Financial Advisors are being challenged as never before by the sheer number of planning tools available on the Internet. What can you do to provide added value to your clients? Help your clients estimate the odds of achieving financial success?

Is it really just magic?

Becoming a financial success can be considered by some as a matter of luck. Oh, he/she was in the right place at the right time and somehow took advantage of a 'good thing'.

In reality, financial success can be achieved by a series of very shrewd steps in life stage planning. But how can anyone predict what will happen in the future, where they might mis-step? The answer is better than you might possibly think. For more than a decade now there have been financial tools and calculators on the Internet available to the average investor. Once incredibly expensive, most of them are now free, even sophisticated analytical tools that can suggest probabilities and quantify uncertainty. Knowing the conclusions to alternative courses of action helps investors make wise decisions, thereby increasing the odds of ending up down the road on the positive side of a net worth statement.

Probability analysis is not news to the insurance industry.

In general, insurers probably possess the most innovative and finely developed probability simulation models in the world. They need them. Insuring clients for loss is after all a game of outcomes and those that make the most educated assumptions regarding the insurer's ultimate financial responsibility in a given market stand to become very profitable. One only need to look at the balance sheet of Renaissance Re whose incredibly intuitive CEO was the forefront developer of Capital Asset Pricing Models. Understand that reinsurers who provide coverage for hurricanes certainly had several models in action that predicted the probable damage and loss effect on Bermuda. Thus, modelling simulations and what-if scenarios provide significant data in planning for the cost of future events.

The financial industry has lagged.

Decision making in terms of investments and financial choices is hardly an all or nothing event, yet current planning software used by many financial advisors use only three or four variables to determine a single outcome. To explain, let's look at the common questions asked about retirement issues.

*How much do you need to live on in retirement?

*How much have you saved toward this goal?

*How old are you now?

*When do you plan to retire?

These numbers are popped into a calculator along with an interest rate, which then supplies an 'average' answer. Suppose that using a four percent investment interest rate does not work; in other words, the investor will run out of money in retirement. The financial advisor ups the ante to an interest rate of six percent or 12 percent or 20 percent. He / she hopes that the portfolio will grow at that average rate of return, even if it exposes the investor to additional volatility. What if the investor simply cannot tolerate that level of risk in their portfolio? Do any of us know what interest rates will be in the future? What we do know is that they won't be the same every year for the next 20 or 30 or 40 years! Conditions of uncertainty make this type of financial planning model inaccurate.

Not only is the interest rate a straightforward average - the most common used is the historical rate of return for equities - but the quantifying process does not build in for the investors' non-financial issues. We all know that there can be many of those, starting with the four R's; Redundancy, Relocation, Relationship Rupture (divorce & death of a partner) and Career Revision. What happens if the client has a long-lived family? What happens if the client faces distribution risk by withdrawing far too much in the first few years of retirement? Should the client take an annuity versus a lump sum distribution? How can you predict for these events?

The advisor can use an appropriate simulation program that can model for historical market returns, pure simulated scenarios and even random mortality. Quantifying the client's probably outcomes, wouldn't you feel better if you knew that you had a 70 percent chance of achieving financial success with a comfortable risk profile, rather than guessing at some investment rate of return in the future?

Financial advisors need to understand these new planning techniques, if only because your clients will be asking you why you don't have them or use them. The advent of these sophisticated planning tools gives financial planners and advisors alike the opportunity to be above average in their approach to modelling the future. And guess what, leading the world again in innovative forward thinking, the United States Securities and Exchange Commission have recently allowed the use of simulation analysis for all brokers, on a nation wide basis!

Are you behind the curve with your clients? You need to get ahead. This is the future of financial advice.

Martha Harris Myron CPA CFP