by Steven I. Levey

Asset allocation, arguably the cornerstone of personal financial planning and investment management, is evolving.

While planners and advisors were once relegated to basic asset allocation packages when designing programs for clients, they are now the beneficiaries of a far more sophisticated toolbox, with a full array of features including investment data and statistics, retirement projections, cash-flow analysis and Monte Carlo simulation.

And depending on the level of sophistication that you require to meet your client needs, prices in this category can range from $299 to $1,100.

Allocation Master
SunGard Online Investment Systems

After you log on to Allocation Master at, a screen showing input-personal information, risk tolerance, holdings, goals and contributions appears on the left of the screen. Data can be easily collected with a three-page questionnaire available via Adobe Acrobat. The personal information section allows for client name, birth date and current tax rates for federal tax bracket, capital gains bracket and state tax bracket. There is a lookup pull-down bar to find the state income tax rate desired. Scrolling down the screen reveals an input for future tax rates including the starting year, inflation rates and desired target return. At the very bottom of the screen is a commentary stating, “The tax rates entered on this screen are used to perform many of the calculations in this analysis.”

Click on the risk tolerance tab and 10 client questions rated from “strongly disagree” to “strongly agree” with five gradations appear. The following are samples from the questionnaire:

“1. Expected return. Given historical returns on different kinds of investments, my desired level of investment return is above average.

“2. Risk tolerance. I am willing to bear an above-average level of investment risk (volatility). I can accept occasional years with negative investment returns.

“3. Holding period. I am willing to maintain investment positions over a reasonably long period of time (generally considered 10 years or more).

“4. Liquidity. I do not need to be able to readily convert my investments into cash. Aside from my portfolio, I have adequate liquid net worth to meet major near-term expenses.

“5. Investment experience. I have prior investment experience with stocks, bonds and international investments. I
understand the concept of
investment risk.”

Other questions address client participation, number of dependents, income levels and security, creditworthiness and insurance coverage.

The holdings section has room for both qualified (tax-sheltered) and non-qualified (taxable) investments. Assets are entered by asset class, product name or symbol. There is an asset finder tab that allows a user to enter the symbol and everything is filled in. Enter FMAGX, and Fidelity Magellan appears under product name listed as large value stocks. This saves significant input time. Market value and book value are easily entered and add row/delete row buttons allow for entering or deleting additional investments.

Goals can include acquisition of a new car, college funding, and retirement. The goals screen has a description of the goal, the starting year, annual amount net of tax, number of years and growth rate. Contributions are entered the same way, except a pull down section for qualified or non-qualified contributions is available.

Once data is entered with holding instructions, the asset mix section can be accessed for a visual interpretation of proposed results, including a pie graph with the choice of either percentages or dollar amounts. Scrolling down reveals an efficient frontier risk/return graph with present (delta symbol) and proposed (plus symbol).

Two buttons at the bottom of the screen allow for customization of the allocation. The holding limits button shows minimum and maximum percentage input for assets ranging from cash equivalents to emerging equities. Specify mix allows for the exact percentage desired in the same asset categories. Any assets marked hold in the input section are designated non-repositionable in this section.

The user can select the comparison section and view combined, qualified, or non-qualified current and proposed graphs. Sub-asset and broad asset views are available either by percentage or dollar amount. Before-tax and after-tax returns, as well as Sharpe Ratio and standard deviation (risk), are displayed in either mode.

A Backtest feature shows either graphically or by a table what the asset mix would have done in the past. Benchmarks of any index imaginable are available with a drop-down menu to compare the proposed allocation. Financial forecasts by qualified, non-qualified or composite are illustrated with current or proposed mix, inflation adjusted dollars, and in graphs or numerical tables. There is a simulation section that demonstrates range of returns and target returns.

A sensitivity section allows the user to increase or decrease the rate of returns to compare projected assets. To finalize the plan, an implementations option is available to illustrate actions by proposed asset class, product recommendation and proposed dollars. A product mix pie graph helps illustrate the implementation process. Additional statistics with histories of investments as well as parameters of risk, return, yield, dividend and turnover are furnished.

Cheshire Asset Allocation Planner
Cheshire Software Inc.

Cheshire Asset Allocation Planner is one of nine modules in the Cheshire Financial Planning Suite. It is a stand-alone module that easily integrates into the suite so that multiple entry of data is not required. The planner can add an unlimited number of asset classes.

Other features allow the use of historical or expected rates of return; the construction of efficient frontier curves based upon any combination of asset classes using minimum and maximum constraints; the calculation of rates of return and standard deviation for current and proposed scenarios; the input of planner recommendations on specific investments; and the printing of a risk-tolerance questionnaire.

The program has tabs for general, risk questions, what to allocate, asset classes, current portfolio method, efficient frontier, proposed portfolio, and action plan. The general section is for the input of client names. The risk questions ask for the number of dependents, anticipated earnings growth, emergency savings, fixed/variable rates of return, loss tolerance, unexpected needs, comfort level, potential rate of return, time horizon, and amount of portfolio loss capacity.

