Depending upon the practice, financial planners can be very directed, specializing in one form of investment vehicle, or more broadly based, either recommending or with access to multiple types of investments.
The one truism in the profession, however, is that nothing stays the same forever. This applies to both the yield on individual client investments, and clients' goals. To accommodate both of these scenarios, it makes sense to sit down with the client every so often and re-evaluate how their investments are doing compared to the client's stated goals, and whether those goals themselves have changed enough to require a rethinking of the investment strategy for that particular client.
Most clients' investment goals do change over time, and in many cases, as they get closer to retirement, so does their willingness to take risks. A good financial planner does their best to build a portfolio for the client that takes into consideration the investment yield, the target goals and the degree of risk that the client is willing to accept.
Making the process even more difficult is the fact that a client may have more than one or two stated goals. In the short term, they may want to maximize capital to accumulate enough money for a major purchase, like a car, boat or house. The same client may also want to invest some of their assets to assist their children with college costs. And then there are plans to be made for retirement. Sometimes the strategy is to maximize capital to meet one goal while maximizing income to meet another.
In building a plan for a new client, or updating one for a current client, one of the tasks that needs to be undertaken is asset allocation, or where to invest the client's money. As the client's goals and appetite for risk change, so will the way that the client's assets are invested. Figuring out the best mix of investment vehicles is no easy task. There are thousands of funds, bonds, stocks and other possible investments that you can advise your client to make. Even those planners who deal with only one or two companies will have a variety of investment vehicles to consider for their clients.
Some planners sell or use only prepackaged plans or investment packages. There's nothing wrong with this approach, but a prepackaged approach isn't always the best method to fit the needs of all of your clients. You may also be locking yourself out of attaining new business with the one-size-fits-all approach.
No universal standard
Asset allocation software applications can help smooth the task of figuring what mix of investments will meet your clients' stated goals. Keep in mind that there are no real standards when it comes to asset allocation software. With accounting software, you can reasonably assume that a general ledger or accounts receivable application is going to have a certain basic set of features. That's not necessarily true with an asset allocation application. Depending on the intended user, and who is offering the software, different "asset allocation" offerings can have very different feature sets.
For example, an asset allocation application meant to be used by the client themselves to make investing decisions will usually be very different from an application targeted to a professional planner. The software systems included in this roundup are meant to be used either by financial advisors, or possibly by the investors themselves. These are certainly not the only packages available, nor are they the only types of asset allocation applications.
Another class of asset allocation packages is targeted at corporate investors, such as Kintera's Fundware allocation module. Fundware is an accounting system used by many nonprofits, and the asset allocation module is used by the financial managers in these nonprofits to help make investment decisions.
Keep in mind as well that many of these asset allocation products are modular, and are part of a larger financial planning system containing other components, such as investment vehicle research.
This sometimes makes the choice of product easier, especially if you already use a particular product, such as Morningstar, in your practice. In this case, if a potential asset allocation product does not support Morningstar, you might want to drop it from consideration.
Another thing to consider is whether or not you have some understanding of how the different products handle the allocations. Most financial planning systems treat the process as a "black box." Drop in some figures, answer a few questions, and out pops a plan, complete with pretty graphics. The underlying modeling and statistical engines are completely hidden from the user and client.
While there's nothing wrong with an easy-to-use product, you should have at least a basic understanding of the underlying processes being used by your software. If an asset allocation application offers and uses Monte Carlo statistical modeling to predict future investment growth, you don't need to be an expert on queueing theory, but you should at least have some familiarity with why Monte Carlo runs are being used. The same thing applies to the Efficient Frontier method that many products employ.
The individual vendors' Web sites usually have fairly detailed explanations of the methods and techniques employed in their products. It would be in your best interest to take this information into account when making your choice.
Lots of hardware choices
To help you in making your choice, we tested a half-dozen asset allocation products, varying widely in features and cost. Two of the six were Web-based, while the others will run on a fairly basic office PC. Given the large amount of mathematical calculations that many of these applications perform, a higher-powered PC would probably be a better choice if one is available.
