The Next Generation of Financial Planning Software

PlanTechHub lets clients click through your website to a white-labeled portal and create multiple personal plans so that they can see the possible outcomes. Meanwhile, advisors use the planning tool to make recommendations that clients can click on (no more paper financial plan!), and suddenly a new (hopefully better) scenario pops into view. Clients can adopt as many or as few of the recommendations as they want, while the system shows them, in future financial terms, the benefits of taking (or ignoring) their advisor’s advice. Interactive co-planning becomes a reality – and notice that clients are inputting much of the data, saving you the hassle.

The specialized tools would be pulled into the program as needed to do very specific, detailed number crunching, and the outputs would then be incorporated as part of the analysis and plan creation. These integrations will be announced when the program formally launches, but I hope many of the tools I list below will be included.

Visualize client relationships

To help with client onboarding today, look at AssetMap, which is a planning engine that also happens to be a terrific facilitator of that initial client discovery meeting. When you input the names of your new clients into the software, it creates, right there on the screen, a mind map with boxes all around the clients’ names. One set of boxes lists all the sources of income (employment, Social Security, an annuity or qualified plan, etc.) and income amounts. Another group of boxes list the financial holdings in investment accounts, the amounts and where they’re located. There are boxes for various insurance coverages, debt and credit cards, the family residence and any vacation properties, and of course dependents like children or parents are listed as well. You can add or customize boxes for any asset or financial instrument that comes up, just by hitting an “add” button and typing in the data.

The unfilled mind map template ensures that nothing gets left out in the initial discussion of a client’s financial picture – and the interesting part is that clients will often take over and drive the discussion, pointing to boxes and asking that they be filled. The unfilled boxes also point to holes in the plan. No life insurance coverage? No long-term care plan? Should we talk about that?

Another advantage is that clients can see all of their financial life, all on one page. This can be much more intuitive than the net worth statement that traditional planning engines will produce.

Deeper analysis

From a purely analytical standpoint, traditional financial planning software has a number of obvious holes. It doesn’t help you make detailed Social Security recommendations, for example. Nor can you use MoneyGuidePro or Right Capital to model a client’s tax situation over the next 10-15 years. So you don't have a quick and easy way to see whether it makes sense to top off a client’s current tax bracket by taking early distributions from the IRA or doing partial Roth conversions – as a way to minimize future required minimum distributions (and their tax consequences).

Fortunately, Covisum offers a powerful solution in both areas.

Covisum’s Social Security timing program lets you input or download the payment history of a client and spouse, and then produces a color-coded two-dimensional graphic that shows which of many claiming strategies would be optimal if the client or spouse were to die tomorrow, next year, or any year going out to ages 110. It also illustrates the gap between the Social Security benefits and a client’s desired income in retirement, which tells you how much the IRA and taxable portfolios will have to produce to cover a client’s living expenses. Presto! You’re a Social Security expert for your clients.

Meanwhile, Covisum’s Tax Clarity program produces a tax map which shows your clients’ marginal rate on every additional dollar earned or collected this year (which helps you provide current tax planning advice), and projects a client's tax rates out into the future, based on projected required minimum distributions, Social Security income and the client’s projected taxable portfolio values. Tax Clarity is a favorite among CPA planners who offer detailed tax planning, but the graphical interface is surprisingly intuitive for non-tax-experts, considering the power of the software.

Speaking of tax planning, I’m sure you’ve attended one of those industry presentations where a tax expert shows you how to glance at a client’s recent tax return and know all sorts of things about the client’s financial life. Now, thanks to the only genuinely artificial intelligence software I’ve seen (that doesn’t play chess, Go or the TV game show Jeopardy!) you can do the same thing for clients.

The brand new program is called Holistiplan, created by financial planners who found most tax planning software to not only be too complicated, but also too tedious to input all the #@&% fields from the tax return. The program uses sophisticated, customized optical character recognition features to map the numbers on a client’s tax return to the software’s evaluation engine. All you have to do is feed the tax return PDF into the program, and the software does the inputting for you. Then its AI system generates observations and recommendations.

Such as? At the top of the client output page, you see the client’s total income, federal taxes paid, effective tax rate, taxable income, marginal rate, modified adjusted gross income, itemized or standard deductions, short-term and long-term capital gains, qualified and ordinary dividends, carryforward losses (if any) and the safe harbor estimated tax payment this year. All of that is generated automatically, just by feeding the tax return into the software.

