How to fix financial planning

By Dave Faulkner

I always look forward to and enjoy reading Michael Kitces’ blog posts. If you are not familiar with his work, you should check out his blog Nerd’s Eye View.

Recently, Kitces has taken on financial planning software and financial planning itself and raised some important questions about how it is commonly practiced.

In “Is Financial Planning Software Preventing The Growth Of Real Financial Planning Advice?”, Kitces questions whether the product-centric focus of traditional financial planning software is getting in the way of real planning.

In a subsequent post, “Reimagining Client Meetings With A More Client-Centric Financial Planning Process”, Kitces proposes a more client-centric process for doing financial planning with clients.

I have been in financial services for the better part of 40 years and began my career, like many advisors, selling products for a commission.

For the past 20 years, my focus has been on comprehensive financial planning as both a financial advisor and a software designer/developer. Ten years ago I realized that the “generally accepted process” for delivering a financial plan was not working for me or my clients. Clients were not properly engaged and I was not adequately compensated for my time.

After much soul-searching I realized the problem was not me or the client, it was the software tools we had at our disposal.

My financial planning software manifesto

So, I set out to re-envision the financial planning process based on these six principles:

1. Financial planning software is NOT a financial plan

To borrow a Harley-Davidson tagline, “It’s not the destination that matters, it’s the journey.” A financial plan should address the needs of the client and support implementation of the recommendations made.

2. Financial planning software must be client facing

I do not have the time to do anything more than once, so the client needs to be present when preparing the analysis and constructing the financial plan.

3. Real-time data entry should take no more than 15 minutes

To do this, the amount of information gathered in the first meeting would need to be minimized. The 80/20 principal states that 80% of our productivity comes from 20% of our efforts. This is equally true for financial planning: 80% of a financial plan comes from 20% of the client’s information. This approach gives us a very good sense of the plan while contributing to engaging the client in a much easier up-front information gathering process.

4. No “what-if” scenarios

To eliminate the need for what-if scenarios, the system has to automate all routine elements of the financial analysis. Implementing strategies to minimize tax and maximize returns should be done with intelligent algorithms instead of manual data changes. In simple terms, the system would need to automate the calculations that any competent advisor would perform, but without requiring input from the advisor.

5. Financial planning should provide simple answers to common questions

“How much can I spend?” “When can I retire?” “How much do I need to save?” and, “What rate of return do I need?” In any situation, no matter what the outcome of the analysis, an intelligent algorithm should automatically provide the above answers.

6. No shortcuts in business logic

The analysis must be robust and accurate, providing proper tax calculations and flexible assumptions that can be controlled by the advisor.

Simplification is valued over complication

I felt so strongly that advisors needed to ‎spend more time interacting with clients and less time on computers crunching numbers that I decided in 2010 to create a software tool that lived up to these principles. ‎

To give this new financial planning software program a name, I looked to Occam’s razor, a problem-solving principle that states “the simplest explanation is usually the correct one”. Over the years I also noticed that “the simplest recommendations are usually implemented first”, so it seemed only logical to call this new tool “The Razor”.

The Razor has evolved into RazorPlan which embraces simplicity and automation, without sacrificing precision, helping to engage clients interactively in the financial planning process.

Register today for a FREE 30-day trial of Razorplan.