The Prob­lem with In­no­va­tion

New plan­ning soft­ware of­fers plenty of features, but still lacks the fo­cus to track a client’s needs.

Financial Planning - - CONTENT - By Michael Kitces

New plan­ning soft­ware of­fers plenty of features, but lacks the fo­cus to track a client’s needs.

FEW PLAN­NING SOFT­WARE COM­PA­NIES HAVE man­aged in the past decade to take on to­day’s in­cum­bents — Moneyguide­pro, emoney Ad­vi­sor and Naviplan. The prob­lem is the cost of switch­ing is of­ten very high for ad­vi­sors, given that client data isn’t por­ta­ble and can’t be ef­fec­tively mi­grated from one so­lu­tion to an­other.

More im­por­tantly, though, few new providers have re­ally taken an in­no­va­tive and dif­fer­en­ti­ated vi­sion of what plan­ning soft­ware can and should be.

Con­se­quently, there is tremen­dous op­por­tu­nity for real in­ven­tion.

And with fidu­ciary reg­u­la­tions on the hori­zon, the land­scape is ripe for smaller com­peti­tors to cap­ture mar­ket share. Will the com­ing years usher in a new phase of in­no­va­tion?


In the early days of plan­ning, vir­tu­ally no one was ac­tu­ally paid to de­liver a fi­nan­cial plan. In­stead, ad­vi­sors were com­pen­sated by the plan­ning prod­ucts they im­ple­mented, i.e., in­sur­ance and in­vest­ment so­lu­tions. Tools like Fi­nan­cial Pro­files, founded in 1969, fo­cused on re­tire­ment pro­jec­tions, which would demon­strate a need to save and in­vest more — putting dol­lars into the ad­vi­sor’s prod­ucts.

By the ‘80s though, there was an emerg­ing move­ment to ac­tu­ally get paid for their plans, not just push prod­ucts. The chal­lenge, how­ever, is that to get paid for a fi­nan­cial plan, the rigor of the plan­ning anal­y­sis had to stand as a value unto it­self.

For­tu­nately, the rise of the per­sonal com­puter meant that ad­vi­sors could buy more so­phis­ti­cated an­a­lyt­i­cal tools. Ac­cord­ingly, 1990 saw the birth of EISI’S Naviplan, the first cash-flow–based plan­ning soft­ware, which was sub­stan­tively dif­fer­en­ti­ated from its pre­de­ces­sors in its abil­ity to model in-depth, long-term cash flow pro­jec­tions.

How­ever, by mod­el­ing cash flows, it was nec­es­sary to in­put and project ev­ery cash flow. As a re­sult, the time-con­sum­ing na­ture of in­putting data into cash-flow–based plan­ning tools led to the ad­vent of Moneyguide­pro in 2000 and the birth of goals-based plan­ning soft­ware, where the only cash flows that had to be in­putted were the spe­cific saving in­flows and spend­ing out­flows of the par­tic­u­lar goal.

Yet the prob­lem with goals-based plan­ning is once the plan is de­liv­ered, there isn’t much else to do. As long as the client re­mains rea­son­ably on track, each up­dated plan­ning pro­jec­tion sim­ply shows the same re­tire­ment and wealth tra­jec­tory as the last, with lit­tle change from year to year — let alone quar­ter-to-quar­ter.

Con­se­quently, a new gap emerged for plan­ning soft­ware that could ac­tu­ally show mean­ing­ful track­ing on a more fre­quent ba­sis. This opened the door for the rise of emoney Ad­vi­sor, which was also founded in 2000 but re­ally gained trac­tion in the 2010s as ac­count ag­gre­ga­tion tools like Mint.

com made con­sumers and ad­vi­sors in­creas­ingly aware of the value and virtue of con­tin­u­ously track­ing and up­dat­ing a house­hold’s en­tire net worth and cash flows. A Per­sonal Fi­nan­cial Man­age­ment dash­board would go beyond just their port­fo­lios, or their progress to­ward ul­tra-long-term goals.