Once completed, the planner is allowed to select the method of investing theory — efficient frontier, manual or pre-selected investment model. The what-to-allocate tab reveals a pull-down tab with selections for retirement, general or whatever is desired by the client. The planner can also select to include or exclude the client risk questionnaire, as well as whose assets —husband’s, wife’s or joint — to allocate. A green dot indicates if data for each participant has been entered.

The asset classes section has options for historical asset class returns, which are furnished by the software. Planners can select a span from any historical period to a current date that includes standard deviation and rate of return with either an arithmetic or a geometric mean. A correlation matrix button shows the statistics of the chosen asset categories. If the expected return data radio button is pushed, the asset categories show up blank, leaving it to the planner to fill in the appropriate data.

The current portfolio tab illustrates the existing asset allocation by asset class, amount and ownership. If further detail is required, a click of the blue arrow to the right of the investment allows the planner to enter by taxation areas such as annuities, Roth IRA, qualified plan, tax deferred or taxable. The method tab utilizes Microsoft Excel to calculate points for the efficient frontier curve. If manual calculation is selected, current assets are presented in either dollar or percentage amounts.

The proposed amounts column allows for details such as annuities, Roth IRAs, qualified plans, tax-deferred or taxable to be seen when the blue arrow is pushed again. An investment manager bar at the bottom hides the detail of the investments. When pushed, a full-page display of investments is displayed. Headings for taxation, holding name, ticker, number of shares, price per share, current value, cost basis and asset class are available.

A click on the taxation section offers descriptions of annuities, Roth IRAs, taxable, tax-deferred, appreciated securities and tax-free. The asset class tab has descriptors for small, medium, large, municipal and government bonds, as well as cash and equivalents.

Once data is entered in current and proposed, users can see a net change by dollars or percentages. The action plan has a buy-sell wizard that helps the planner determine what to buy and sell so that specific holdings in the proposed portfolio match up with the asset classes selected for the proposed portfolio. When pushed, a screen appears that states that the primary steps of the wizard are to sell unwanted holdings from the current portfolio and buy desired holdings to make up the proposed portfolio.

There are then nine steps to complete the tasks. Steps one through five are to sell the asset classes, such as cash, bonds, equities, etc. The current balance and amount to sell is listed above the screen. Once the sell is ordered, the amount to sell headers display the action, leaving a column for balance left to sell at the bottom.

The last four steps are to purchase proposed assets. A click of the view output button reveals a pie graph with the current allocation. Tabs on top show portfolio, action plan, inflation versus investment, risk score and best/worst. The bottom of the screen has buttons for current, proposed, asset class, holdings, taxation, summary, detailed, “$” or percentage, and whose assets are shown.

The action plan tab shows the specific buys and sells by investment. Inflation versus investment shows the impact of inflation on any of the asset classes selected. The risk score graphically shows the client risk tolerance based upon the questionnaire. The best/worst shows the range of returns over the period selected for highs and lows. Any of these charts can be printed easily. When the radio buttons at the bottom are pushed, actual holdings by dollar amount or percentage in either current or proposed portfolios can be displayed.

Ibbotson Portfolio Strategist
Ibbotson Associates Inc.

Ibbotson Portfolio Strategist is a tool that helps a planner determine a client’s risk tolerance; propose asset allocation; implement recommendations with mutual funds or annuity subaccounts; project with a Monte Carlo simulation; link to dbCams, Centerpiece, Advent, Axys and Profiles+; and produce customizable color reports in Microsoft Word.

Most portfolio optimizers use Modern Portfolio Theory to produce the “optimal portfolio.” Ibbotson Portfolio Strategist also uses mean-variance optimization combined with Monte Carlo simulations (stochastic techniques); however, the MCS does not color or influence the outcome.

The opening screen has tabs on the left side for client profile, current portfolio, risk profile, optimize portfolio, sensitivity analysis and implement. Other choices on the right side of the screen are for spouse, background, education, expected earnings, cash flows, retirement, tax rates, savings, Social Security, annuities and updated market assumptions.

The spouse tab reveals the spouse’s birth date, expected retirement age, life expectancy, and current income before and after tax. Education deals with cost of education for children, including birth year, starting date, school name, current cost, tuition premium, inflation rate and tuition growth rate. Cash flows expand to start year, end year, classification of taxable versus tax-deferred, description, amount, percentage or “$,” and inflation adjustment.

Retirement allows the planner to load the percentage of current income needed for retirement by year. Saving shows the amount the client is putting away each year. Social Security has an option to include or exclude; plus it lets the program estimate the amount, or the planner override the computer.

Annuities can indicate lump sum, lifetime income, or systematic withdrawals, the age to begin collecting and survivorship options. Different start years can be selected by the planner after entering life expectancy, retirement age, and before- and after-tax income.

A click on the current portfolio reveals tabs on top for IRAs, deferred, Roth IRA, taxable accounts, variable annuities and summary. Classifications of investments start with large cap growth and large cap value, all the way to cash. The planner can input the current portfolio by amount and by weight, and also enter basis.

