As we sit in limbo waiting to learn about the now delayed DOL rule, many financial services firms are still preparing for the investable industry change. In this preparation, firms and advisors are taking a long, hard look at financial planning software for their practice.

Whether they currently use financial planning software or not, many organizations are determining that their current process does not meet their needs in upholding a fiduciary standard.

5 Software Functionalities to Uphold a Fiduciary Standard

  • 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. Many of clients' 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.
  • 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 as 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.
  • 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 to 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. Firms and advisors must inquire about the Monte Carlo analysis process prior to believing its accuracy.
  • 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 by not allowing 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.
  • 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.

(For more from this author, see: How Tech Is Improving the Advisor's Sales Process.)

You can learn more here about remaining competitive in the face of increasing competition and shifting regulation. This article was written by Brian Sasaki, regional account executive at Advicent.

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