Later in the report, there’s an itemized deduction summary: health care expenses, mortgage and investment interest expenses, charitable contributions, etc. and, if the amounts claimed are washed out by the high standard deduction, the software recommends bunching deductions into alternating years.

Holistiplan’s observations note, in straightforward prose, things like whenever the modified adjusted gross income exceeds the threshold for the Medicare tax on investment income (a tax planning opportunity to lower taxable income or avoid realizing capital gains); there is no HSA deduction (is the client eligible to contribute to one, and can the planner help with that?); or that the taxable income is higher than the qualifying business Income deduction phaseout limits (another potential tax planning opportunity).

Then comes the analysis. The program’s tax planning engine lets an advisor model long-term planning opportunities like the future impact on RMDs (and future tax rates) from a partial Roth conversion today – although at the moment the software only projects tax years out to 2023. You can also use the software to help clients stay under the phaseout limits for Roth contributions and the child tax credits. The recommendations offered by the program are constantly evolving as the developers hear suggestions from their users; the software is actively learning, which makes it more AI-like than anything I’ve seen on the market.

Distribution planning

Another important ongoing service you won't find from traditional planning software is distribution planning from client portfolios during the retirement years. The leading traditional planning programs will do little more than let you determine a client’s expected annual lifestyle expenditures and then apply a Monte Carlo analysis showing the chances of success or failure. They don’t let you play around with different possible distribution methodologies--which, if optimized from a tax standpoint, can add years to the client's portfolio sustainability.

To explore distribution strategies, you need Timeline. It’s built on research that most of us are familiar with: You can illustrate a client’s portfolio decumulation using Jon Guyton’s “guardrail” strategy (where the distributions will be held steady in the years when the portfolio value goes down), or Michael Kitces’ “ratcheting” rule (where the portfolio becomes more aggressive as clients get older), or Bill Bengen’s 4.5% (or whatever you choose) constant inflation-adjusted distribution model. The program even provides links to the research papers authored by those individuals.

The program is simple to use. You input the client’s retirement assets, portfolio mix and expected lifestyle expenditures (which can be adjusted on the fly) and see the success rate for different withdrawal strategies out of that portfolio allocation over 20, 25, 30, 35 and 40 years – in graphical format, and compared with a more aggressive or conservative portfolio or more naive distribution plan.

What Timeline does not (yet) do is allow you to make tax-aware distributions; that is, model your optimal asset location and let you see how much to take out of the client’s taxable, Roth or IRA accounts to get the best annual tax rate. But you can do your annual tax rate modeling in Tax Clarity and then use that information in Timeline to create a long-term withdrawal policy.

As a less expensive but powerful alternative to Timeline, the Big Picture App computes and illustrates safe withdrawal rates for portfolios composed of any combination of 11 major asset classes.

Asset-location modeling

This raises the question: How tax-efficient are your client portfolios, when you have assets located in taxable accounts, traditional and Roth IRAs? Chances are you have some idea how to increase the efficiency – for instance, holding muni bonds in your taxable accounts and putting anything throwing out high short-term income in the IRA or Roth. But can you quantify the dollar benefits of smart asset location out into the future, based on a client’s current and projected future tax rate?

This is the value proposition of LifeYield. LifeYield pulls your client portfolio positions in traditional and Roth IRAs, taxable accounts, 401(k)s etc. and (for the taxable positions) gets their cost basis from the custodian, and performs an analysis that yields a “taxficient” score, from 0% (let’s hope this isn’t the score of any of your clients) to 100%. Then the software proposes more efficient asset locations, and even recommends specific trades to facilitate this greater efficiency. Make the trades and the "taxficient" score goes up accordingly.

The program can also be used with prospects when you offer a free portfolio analysis review. Feed the prospect’s portfolio information into the software, propose an alternative asset location mix in the system, and LifeYield will calculate, side-by-side, the after-tax annual returns and total dollar balance of current and proposed portfolios over the next 15 years.

College planning

One major goal on clients’ minds these days is college planning. MoneyGuidePro, RightCapital and eMoney all feature college-planning modules that let you model the future college costs and figure out how to save for them. But there are a lot of things they don’t do.

