Advisors weigh the pros and cons of goals- and cash-flow-based planning.
This monthly series of articles describes the many steps and occasional missteps we took in building our financial advisory business, Mosaic Wealth Management. Mosaic is a fee-only comprehensive financial planning and investment management firm located in Bethesda, Md., a suburb of Washington, D.C. At this writing, we have about $50 million under advisement, 40-plus clients, two employees, an 1,100-square-foot office suite in a Grade A building, and the two of us--Annette and Veena--the principals and equal owners of the firm.
Everyone hates change, right?
Yet, as we have reported in our earlier columns, during our five years of building Mosaic together, we have gone through a lot of changes. We've moved from a home-based business with no employees to an office environment with two full-time staff members and from accepting almost any client who walked in the door to setting and adhering to a relatively selective standard. We are constantly re-examining how we do things and looking for ways to better serve our clients while increasing our efficiency and effectiveness.
A Move to ASPs
Toward this end, we have recently been rethinking our technology strategy. For a variety of reasons--some that we'll be writing about further in future columns--we are moving away from our current virtual private network (VPN) and adopting programs provided by application service providers (ASPs). We concluded that maintaining and supporting our current VPN is inefficient. ASPs provide and update their own program software and in addition maintain the requisite data on their Web site in a secure environment. By using an ASP, we can gain access to client data and technology from any computer.
Our goal over time is to move much of our technology functionality to ASP environments and reduce our hardware requirement to basic non-networked computers. This will save us both time and effort--resources that could more productively be spent practicing financial planning. In addition, the moves would support our lifestyle by allowing us to work at the office, at home, and on the road. We receive this via our VPN already but feel that an all ASP environment would further enhance this flexibility.
Some of the software we currently use is already ASP based--most notably Morningstar Advisor Workstation and TD Ameritrade's VEO platform. We have never had any serious downtime or loss of data with either of these platforms, which leads us to think more favorably about other ASP solutions. A key advantage to using ASPs is that many of these programs can transfer data to each other seamlessly and make repetitive data entry unnecessary. As we look to the future of our business, reducing the amount of time spent on data entry seems both practical and hugely appealing.
A Key to Decision to Make
The financial planning software that we use, NaviPlan Extended, is a desktop program, so we know we'll need to change. The question has boiled down to: Should we move to the newer, ASP version of NaviPlan, which still does cash-flow projection-based planning, or is this the time to move to another popular ASP, MoneyGuidePro, which relies upon goals-based planning and provides excellent output and integration with other ASP-based programs?
We have embarked on a process of re-evaluating what we really need from our financial planning software. We have always believed that cash-flow analysis is the heart of good financial planning. Annette was an early adopter of NaviPlan Extended and has been a die-hard advocate of its detailed analytical approach.
Recently, though, we have begun to wonder if using a strong goals-based program (like MoneyGuidePro) combined with specialized tax-planning software would allow us to provide our clients with sufficient analysis and give us better tools for illustrating and explaining important planning concepts. We also like the fact that MoneyGuidePro has partnered with other vendors offering financial advisory products, such as Redtail Technology, FinaMetrica, and CashEdge. After all, our objective is to have seamless data entry among software products.
What Others Say
This is a big decision for us, one that could change the way we plan and communicate with clients in a fairly dramatic way. We decided to ask for input from our respected colleagues at the National Association of Personal Financial Advisors (NAPFA), whom we often turn to when seeking technical or practice management advice. It is always beneficial to learn from the thinking of thoughtful and smart people on these issues.
Some are firmly in the cash flow/NaviPlan camp:
"As you know, we use Integrate, which is a cash-flow model. But the amazing thing is that Integrate, because it is Excel-based, can also be a goal-based program (using a feature called "goal seek")! My sense is that the cash-flow model requires a great deal of up-front effort on the part of the advisor to correctly model the situation. But for the older client when cash-flow patterns are predictable but changing, this model can deliver a great deal of peace of mind. I can speak specifically to a life/death client situation that could NOT have been handled with a goals-based approach. The cash-flow model can even be good for younger folks when they want a sense of the relative effect of the choices they are considering (e.g., private schooling for the kids, instead of public) on their own financial security. Frankly, I don't think the cash-flow approach requires any more input and data than the goals approach; you can still run a situation with a thumbnail sketch of the client."
--Mary A. Malgoire, The Family Firm, Bethesda, Md.
"Goal-based planning is more intuitive and you can present the client with specific recommendations on regular savings strategies. However, with a little tweaking, you can get the same info out of a cash-flow-based planning program and not give up all of the other benefits of cash flow based planning software. At the end of the day, planning is an analysis around cash flows to meet goals. Life is a series of changing cash flows in an effort to meet those goals. The cash-flow-based planning does not remove emphasis on the goals; it simply analyzes the cash flows better. I know that clients want a simple answer like, 'How much do I need to save for college?' or 'How much do I need to save for retirement?' or 'How much can I spend?' The truth is cash flows change and so will the amounts they need to save or spend. The savings amounts or spending amounts that come out of the goal based calculators use simplifying assumptions and can often lead to incorrect amounts over the long term"
--Tom Orecchio, Greenbaum and Orecchio, Old Tappan, N.J.