We did our testing on a fairly common business configuration - a 3GHz Pentium 4 with 1GB of RAM, a 160GB hard drive, and a DVD burner. Our Internet connection is high-speed cable broadband. If you intend to use one of the Web-based applications, a high-speed Internet connection, either cable or DSL, is a must.
To perform our tests, we used the sample clients provided by the vendor and changed factors, including goals, how much risk the investor was willing to take, and the different modeling and reporting options that each package offered.
AdviceAmerica's AdvisorVision, part of a modular financial planning system called WealthVision, is the "new kid" in the industry, launched only a few years ago. For a relatively new application, it's gotten off to a great start, having been licensed or provided to a number of well-known financial institutions such as Citicorp.
The WealthVision system includes AdvisorVision, which is targeted to financial institutions or planners, and LifeVision, a tool meant to be offered by these planners/institutions to their clients for client use. A new application, AdvisorVision Retirement Income Edition, is a single-focus application designed for retirement planning. These applications are available as a hosted application service provider service, or for in-house installation for enterprise use.
While AdviceAmerica now offers a single-purpose Retirement Income Edition, AdvisorVision is a modular system, and you can add modules for a variety of differing goals. These modules include net worth, retirement, education, life insurance, accumulation, emergency fund, estate planning and debt management. You can sign up for the whole system, or only for those modules that you currently have a use for.
While AdviceAmerica states that the application will run fine with a dial-up line, we tested it with a broadband connection, and it ran very nicely. Considering that the application will be heavily used in a financial planning practice, upgrading from a dial-up line, if you're still using one, is definitely a good idea.
Running AdvisorVision over the Web really doesn't feel different from running it on an in-house PC. Screens are very nicely laid out, and you set up a client through a logical progression. As with most of the applications we tested, risk avoidance is determined with just a few questions scaled through five degrees, positive through negative. It doesn't seem very in-depth, but as most of the products we looked at seem to use the identical approach, it evidently works better than one might suppose.
Once you've entered the client's goals and other constraints, the software will access whatever research databases you have subscribed to. Multiple databases can be used to widen the choices. After you've selected investment vehicles for your client's consideration, you can print out a comprehensive report in Word or in PDF format.
The latest version, AdvisorVision 4.0, includes the ability to allow your client to collaborate with you over the Web in the planning process. This is a great feature, and it can substantially speed up the process, as your client doesn't have to wait until you are face to face to have a hand in the process.
AdvisorVision is a higher-end application, but the yearly subscription price is based on which modules and database services you subscribe to, so you can start out somewhat economically and increase the capabilities (and cost) as your practice grows.
Cheshire Financial Planning System
Not every planning practice needs a top-of-the-line asset allocation application. Nor can every practice afford one. If you're just starting out, Cheshire's $499 Asset Allocation Planner might be a good way to get started with this type of software. While Cheshire offers the more expensive and more capable Financial Planning System, the basic Asset Allocation Planner lets you define a set of investment vehicles, establish rates of return and set your client's goals. You'll have to cut and paste in historical data, as the software does not interface with online research services.
Cheshire's more comprehensive Financial Planning System, priced at $1,799 for the first year, and $750 for following years, includes the Asset Allocation Planner, and adds the retirement planner, education planner, net worth and cash-flow planner, estate and trust planner, life and disability insurance planner, distribution planner, a Monte Carlo simulator, and a financial planning questionnaire.
The financial planning questionnaire is a good way to gather information from the client. It might be more efficient if they could fill it out online, so that you could simply transfer the information, rather than keying it. Once all of the client data has been entered, you can run the Efficient Frontier model and use Monte Carlo simulations to model returns. The Efficient Frontier model requires that you have Excel and Solver installed on your PC.