Such as? A program called College Aid Pro includes a database showing the net cost (sticker price minus grants that a client’s child is qualified to receive) of most U.S. universities, with a search function that will help locate the schools that are competing for students with your clients’ kids profile. The software takes into account the student’s grades and SAT/ACT scores. It collects the relevant data that can be mapped to the Free Application for Federal Student Aid (FAFSA) college aid forms. And it integrates various cost options into the family’s overall financial plan, prioritizing grants, then federal direct loans, then more conventional loans. It helps families create a 529 distribution plan that will maximize grants and loan opportunities.

Chances are clients are looking for a lot more help regarding college funding than just how much to save each year to pay the tuition, room and board. College Aid Pro is an example of specialized software that lets you provide ongoing – and much more sophisticated – advice than most advisors are currently capable of offering.

Medicare expertise in a box

Clients might also turn to you for detailed advice on their Medicare options – and once again, you aren’t going to get much help from your traditional planning software. If you want to become an instant Medicare expert, try out a program called i65.

The i65 program starts by asking questions that the advisor and client can answer together, which helps the system sort out the client’s Medicare options. If the client is just about to turn 65 (and is looking to enroll for the first time) then the system determines whether he or she is eligible (Have you or your spouse worked and paid taxes for at least 10 years?), whether the client is taking Social Security benefits, and whether the client is currently employed and covered by an existing policy through the employer. It asks for information off of the client’s recent tax return, in order to calculate the Medicare premium amount – the dreaded income-related monthly adjustment amount (IRMAA).

If the client is currently employed and covered, this opens up a detailed analysis of existing coverage versus the benefits (or not) of switching to Medicare. This can be surprisingly complicated. If the client’s employer covers 20 or fewer employees, then the existing policy can function as Medigap coverage; otherwise it could be the primary insurance policy. But hold on! The program offers a side-by-side comparison of the costs and potential out-of-pocket expenses of the existing coverage versus Medicare, taking into account things like whether the company is covering a spouse and/or children (in which case separate insurance would have to be purchased if the client switches to Medicare, and the program supplies an estimated cost), and whether the existing plan covers dental and/or eyecare expenses (which Medicare does not).

Some clients may be working past traditional retirement age, and are thinking about moving out of a company plan and enrolling in Medicare at age 70 or later. Others may have been covered by Medicare Advantage and want to switch to traditional Medicare, or vice versa. Many clients enrolling for the first time simply want to know whether, based on their circumstances and preferences, traditional Medicare with a Medigap policy or Medicare Advantage would be the best option. In each case, the system walks them (and the advisor) through the possibilities. The program is remarkably detailed, and a pretty easy way to provide Medicare advice and expertise to your clients.

End-of-life planning

Finally, is there anything in your planning software that helps clients assess their cognitive abilities, or the planning issues around whether they have a power of attorney document or advance directives? A program called Whealthcare Planning offers clients a questionnaire, and then produces a cognitive score plus a customized financial caretaking plan in PDF format.

The plan allows clients to input the names and contact information of all of their financial caretakers, and lists to-do action items like getting that power of attorney taken care of. It prompts the client to give the advisor a signed document giving the advisor permission to contact children or other family members if the advisor becomes concerned, at some point down the road, about the clients’ cognitive ability to manage their affairs or a potential case of financial abuse or fraud. There’s a pet caretaker agreement.

Another part of the software creates an estimated cost of future healthcare expenses (Does your planning software do that?), based on the client’s current health, usage of medical facilities and out-of-pocket costs collected by the Employee Benefit Research Institute (EBRI). Whealthcare also provides an estimated life expectancy and has an “aging in place” module that recommends certain modifications of the existing home to accommodate increasingly aging residents. Advisors using the program can more precisely model future healthcare expenses into the financial plan, get clients to fill out a template advance directives document, and create an end-of-life wishes document. It addresses a major gray area of financial planning – planning for the final years of a client’s life – as straightforwardly as retirement planning using eMoney.

People can complain about how traditional planning software only does one thing well (the initial financial plan), but there’s no excuse not to offer deep, expert ongoing planning to clients. The tools are there; you just may not have heard of them – until now. (Did I win my bet?)

Bob Veres' Inside Information service is the best practice management, marketing, client service resource for financial services professionals. Check out his blog at: www.bobveres.com.

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