Others have happily made the conversion to goals-based/MoneyGuidePro planning:
"I was a huge advocate for NaviPlan and the cash-flow-based plan. I have since converted to MoneyGuidePro and have never been happier! My clients do not dread the financial planning meetings anymore. Here is my take. If you do a financial plan in NaviPlan, it may take you 10 hours or so to monkey around with the input and produce a plan. In MoneyGuidePro, it may take you at most two hours to enter the data, monkey around with it, and produce a financial plan. The remaining eight hours for the MoneyGuidePro user can now be used doing actual planning!!! Not being a computer programmer in NaviPlan."
--Paul A. LaViola, Financial Planning Solutions, Media, Pa.
"I use MoneyGuidePro exclusively. The goal-based planning is terrific. Clients "get it" very quickly, that is they see whether or not their financial goals will be realized. As financial advisors, we are very comfortable with numbers, but most clients are not. MoneyGuidePro is perfect for the client who is a visual learner. Clients can see very quickly whether their financial goals are going to be realized with the star and percentage based reporting. Clients can also see at a glance, using the pie charts with different colors for asset classes, how diversification in their portfolio compares with a targeted portfolio. And the dollar amount MoneyGuidePro reports to increase or decrease various asset classes to achieve a target asset allocation is very helpful for the advisor who will know quickly whether the asset allocation is out of whack. MoneyGuidePro is also great for using live in front of clients. It is possible to quickly and easily examine different assumptions and see how they impact upon the client's achieving various goals."
--Chris Falvello, Navigate Financial Planning, Bethlehem, Pa.
"We have used both NaviPlan as well as a goal-oriented (Microsoft Excel based) cash-flow planning. The reason we transitioned is our belief that the super-detailed NaviPlan analysis gave our clients a false sense of security. NaviPlan would generate precise numbers that gave the illusion of a definite outcome. Clients would focus on the precision and lose sight of the fact that the only guarantee we could make is that the financial plan would not come to fruition exactly as predicted. In addition, our clients would seize upon hitting each line item of the cash-flow statement. Now that we have transitioned to goal-oriented cash-flow planning (for example: 'You need to save $15,000 each and every year until retirement.'), we feel our clients have gained a better understanding of the big picture concepts of financial planning."
--Jeffrey J. Zures, Sanchez & Zures, McLean, Va.
"Having used a cash-flow-based planning program (Integrate), but switching to MoneyGuidePro, I have a strong preference for the latter. Bottom line: MoneyGuidePro keeps me as well as clients focused on the forest, rather than the trees. Also, most of my clients have high net worths, are financially sophisticated, and still appreciate the MoneyGuidePro goals-based approach."
--Milo M. Benningfield, Benningfield Financial Advisors, San Francisco
Still others are still wishing for a product that would do it all:
"Goal-based software is great for communicating ideas to client, but only good in relatively simple client situations. We as planners need to have the skills to communicate complex concepts and can't rely on software to do all of the communication for us."
--Rodney D. Wade, Wade Financial Planning, California
"I use NaviPlan right now (have for four years), because many of my clients need short-term cash-flow planning (e.g., working part time or leaving the work force for periods of time). I do think MoneyGuidePro does make evaluating goals easier and clearer to clients than NaviPlan does. It's all there in NaviPlan, but the reports are not as client friendly. I'd love to have the best of both worlds without having to buy and pay for two programs will all of the additional complexity that entails."
--Chris Long, Long Financial Planning, Chicago
"For near-term planning, a cash-flow-based planning model is extremely useful in many cases, as are income tax projections. Without a detailed understanding of the projected cash surplus or deficit clients can expect over the next several years, it is difficult to plan from a portfolio liquidity, savings, spending, and income tax planning standpoint. However, beyond several years out, such a detailed analysis once again implies a level of precision that is impossible to achieve and the numbers quickly become meaningless. Unfortunately, I've yet to find a cost-effective, dedicated piece of software that produces both a very accurate five- to 10-year income tax projection and cash-flow projection in one. Therefore, we still use an Excel spreadsheet for near-term cash-flow projections completed with the help of income tax projection software. It is a little cumbersome, but it works."
--Steven A. Weydert, Bowyer, Weydert Wealth Planning Partners, Park Ridge, Ill.
And, lastly and importantly, a key opinion from an advisor who provides outsourced planning services to other advisors and who recognizes that there may not be a one-size-fits-all solution:
"It's more of a question of philosophy about how you're going to approach planning and communicate with clients. Some clients want to know in detail what's happening at all times. Engineers, for example, don't like MoneyGuidePro. They can only feel confident that the numbers are working when they see detailed cash flows. MoneyGuidePro is too much of a black box to people like this. Yet MoneyGuidePro's integration tools can cut the time needed to prepare a plan in half. Moreover, it's a fallacy that goals-based planning eliminates all detailed cash-flow projections. In fact, MoneyGuidePro provides detail cash flow during the clients' retirement years--including tax calculations. For clients who are only a few years away from retirement, you can see where they are now and what their cash flow will look like in retirement. For many clients, the burning question is, "Do I have enough?" Goals-based tools speak language of the client and give them a probability of success."
--Naomi Y. Scrivener, Back Office Solutions, Colleyville, Texas
A Security Blanket
So where does this leave Mosaic? We're planning to purchase MoneyGuidePro and a tax planning package to try this combination on a few new client engagements. But we'll be hanging on to our NaviPlan Extended for now--and expect to use it in more complicated situations. It's a security blanket we're not ready to part with just yet. We're going to shake hands with this change but are not quite ready to fully embrace it.
Next month, the technology discussion continues as we'll discuss our initial experiences with MoneyGuidePro as used for actual client situations and other technology changes we are considering.
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