Three buttons on the bottom include launch security classifier, historical analysis and set basis to market. A push on launch security classifier reveals a returns-based style analysis to categorize existing holdings into Ibbotson’s 13 asset classes. This is the section that allows the importation of client data, which is a faster alternative to manually entering the portfolio. Historical data analysis lets the planner compare the existing portfolio to the related statistics of the asset categories.

Risk profile has a series of five questions surrounding a hypothetical $100,000 portfolio including the maximum amount of gain and loss tolerated from minus 21 percent to plus 48 percent. Other questions involve a potential 45 percent decline over 18 months and the hold philosophy of the investor, what the investor would do with a 22 percent decline over 12 months, and how the investor feels about short-term fluctuations.

The optimize portfolio feature reveals a screen with a tool bar for capital market assumptions and the constraints to the current portfolio. Clicking on the capital markets tool bar shows the asset classes, and radio buttons to adjust tax-free up and the taxable down. A drop-down menu includes basic optimizer, advanced optimizer, enter model portfolio or select model portfolios.

A push of the go button reveals a graph that says optimize portfolio. The graph shows the expected return and the standard deviation. Moving a needle below changes the current versus proposed frontier and changes the linked mix displayed next to the current portfolio.

Another drop-down menu has “find by pie chart,” which will display a colored graph that is exportable to Word, Excel or PowerPoint. Sensitivity analysis shows four tabs including savings, education, retirement and taxes/return.

Contributions to savings and tax-favored accounts can be
entered here by dates and amounts. Rates of return are displayed by either current or proposed portfolio, including total return and yield. Turnover percentages can be manually input. Assets can be shown pre-tax or post-tax using current dollars or future dollars.

A wealth table quantifies, per year, the beginning balance withdrawals and taxes, investment returns, additions and ending balances in both taxable and tax-deferred accounts. The numbers can then be converted to a graph, as well. The implement tab reveals the selection of investments by selection and target and effective comparison. The proposed portfolio can be shown by taxable or tax-deferred categories.

Another pull-down menu includes view proposed, select securities, select asset classes, view mapping table and delete selected. Additional tool bars on top of the screen allow for filters on withdrawals and reinvestment. Reports take about three minutes to run and can be customized and shown in Microsoft Word or PowerPoint.

Retirement Income Navigator
Brentmark Software

Retirement Income Navigator was formerly known as Investment Scenario Generator. The platform acknowledges that — while the focus of financial retirement planning is on the allocation of assets for growth based solely upon personal risk tolerance — in order to achieve success, goals must be set according to the true objective of providing income.

According to Brentmark, the ISG technology underlying the Retirement Income Navigator was developed to calculate the optimum balance between fixed-rate investments for income and investments in stocks for growth. Its ISG methodology results in a mathematically precise and individualized approach to retirement planning. Comprehensive plans can be developed that show how to achieve the desired income with retirement plan assets.

The program screen is divided into four sections. Section 1 displays five inputs: beginning capital, annual income need, payment period, years in scenario and anticipated inflation. The planner will find a computer symbol button throughout the program. A click on the computer symbol button next to beginning input reveals a screen with options to preserve inflation-adjusted capital or consume capital. The same button next to years in scenario offers the same options.

Section 2 displays custom income needs, other sources of income, multiple allocations and an option to inflate dividends. A click on the “custom income needs” box reveals an edit button. A click on the edit button shows a screen for description of income, amount, first year, last year and percentage annual increase. Click on the amount, and the computer symbol button appears again. A click on the button pops up a “calculate future value” screen with input for present amount, annual growth and number of years.

Once the data is input, the future value is immediately displayed. The edit button on other sources of income reveals input sections for Social Security, pension income or any other income source. The first and last year, annual increase, and asset categories where invested are listed here.

For example, the planner can enter any combination of a pension portfolio, such as 10 percent cash, 25 percent high-yield stock, 40 percent blue chip stocks and the balance in growth stocks. Yearly amounts can be added or deleted and easily replicated.

Section 3 has input categories for fixed-rate, high-yield stocks, blue chip stocks and growth stocks. Investment names can be edited to fit the client’s portfolio. Total return and dividend yield percentage, as well as allocation percentages, are entered here.

Once the data is entered, the user pushes the “optimize investment” allocation bar and a screen appears with the following options: Re-allocate for maximum ending capital, custom income cannot be maximized, and find the lowest capital that will support the income needed. Additional options include preserve inflation-adjusted capital, consume capital and allocate optimization to nearest percent.

Once these options are selected, push the calculate optimum investment allocation bar at the bottom and the program calculates the optimum allocation, including the percentage of each asset category and the projected ending capital. The planner, then, has the option to use the results or cancel.

When “use results” is selected, the planner can then go to Section 4, which provides a summary of current scenario results with a starting balance. A blue plus button provides numerical detail of the change from the beginning to the end of the period by investment category. Tabs for year-by-year detail, cash flow by withdrawals from each asset category, sources from dividends, investment income, additional contributions and reinvestment are also displayed.

A color graph allows the planner to show the client the amounts with or without inflation. A 150-page user manual with case studies enhances the program.

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