The pro­gres­sion of fi­nan­cial plan­ning soft­ware from a prod­uct-needs ba­sis to a cash­flow ba­sis to a goals ba­sis, and then on to ac­count ag­gre­ga­tion, helps de­fine when and why cer­tain com­pa­nies have grown over the past sev­eral decades, while oth­ers have lan­guished. And be­cause client data still isn’t por­ta­ble, chang­ing so­lu­tions is a mas­sive and po­ten­tially firm-break­ing risk.

Only sub­stan­tial differentiation that sup­ported a fun­da­men­tally dif­fer­ent fi­nan­cial ad­vi­sor value propo­si­tion has at­tracted ad­vi­sors away from com­pet­ing so­lu­tions.


Ad­vi­sors can show clear value in to­day’s en­vi­ron­ment through proac­tive in­come-tax plan­ning strate­gies, as real-dol­lar tax sav­ings can hand­ily more than off­set most or all of a com­pre­hen­sive plan­ning fee. Un­for­tu­nately, most plan­ning soft­ware falls short when it comes to de­tailed in­come tax plan­ning, es­pe­cially with state in­come taxes.

A tax-fo­cused plan­ning soft­ware so­lu­tion would project ac­tual tax­able in­come and de­duc­tions from year to year, with fu­ture tax brack­ets ad­just­ing for in­fla­tion, and also in­clude the im­pact of state in­come taxes. Too of­ten, sim­ple as­sump­tions like an ef­fec­tive tax rate in re­tire­ment grossly mis­cal­cu­late tax obli­ga­tions over time, and ut­terly fail to rep­re­sent the pos­i­tive im­pact of prospec­tive tax strate­gies. For in­stance, how can you pos­si­bly show the value of the back­door Roth con­tri­bu­tion strat­egy, or sys­tem­atic par­tial Roth con­ver­sions in low in­come years, if the soft­ware al­ways as­sumes the same static av­er­age tax rate in re­tire­ment and ig­nores the ac­tual tax con­se­quences of Roth con­ver­sions when they hap­pen?

Sim­ply put, tax plan­ning has real value, and plan­ners shouldn’t be con­strained to stand­alone soft­ware tools like BNA In­come Tax Plan­ner, when it could — and should — be part of the holis­tic fi­nan­cial plan.


His­tor­i­cally, ad­vi­sors have fo­cused their ad­vice on in­vest­ments and in­sur­ance, for the re­mark­ably sim­ple rea­son that that’s how most ad­vi­sors get paid — ei­ther for im­ple­ment­ing such prod­ucts and so­lu­tions or man­ag­ing them on an on­go­ing ba­sis. As a re­sult that’s where most plan­ning soft­ware has fo­cused. How­ever, from the con­sumer per­spec­tive, the cen­ter of most peo­ple’s fi­nan­cial lives is their house­hold cash flow.

This is why cash flow track­ing tools grew to 10 mil­lion ac­tive users in its first five years — which would be al­most 10% of all U.S. house­holds — while the typ­i­cal ad­vi­sory firm strug­gles to get 20% to 30% of their clients to log into their non­cash-flow– based plan­ning por­tal once or twice a year.

And there’s ev­i­dence that reg­u­lar use of plan­ning soft­ware to track spend­ing mat­ters. One re­cent study on Per­sonal Cap­i­tal’s mo­bile PFM app found the av­er­age Per­sonal Cap­i­tal user cut their house­hold spend­ing by 15.7% in the first four months af­ter us­ing the mo­bile app to track their spend­ing.

In to­day’s world, most ad­vi­sors don’t work with clients on their cash flow be­cause it’s dif­fi­cult to show value, and be­cause it’s chal­leng­ing to get clients to track their spend­ing in the first place. But as tools like and Per­sonal Cap­i­tal have shown, soft­ware can ef­fec­tively help solve both of these chal­lenges.

Be­cause client data still isn’t por­ta­ble, chang­ing so­lu­tions is a mas­sive and po­ten­tially firm-break­ing risk.


