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To see the future of wealth planning, look to your car

Clients' wealth plans must be dynamic, in order to prevent their value from deteriorating swiftly

Oct 5, 2017 @ 8:44 am

By Jim McCarthy

People, supported by technology, are going to chart new futures that draw upon a dynamic mix of planning, budgeting and tax-smart portfolio management.

Traditional wealth planning is a challenge for both the client and the financial adviser. It is usually time-consuming and deals with a mix of emotionally charged issues representing our biggest aspirations and deepest anxieties. Not surprisingly, clients either procrastinate about commencing the process altogether or delude themselves with unfulfilled pledges to save more or spend less.

By the time a client engages with a financial adviser for guidance, they expect a more complete solution that not only maps out their full financial picture, but can also help them adjust dynamically for what the future might bring.

The critical underpinning of any wealth planning effort is the discovery discussion, which helps visualize and order priorities for the client.


While new online tools and gamification makes some of this information gathering easier and more efficient, there is no substitute for an empathetic financial adviser who is equipped to ask the right questions, having experienced all kinds of life events during his or her career. The trained financial adviser can build a plan based on a deeper understanding of a client's unique goals, hopes and priorities, helping the client set the destination.

Still, even the best wealth plan has its limits. Not unlike a new car that begins to lose value when it's driven out of the showroom, the wealth plan begins to depreciate immediately after the client leaves the financial adviser's office. All that work created a product that couldn't be adequately dynamic — adapting to changes in a client's life or the investing environment. The once every year or two approach to updating a plan leaves enormous room for improvement.

The latest in investment technology will enable financial advisers to provide more personalized goal plans with real-time tracking and updating, changing the conversation with clients from investing and evaluating performance against some benchmark to dynamic goals-based wealth management.

The goals-based approach begins by contextualizing the traditional portfolio management process in terms of overall outcomes that utilize the real language of clients. It is rare that clients want to talk about Sharpe ratios, standard deviation and downside capture. Rather, clients focus on the questions they ask themselves at home: "Can I retire in five years?" or "How much can I contribute to my children's or grandchildren's college bills?"


Additionally, this technology-enabled goal planning works by bringing asset aggregation technology to mobile devices to constantly track the latest information available about assets, savings and spending across multiple financial providers. That ability produces the type of dynamic feedback and behavioral finance nudges that can help clients stay on track toward longer-term objectives.

For example, the new tools will help clients spot trends, so if a client is persistently exceeding a spending target, the financial adviser can revise the goal plan, include a hypothetical projection of the long-term potential impact of remaining off track, and use that as motivation to spur the necessary behavioral adjustments. Instead of a paper plan that may quickly go stale, once the client and financial adviser have picked the goal, the new wave of applications can help them identify adjustments, as drivers use navigation apps for information when they adjust course.


The final element of the goals-based approach is seeking to maximize the "miles per dollar," expressed via the tax efficiency of a client's accumulated investments. As portfolios are built, systematically factoring in "asset location" can add incremental return potential without necessarily increasing market risk. Asset location considers that each type of account (IRA, Roth IRA and standard brokerage account) is taxed differently.

The same is true of different types of investment returns. Carefully matching the combinations in a tax-efficient manner can add meaningfully to potential returns over time. In the same way, the long spend-down period of retirement presents a significant opportunity to generate incremental after-tax return potential by utilizing a series of "intelligent withdrawal" routines that seek to minimize taxes while keeping the portfolio properly allocated.

These new technologies should provide financial advisers with the ability to deliver goal plans that are more current, seek to be efficiently implemented, and are valuable to a broader set of clients, helping make their goals a reality.

Jim McCarthy is a managing director at Morgan Stanley.


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