Cheshire Financial Planning System has a few areas where it doesn't quite measure up to the other applications we tested. As mentioned, there are no direct links to online research services, so you'll have to subscribe on your own, then cut and paste data into the application. We also found the user interface a bit plain, and integration between the modules is not as tight as with most of the other applications reviewed.
None of these is a deal-breaker. If you need to acquire a basic financial planning system on a budget, Cheshire's modular approach may allow you to get started economically.
Ibbotson Portfolio Strategist System
Ibbotson has become a well-known name in financial planning software and resources. So well-known, in fact, that earlier this year it was acquired by Morningstar, one of the premier sources of data in the investing industry. At the moment, Ibbotson's Portfolio Strategist System is still being sold. At some time in the future, however, it's quite possible that the product will undergo a name change, or will become integrated or incorporated into this vendor's product line-up. Given Portfolio Strategist's popularity in the industry, and the number of existing users, it still makes sense for many financial planners to consider the software.
Many of the asset allocation applications that we tested are part of a modular financial planning system, as is the Portfolio Strategist. You can buy just the asset allocation module, and other modules that fit your particular practice. The Portfolio Strategist, which includes the fund optimizer module and is the module that actually performs the asset allocation process, is named the same as the overall system. The overall Portfolio Strategist System includes these two modules, a security classifier module, a fund strategist and an analyst module. If you decide to buy extra modules after your initial purchase, the installation creates a seamless integration between the older modules and the new ones being installed.
We found the user interface very easy to understand and use. Tasks are organized into groups and displayed in a set of vertical tabs on the left side of the screen. Clicking on a tab changes the horizontal tabs being displayed to present what operations are available in that task group. Portfolio Strategist uses Monte Carlo simulations and the Efficient Frontier model to perform investment projections, and makes it easy to set multi-tier goals to accommodate different investing strategies in different goal areas. The application has extensive reporting options that incorporate jazzy graphics, including Word files and even a PowerPoint presentation.
The basic Portfolio Strategist system is very affordable at $695 per year. Adding other modules ups the ante, but also provides additional capabilities. To really be usable, you'll also have to add database subscriptions. Still, for many financial planning practices, the outlay will be very worthwhile.
Total Planning System
Money Tree's Total Planning System is the vendor's premier product. It also offers the Silver Planning System and a set of the modules that make up the Total Planning System. Since the Total Planning System is priced starting from $850, it probably represents the best value. TPS incorporates both goal- and cash-flow-based planning models, and has Monte Carlo simulations for modeling predicted returns.
The software is probably not as focused on the asset allocation part of financial planning as most of the other applications that we reviewed, but more of a general all-around financial planner. This emphasis is reflected in the fact that there are very limited features for incorporating historical performance research data in your models. You can import from Albridge Solutions, Outlook and a few other programs, but if you subscribe to Morningstar or another major research service, it's not particularly easy to get the data into TPS.
On a more positive note, it's very easy to use the software. Client set-up is on a par with the other applications that we reviewed, and client risk assessment questions are similar to those asked in much more expensive packages. Considering the reasonable cost, Total provides very good reporting capabilities, with professional-looking and understandable reports.
For many practices, the difficulty in importing historical performance data on investment vehicles is going to be a major bump in the road unless you deal with a very limited number of investment choices. If that is the case, Money Tree's Total Planning System may be a good fit for your practice.
SunGard is one of the stars in financial planning, though the vendor usually deals with institutions such as banks and brokerage houses, rather than small to midsized financial planning practices. Planning Station is a Web-based system, and is targeted more toward "wealth managers," rather than financial planners. The difference is one of degree, and the amount of assets that the planner has to work with.
Planning Station is modular, a common approach in this application market, which lets a practice subscribe to only those modules that it currently needs and can bill clients for. Even with a rather sparse approach, Planning Station is far from inexpensive, though the vendor prefers to quote prices on an individual basis.
