to understand what services are being offered by industry competitors and third-party vendors as well as what leading-edge functionality and tools exist.
A Gap Analysis documents how far current capabilities are from desired future capabilities to assist in understanding the technical difficulty and cost of implementation.
A Roadmap takes into account priority, cost, technical difficulty, and dependencies and helps determine what and when different functions should be implemented. A build/buy analysis (discussed on the next page) is often conducted as part of this phase to evaluate the relative merits of various approaches to development/ implementation.
EMC® Consulting brings an industry-recognized
best practice roadmap approach to understand the current state, develop a vision for the future state, and define the business and technical roadmap to achieve that future state.
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EMC believes the information in this document is accurate as of its publication date. The information is subject to change without notice.
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implementation—are critical factors to success.
CONCLUsiON
Financial planning and related tools are critical to building and maintaining the client/ advisor relationship. They build trust and accountability, help educate clients, and provide value-added services that support stronger client relationships.
Financial advisors want to differentiate themselves through service and performance, but without the appropriate tools, they create a noticeable gap that will be perceived by their clients and potentially exploited by their advisor rivals. Advisors who have the best tools can also use them to differentiate themselves and win new business in competitive situations. Employing probabilistic planning and more collaborative tools that maximize client touch points is an approach that provides a strong foundation for long-term client relationships. Equally important is the approach used in evaluating tool needs and deploying the
functionality. A well thought out roadmap—from requirements through implementation—will ensure that the right tools are implemented in the right way, at the right time, and at the right price.
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