How financial planners can use modeling scenarios to boost client confidence

Advanced modeling capabilities take a holistic, 360-degree approach to retirement planning. For example, “If I do ‘x,’ what are the implications to my lifestyle, taxes, investment returns, and family legacy?”

According to Joe Buhrmann, Advisory Financial Planning Consultant at eMoney Advisor, financial modeling is all about analyzing things that clients may have some control over, such as when they retire, how much they spend, and when they should claim Social Security benefits.

It’s also about stress-testing plans: “What happens if my spouse dies prematurely or needs long-term care?” “What happens if inflation runs hot, investment returns are lower, there’s a bear market when I retire, or Social Security retirement benefits get reduced?”

“Many financial advisors and clients are seeking a single, perfect financial plan, but that does not exist. A financial plan evolves over time as life changes and the financial markets ebb and flow,” said Buhrmann.

That’s where financial modeling comes in. It allows both advisors and clients to dive deep into the “what-if” scenarios that life may throw at them.

Don’t overlook the human touch

While technology allows us to model multiple scenarios or potential outcomes, it’s often the advisor using the technology that serves as the most valuable resource. “Clients still seek a human being that understands them and their concerns,” explains Buhrmann.

Through financial modeling, advisors can help their clients with these types of common questions.

Am I going to be okay?

By analyzing the planned course of action, exploring different scenarios that demonstrate the impact of their choices, and comparing plan options and stress testing the plan, clients get reassurance that their plan is adaptable and resilient.

What about worst-case scenarios? What is plan B?

When advisors review and refine plan recommendations by analyzing potential alternative courses of action, clients gain a deeper understanding of their plan. This process builds trust by demonstrating readiness to handle worst-case scenarios and ensure clients feel secure.

While technology can help with assessing the impacts of all these possibilities, it’s the advisor—he human being behind that technology, doing it collaboratively– that can help make sense of it all, keep it personalized, and help address the human-side of wealth management.

Turn complex products into clear outcomes

Advisors can use modeling scenarios to help simplify a complicated concept like secure or guaranteed income annuity solutions. They may demonstrate how these products are essentially steady paychecks, predictable interest, or a “personal pension” that can last for life.

This can help ensure that clients won’t outlive their money, covering essential expenses regardless of market swings.

“Disclosure is paramount. When discussing secure income products with clients, advisors must disclose the product type, risks, fees, guarantees, liquidity and surrender restrictions, and the fact that annuities are insurance contracts – not bank deposits or FDIC-insured investments,” explained Buhrmann.

When financial technology is used to explain complex products with visualization, stress testing, and personalization, everyone wins. Advisors and clients can visualize the impacts of different strategies or solutions upon portfolio values, cash flow, taxes, and wealth transfer.

In addition to visualizing a plan, fintech can help with modeling any number of scenarios or what-ifs, such as “what if I live to average life expectancy”, “what if inflation runs higher, or “ what if the markets experience lower-than-average returns?”

Digital dashboards can integrate all accounts, showing how secure income and investment portfolios can be part of a holistic plan.

Model what matters most to clients

First and foremost, advisors should listen to their clients and ask good questions to uncover their concerns. It’s also important for them to assess financial plans and provide recommendations for any blind spots that may be evident.

“From there, advisors can use a simple Monte Carlo simulation to model best-case scenarios along with protection solutions such as life insurance, disability coverage, long-term care solutions, and property and liability insurance,” said Buhrmann.

Beyond life events such as these, it’s important to model for economic changes such as changes in inflation, market returns, tax rates, and Social Security benefits.

Implementing powerful planning technology into the financial planning process can enable advisors to work collaboratively with their clients, providing them with peace of mind and cementing their role as a trusted guide through life’s complexities and opportunities.

Start small to prevent overwhelm

Financial planning technology should take on a collaborative approach where the advisor and client review and refine the recommendations together. Once scenarios are evaluated, the technology can support iterative refinement.

“While sitting with a client, advisors can quickly adjust variables, test out hybrid approaches, and finalize a plan – ensuring that recommendations align with the client’s evolving priorities and comfort level,” explained Buhrmann.

The financial planning process can be a lot for a client to take-in and process, so it’s important for advisors to tackle the steps in an easy to consume way. Just like you wouldn’t go to a doctor and receive all the health care you’d ever need with your pre-school checkup, a financial planning relationship can be decades long, and not everything has to get completed in the first 90 days.

“I encourage advisors to put together that first iteration of a plan during the early months of the client engagement. Keep the number of recommendations small. A plan with 27 recommendations isn’t 9 times better than a plan with 3. Rather, the client will feel 9 times as overwhelmed and in turn, take no action at all,” added Buhrmann.

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