We tested the Allocation Master component of Planning Station. This module is based on the desktop in-house Frontier Analytics Allocation Master application, which is also available from SunGard. As with several other of the more comprehensive systems that we reviewed, Planning Station uses the Efficient Frontier process to build the investment vehicle mix, and Monte Carlo simulations to predict each modeled portfolio's performance. Subscriptions to research databases are priced separately, and you can subscribe to a wide variety, which determines which investments you can include in your modeling.
Considering the cost and capabilities, we found Planning Station very easy to use. Tasks are listed in sequence vertically in a left-hand window pane, and a help pane can also be displayed on the screen. Planning Station can print out a comprehensive client questionnaire that you can give to the client to fill out, simplifying the data collection process.
Once you have entered the client data, preferences and risk assessment, you can start the modeling process. When you have an allocation mix or mixes that you want to present to the client, Planning Station will produce an extensive variety of reports with excellent graphics to make explaining the output easier. Planning Station is expensive, but if your practice can afford it, it's worth the expense.
Zephyr AllocationAdvisor 6.2
One of the more expensive financial planning products included in this roundup, AllocationAdvisor is a part of the even more comprehensive StyleAdvisor financial planning system. AllocationAdvisor has extensive capabilities by itself, but really shines when you add the other components of the system, including a high-end graphics generator, a database management subsystem, and PowerPresenter, which lets you create top-of-the-line reports and client presentations. Most financial planning practices will go for the whole ball of wax, with a yearly subscription fee well over $10,000, though the vendor prefers to quote prices for specific installation and licensing situations.
Of course, big bucks often mean big features. For the high-end subscription, you also get considerable access to financial instrument research, including Zephyr's Index Database and Morningstar's extensive mutual fund database. Monthly updates to both are provided, as is unlimited technical support and a berth at Zephyr's yearly user conference. If the Morningstar and Zephyr databases aren't enough, the vendor can supply subscriptions to a wide variety of additional services.
Most of the applications that we reviewed for this roundup, including AllocationAdvisor, work similarly. Once client information is entered, the client needs to perform a risk assessment, and set goals. Then you are ready to select possible investment vehicles and run models to simulate the performance of portfolios. Most of the applications we looked at use the Efficient Frontier model, but the underlying model in AllocationAdvisor is the Black-Litterman model, rather than the more commonly used Markowitz mean-variance optimization approach. Black-Litterman allows you to add your own estimates of expected return into the model.
As you might expect from a high-end application, AllocationAdvisor can produce comprehensive and attractive reports, especially when you add the other modules that make up the StyleAdvisor system. The reports produced can present an exceptional amount of detail, which is important with some clients who like to have "all the figures" before they make their decisions.
If you have a high-end financial planning practice, with wealthy clients who don't mind paying for the services, AllocationAdvisor, and the more comprehensive StyleAdvisor, are targeted to your kind of practice, and your kind of clients.
Ted Needleman, a former editor of Accounting Technology, is a consultant and freelance writer based in Stony Point, N.Y.
34770 Campus Dr.
Fremont, Calif. 94555
Price: $500 to $2,000 per year, plus data services depending on edition.
* Cheshire Financial
Cheshire Software Inc.
1170 Walnut Street
Newton Highlands, Mass. 02461-1224
Price: First year - $1,799; $750 annual maintenance. Asset Allocation module - first year, $499; $150 per year after.
* Ibbotson Portfolio
Ibbotson Associates Inc.
225 North Michigan Ave., Ste. 700
Chicago, Ill. 60601
Price: First year - $2,795, plus cost of data. Individual modules available.
* Total Planning System
Money Tree Software
1600 SW Western, Ste. 110
Corvallis, Ore. 97333
Price: $2,000. Individual modules available separately. Goal-Based Planning - $850.
* Planning Station
SunGard Online Investment Systems
2737 South Corporate Park Dr.
Salt Lake City, Utah 84120
Price: Contact vendor.
* Zephyr AllocationAdvisor 6.2
Zephyr Associates Inc.
P.O. Box 12368
Zephyr Cove, Nev. 89448
Price: Contact vendor.
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