Financial advice is about more than just building portfolios

New technology tools can help clients manage their cash flows

Mar 27, 2014 @ 12:01 am

By Uri Pomerantz

Technology has brought unprecedented change to our lives but it's only just begun to transform the financial advisory business. To date, most technology innovation in our industry has focused on lowering the cost and improving efficiencies of asset management. Yet there's another, tremendously exciting, trend just beginning to unfold — using technology as a powerful driver of business growth. The world will look very different by 2020 because of it.

There are 3.5 trillion dollars of untapped assets across 20 million mass affluent families not working with financial advisers. Unlocking it requires helping these households grow assets over time — through cash flow management across a client's full financial life.

It's not just Gen-Y and mass affluent households who stand to benefit. High net worth clients, too, can use state-of-the-art cash flow analytics to identify additional cash that can be directed toward an investment target or other financial goal and to lock in habits that can transform their lives for years to come.

(See also: Retirement action plan for middle-class boomers: Think cash flow, health care.)


Over the last few years, a new generation of software tools has emerged to enhance the financial planning process. Most of these focus on portfolio construction and risk management, not cash flow or the comprehensive financial picture. Many mass affluent households — those with roughly $50,000-$1 million in investable assets — are poised to see their portfolios grow significantly over time. That growth can be accelerated significantly by better cash flow management. In fact, the returns from improved cash flow management may rival or exceed the additional asset growth possible via improved investment selection.

For example, researchers from the Putnam Institute examined a hypothetical situation involving a 28-year-old individual earning $25,000 in 1982 and participating in her company's 401(k) plan with a 3% deferral rate and a $0.50 employer match on the dollar up to 6%. She was assumed to invest her portfolio conservatively across six asset classes — in each case in a bottom quartile fund as determined by Lipper.

The researchers then examined four different scenarios to determine the impact on the size of her portfolio when she reached 57: Fund selection, asset allocation, account rebalancing and deferral rates. Under the absolute best circumstances — using a crystal ball to invest in first quartile funds on a rolling three-year basis — returns over the period improved to $166,200 from a base case of $136,400. Other factors were found to have a lesser impact.

They then considered what would happen simply by changing her deferral rate. Going to 4% increased the size of the baseline portfolio at the end of the 29-year period to $181,800. With a 6% deferral rate, it jumped to $272,700, and at 8%, the value of the hypothetical portfolio was $334,000.

By saving smarter, the participant would have given herself almost $200,000 extra at retirement even with lower-performing mutual funds, versus the $30,000 she could have added by using a crystal ball to select the best funds while maintaining the lower savings rate.


Just as you can't invest what you don't save, you can't change behavioral patterns you don't recognize. It's very difficult to maintain a clear, comprehensive view of cash flows in the course of our complex financial lives. If we don't have perspective on exactly how much we're putting toward discretionary expenses — as opposed to fixed items like living expenses — we can't set goals that are realistic and psychologically feasible.

Here, as elsewhere, knowledge is power. By setting actionable goals that make sense based on client cash flows, combined with ongoing feedback and monitoring of progress, advisers can ensure that these clients stay on track for their goals and consistently grow their assets.

Monitoring feedback in real time, receiving timely alerts about important changes, and getting adviser guidance on progress can greatly assist in the goal achievement process, particularly for technology-savvy investors who are looking to quantify performance in all aspects of their lives.

Cash flow is at the heart of everything investors hope to achieve. In receiving immediate, accurate information on cash flows and easily sharing progress with a financial adviser who can help direct those flows, millions of families have an opportunity to achieve financial peace of mind. As a result, advisers have the opportunity to expand their scope of guidance, deepen client relationships and demonstrate substantial and lasting impact.

Uri Pomerantz is co-founder and chief executive officer of Guide Financial


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