The ma­jor­ity of ad­vi­sors are fo­cused on baby boomer and silent gen­er­a­tion clients, for that’s where the money is. Yet the end re­sult of this gen­er­a­tional fo­cus is that vir­tu­ally all plan­ning soft­ware tools are built for the needs of baby boomers with as­sets, par­tic­u­larly when it comes to re­tire­ment plan­ning, while not a sin­gle plan­ning soft­ware so­lu­tion can ef­fec­tively il­lus­trate the core plan­ning is­sues of Gen­er­a­tion X and Gen­er­a­tion Y clients, such as strate­gies to man­age the nearly $1.4 tril­lion of stu­dent loan debt.

Sim­i­larly, most plan­ning soft­ware lacks other rel­e­vant tools for younger clients, like cash flow plan­ning sup­port, and help­ing to project the con­se­quences of ma­jor ca­reer decisions.

Iron­i­cally, even as fi­nan­cial plan­ning soft­ware has his­tor­i­cally fo­cused on baby boomer re­tirees, most tools do very lit­tle to il­lus­trate ac­tual re­tire­ment distri­bu­tion plan­ning strate­gies.

For in­stance, is it bet­ter to liq­ui­date an IRA or a bro­ker­age ac­count first, or use the bro­ker­age ac­count while si­mul­ta­ne­ously do­ing par­tial Roth con­ver­sions? How can an ad­vi­sor eval­u­ate if a par­tic­u­lar an­nu­ity prod­uct would be bet­ter for the client’s plan, when no plan­ning soft­ware can il­lus­trate spe­cific an­nu­ity prod­ucts — and ditto for loan-based life in­sur­ance strate­gies for re­tire­ment in­come? Would the client be bet­ter off us­ing a bucket strat­egy in­stead of a tra­di­tional to­tal re­turn port­fo­lio?

Sim­ply put, ad­vi­sors pro­vide a tremen­dous range of spe­cific, im­ple­mentable re­tire­ment strate­gies that have to be il­lus­trated and ex­plained in a piece­meal process out­side of plan­ning soft­ware, be­cause to­day’s tools aren’t ca­pa­ble of il­lus­trat­ing what ad­vi­sors ac­tu­ally do.


Ad­vi­sors have been go­ing pa­per­less and dig­i­tal in re­cent years, aided in no small part by the ex­plo­sion of dig­i­tal on­board­ing tools. How­ever, most of to­day’s plan­ning soft­ware is still built with a printed-re­port-first phi­los­o­phy, rather than be­ing cre­ated with a vis­ually ap­peal­ing on-screen in­ter­face that al­lows the ad­vi­sor and client to col­lab­o­ra­tively make changes on the spot.

Yet col­lab­o­ra­tive plan­ning can both save time — avoid­ing the prepa­ra­tion of al­ter­na­tive sce­nar­ios that turn out to not even be rel­e­vant — and break down the fun­da­men­tal flaw of goals-based plan­ning, which is that most clients don’t even know what their goals are un­til they use plan­ning soft­ware to ex­plore the pos­si­bil­i­ties.

Sim­i­larly, the great­est block­ing point for do­ing plan­ning with most clients is that they don’t even have the data to pro­vide to the ad­vi­sor to in­put into the soft­ware, and even if they do it is one of the most time-con­sum­ing steps of the process. A dig­i­tal-first plan­ning soft­ware could be built to col­lab­o­ra­tively gather the data mod­u­larly over time, help­ing to draw clients proac­tively into the process by show­ing them in­cre­men­tal value as the plan is cre­ated be­fore their eyes.


For plan­ners who do on­go­ing com-

pre­hen­sive plan­ning — most com­monly as a plan­ning-cen­tric AUM fee, or an on­go­ing re­tainer fee — the bulk of the plan­ning re­la­tion­ship is what hap­pens in all the years af­ter the first one, not the ini­tial plan­ning year.

Un­for­tu­nately though, no plan­ning soft­ware is built to do ef­fec­tive on­go­ing plan­ning, where the client’s plan is a liv­ing blue­print — con­tin­u­ously up­dated via ac­count ag­gre­ga­tion and show­ing both progress to­ward goals over time and the progress of goals al­ready achieved — which is cru­cial to val­i­date the on­go­ing plan­ning re­la­tion­ship.

