5 reasons your current planning software may not meet a fiduciary standard

March 6, 2017 by Brian Sasaki

A financial advisor talking to his client about financial planning technology, upholding a fiduciary standard

About the author:

Brian Sasaki

Account executive

Brian started his career working for a large insurance and investment company located in Milwaukee, WI, where he was one of the top financial representative interns in the country.

As we sit in the limbo that is the future of the DOL rule, many financial firms are preparing for the industry change. In this preparation, many firms are taking a long, hard look at financial planning software for their practice.

5 financial planning software functionalities to keep in mind to uphold a fiduciary standard

Below is a list of functionalities that firms acting as within a fiduciary standard will need to consider when upholding their clients’ best interests.

1. Tax calculations

A lot of planning systems cannot calculate taxes properly; they either do not calculate taxes at all or use an average tax method — instead of actual tax rates and brackets. When working with clients, many of their financial decisions will have significant impact on the taxes they currently pay and the taxes they can expect to pay in the future. Therefore, demonstrating the tax advantages and disadvantages of recommendations will play an important role when acting as a fiduciary.

2. Cash flow monitoring

There have been many discussions about cash flow and goal-based planning, as well as which strategy is better. The software you choose should actually have the functionality to do both. When it comes to acting in a fiduciary standard, however, cash flow analysis—in conjunction with long-term goal planning—will play an important role in both pre-retirement and during retirement years.

3. Monte Carlo analysis

Not all planning tools are created equal; the same goes for the Monte Carlo analysis within them. Monte Carlo analysis can be a great way “stress test” a financial plan by running hundreds of randomized scenarios to see how the outcomes change. Firms and advisors must be wary of what some software providers consider a true Monte Carlo analysis. Some software programs use an algorithm to run only 50-100 scenarios that are multiplied to get 10,000. I met with an advisor in San Antonio that told me he ran two Monte Carlo analysis back-to-back with 10,000 scenarios each, and the results were the same. This is statistically impossible, meaning firms and advisors must inquire about the Monte Carlo analysis process prior to believing its accuracy.

4. Transparent reporting

There are times when colorful graphs and simple charts are not enough. The industry as a whole is moving to a “less is more” approach when it comes to the reports they deliver their clients; however, there will be times when simplified reports will not cut it. Some planning systems will act as a “black box,” and not allow firms to see the numbers behind the scenes, and there will be times you need to see those numbers to defend a recommendation. Transparent reporting allows you to see from where the results are coming and how the software got from point A to point B. For certain types of clients, you may need to show that level of detail.

5. Progress reporting

It is great to project into the future with your clients’ financial plans, but have you ever taken a step back to talk about their starting point? Client retention is always top of mind for financial advisors, so advisors must demonstrate to clients how successful the relationship has been. With progress reporting, you can show clients how their net worth has grown every year, how you have saved them money, and how much closer they have gotten to their goals.

Click here to learn more about how technology from Advicent can help you uphold a fiduciary standard.