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Kitces: Planning software has an innovation problem

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In the past decade, few planning software companies have managed 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 innovative and a differentiated vision of what planning software can and should be.
Consequently, there is tremendous opportunity for real invention. And with the DoL’s fiduciary rule 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, of course. Financial planning software was product-centric.

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 purchase more sophisticated analytical tools. Accordingly, 1990 witnessed 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 arduous and 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 cash-flow 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 the client data still isn’t portable, changing solutions is an absolutely 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. Fortunately for advisors, there is fertile ground for providers to substantively compete and be meaningfully differentiated.

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 Mint.com cash flow tracking tools grew to 10 million active users in just 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 non-cash-flow–based planning portal once or twice a year.

And there’s substantial 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. And that’s just from using the software, without the further support of an advisor, and without even specifically setting a budget of targeted spending cuts!

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 Mint.com and Personal Capital have shown, software can effectively help solve both of these challenges. And imagine the enhanced value proposition of the typical advisor if the average client boosted their savings rate by over 15% in just the first few months!

The overwhelming majority of advisors are focused on baby boomer and silent generation clients, for a remarkably obvious reason — 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 budgeting and cash flow planning support, and helping to project the consequences of major career decisions (despite the fact that for most Gen X and Gen Y clients, their human capital is their single largest asset).

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 really evaluate if a particular annuity product would be better for the client’s plan, when no planning software can actually 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? Will the retirement plan come out better if the equities are in the IRA or the brokerage account?

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 and the products we actually use.

Advisors have been going increasingly 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 actually do ongoing comprehensive 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 really 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. In other words, what would planning software look like if it was continuously updated via account aggregation, and clients could log in at any time and see trends over time, ongoing planning recommendations that still need to be implemented, and accomplishments of recommendations already implemented?

Similarly, 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 just to find out if there are any new planning needs or opportunities, 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 above. Yet planners know in practice that most don’t do (m)any of these things very well, forcing advisors to frequently supplement financial plans with manually created output from Excel. The financial planning software companies that try usually do them all usually just 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 and communicates 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. Collaborative-first software would have substantially different UX/UI designs if it was intended to never generate a printed report, and be used solely in a collaborative nature.

There are a substantial 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, a large swath of 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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