If the plan­ning soft­ware were con­tin­u­ously up­dated, at what point could it tell the ad­vi­sor when there’s an op­por­tu­nity to en­gage the client, from im­por­tant mile­stone birth­days (e.g., 59 ½, or age 70 ½), to changes in client cir­cum­stances that the soft­ware de­tects, or even no­ti­fy­ing the ad­vi­sor that in­ter­est rates have fallen to the point that the client can re­fi­nance a mort­gage?

In the end, plan­ners shouldn’t have to meet with clients reg­u­larly to see if there are any new plan­ning needs, be­cause on­go­ing plan­ning soft­ware should be con­tin­u­ously mon­i­tor­ing the client’s sit­u­a­tion, and no­ti­fy­ing the ad­vi­sor of the plan­ning op­por­tu­nity.


Sadly, most plan­ning soft­ware com­pa­nies will claim that they do most of the items listed on the pre­vi­ous page. Yet plan­ners know in prac­tice that most don’t do (m)any of these things very well, forc­ing ad­vi­sors to sup­ple­ment fi­nan­cial plans with man­u­ally cre­ated out­put from Ex­cel.

The fi­nan­cial plan­ning soft­ware com­pa­nies that usu­ally do them end up with ex­ces­sive fea­ture bloat and the as­so­ci­ated de­cline in adop­tion and us­abil­ity.

The key point is that the true dif­fer­en­tia­tor of plan­ning soft­ware isn’t a fea­ture is­sue — it’s a fo­cus is­sue.

Ad­vi­sors need a soft­ware so­lu­tion with clear features that sup­port a dif­fer­en­ti­ated vi­sion of the value of fi­nan­cial plan­ning for a par­tic­u­lar tar­get clien­tele.

For in­stance, build­ing truly tax-fo­cused plan­ning soft­ware means the tax ta­bles need to per­me­ate ev­ery part of the soft­ware — from the in­put to the an­a­lyt­i­cal tools to pro­vid­ing out­put that shows tax ben­e­fits and tax sav­ings. True re­tire­ment distri­bu­tion soft­ware needs to in­vest heav­ily in in­te­gra­tions to bring in and ac­cu­rately model all the var­i­ous re­tire­ment prod­ucts and strate­gies that ex­ist to­day.

Ad­vi­sors need a soft­ware so­lu­tion with clear features that sup­port a dif­fer­en­ti­ated vi­sion of the value of fi­nan­cial plan­ning for a par­tic­u­lar tar­get clien­tele.

Michael Kitces, CFP, a Fi­nan­cial Plan­ning con­tribut­ing writer, is a part­ner and di­rec­tor of wealth man­age­ment for Pin­na­cle Ad­vi­sory Group in Columbia, Mary­land; co-founder of the XY Plan­ning Net­work; and pub­lisher of the plan­ning blog Nerd’s Eye View. Fol­low him on Twit­ter at @Michaelk­itces.


There are a num­ber of op­por­tu­ni­ties for plan­ning soft­ware new­com­ers to mean­ing­fully dif­fer­en­ti­ate — both as an op­por­tu­nity for rein­ven­tion among the large, afore­men­tioned in­cum­bents, to­day’s emerg­ing players, and star­tups that are still build­ing behind the scenes and haven’t launched yet.

But at the same time, for the sake of new com­pany growth — and the bet­ter­ment of the plan­ner com­mu­nity it­self — it’s time for plan­ning soft­ware com­pa­nies to take a bold step for­ward into the fu­ture, and not just build­ing for how fi­nan­cial plan­ning has been done in the past, up un­til to­day.

With the La­bor De­part­ment’s fidu­ciary rule as a cat­a­lyst, ad­vi­sors and ser­vices in­sti­tu­tions are be­ing driven to shift from sim­ply dis­tribut­ing prod­ucts to truly get­ting paid for plan­ning ad­vice — which means the de­mand for plan­ning soft­ware, in­clud­ing new so­lu­tions, should only grow from here.

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