What is financial planning software anyway, and how can it help me in my practice, and how can I decide which program or programs to buy?

"What IS financial planning software anyway, and how can it help me in my practice, and how can I decide which program or programs to buy?"

Let's attack this question by breaking it down to its three components.

What is "financial planning software"?

That term covers a lot of ground, but generally refers to computer programs, which help the user perform one or more of the following general tasks:

1. Retirement Income Planning
Here, the focus is on projected income levels. Programs in this category may use "deterministic" modeling (assuming that a chosen rate of return on assets - individually, or as a group - will be earned, each year, with no variation, for the entire period. Often, the user may input one [unvarying] rate for pre-retirement and a different [unvarying] rates for post retirement) or "stochastic" modeling, such as "Monte Carlo simulation" (where variations in the chosen rate are considered).

2. Estate Planning
Here, the focus is generally upon "net wealth transfer to heirs". Some EP packages do little or no cash flow analysis. Some make required income a constraint, funding any shortfalls in income by liquidating assets. Nevertheless, the focus is usually upon one or two Future Values (e.g.: Net To Heirs at 1st death & 2nd death).

3. Investment Planning / Portfolio Management
Here, the focus is on the type of assets owned and how they perform. This category includes "straight analysis" programs, such as Morningstar's "Principia" and Wiesenberger's "Investment View", "asset allocation/portfolio optimization" packages, such as Frontier Analytics' "Allocation Master" and Advisoryworld's "Power Optimizer". Recently, some software vendors have combined portfolio optimization/asset allocation with Monte Carlo Simulation.

4. Client/Task/Asset Database Management
This category may be more in the nature of "housekeeping" than "planning". It includes Client/Contact management programs such as "Act" and "GoldMine" and Client/Contact/ASSET packages such "dbCams". These packages are more focused on record keeping than on projections.

5. Tax Planning
Most packages which are devoted strictly to tax planning are intended for the Accounting market, but nearly all programs in the other categories we're looking at take into consideration Income Tax. Some also consider Estate and Gift Tax.

6. Cash Flow / Debt Management & Planning
Debt management is one area in which the software manufacturing sector has fallen down on the job badly. A few programs permit some, limited analysis of "debt what ifs". Cash flow, on the other hand, is a large component of some FP software but a minor consideration in others.

7. "Capital Needs Analysis"
"CNA" programs have been in use in the life insurance industry for decades. Typically, they seek to show a Net Present Value - the total dollars needed today to fund clients' goals for Survivor Income if Client/Spouse dies, Income if Client/Spouse becomes disabled, Retirement Income, and Education Funding.

8. "Comprehensive" Financial Planning packages
These programs attempt to do several - or even all - of the seven tasks listed above.

How can this software help me in my practice?

First and foremost, a software package is a tool, not a Magic Wand. What it won't do is enable you to perform planning and management tasks that you don't understand. For example, if you haven't any idea how to complete an Estate Tax Return, getting the 706 preparation program from ProBATE Software is just asking for trouble.

Second, even if you feel comfortable in a given area of planning, you don't want to use a software package, which "does" such planning as a "Black Box", the output of which you can be assured is "right". No software package is certain to be free of "bugs" and "glitches" and all of them produce results based on assumptions - some of which may not be explained fully in the documentation (as if anyone ever reads documentation). Which facts lead to a couple of Operational Rules:

1. If you don't know the assumptions that underlie the results you're examining, you can't possibly know if those results make sense.

2. If you aren't sure of where a number came from, you can count on being asked.

That said (and if we haven't scared you off the idea of using any software), let's look at how using financial planning software, of one or more of the types described above, might be a good idea - how it can help you in your practice.

1. A lot of planning is mere arithmetic. And computers do arithmetic a lot faster and more accurately than humans do. Moreover, some of the math in financial planning is complicated enough that most of us simply can't do it "by hand".

2. "What if" is the very essence of financial planning, and "what if" scenarios are difficult, if not impossible, to do without computer help, especially if we're examining the impact of changes in several variables. The best FP software packages allow us to model the effect of a whole assortment of different assumptions and possible strategies.

3. Your Time Is Money. Not only can you, using appropriate financial planning software, do planning which you wouldn't even attempt without it, but you can do so relatively quickly. The value of your billable hour is enhanced.

4. Presentation Is Everything. A really good FP program can produce text and graphics, which look simply terrific! Some even allow you to customize the text and format. For "in person" planning (where you are actually doing "what if"s, right in front of the client, some packages allow you to see the result of a changed assumption or value immediately, right on screen. The impact on the client is often enormous.

5. Your Practice Is A Business. As planners, we often spend a distressingly large portion of our time simply running our practices. Billing, correspondence, Compliance (every planner's favorite task), and the like take up otherwise-billable hours. To the extent that you can do these tasks more quickly, accurately, and efficiently, you "increase the hours in your day".

How can I decide which program or programs to buy?

While the process of selecting financial planning software is anything but easy (which is why planning firms and individuals hire the author to help them do that), asking yourself a few key questions - and spending some serious time and effort in addressing those questions - can make it more bearable.

1. What do you want the thing to do?
The decision process starts right here. Give a lot of thought to this question, because, if you don't have a pretty clear idea, you won't be able to make a good decision.

a. BE SPECIFIC! Include what you want, what you need, what you don't want, and what you don't need. Specify why you feel as you do.

b. WRITE IT DOWN!

c. Ask other practitioners how they would answer this question. Not only will you hear ideas you hadn't thought of, but, when you put the responses you hear into the perspective of what you know about the nature of the respondent's practice, you'll get a better idea of the Nature of the Problem.

d. Reduce what you have to an itemized list of FACTORS. Make sure that there's as little overlap as possible. (Each factor should be both specific and unique).

e. Make up a spreadsheet to "score" each program you're considering. A sample appears on the next page.

The columns are only suggestions as to "factors" which you may find relevant to your practice. Feel free to change or add columns, to reflect your concerns. You enter your "score" for each software program, for each "factor" (e.g.: "printed output") in the row labelled "Raw Score". I use a scale from 1 to 10, with 10 being "this program does this thing perfectly", and 1 being "this program doesn't do the thing in question at all, or does it very badly". (You might want to assign a lower score for the latter than for the former, if you feel that a program's handling a task poorly is worse than not handling it at all).

Then, assign a weighting to each factor. How important is the "factor" to you (irrespective of how well a particular software program handles that factor)? I use a scale of 0-2, where 1 is "normal" importance. A score of 1.5 means that I consider the factor to be more than "normally" important, but not of maximum importance. . A score of 0.5 means it's of less than normal importance. (Presumably, you won't weight any factor as 0.0, as that would indicate that it's of so little signficance that you shouldn't have included it as a column). My Excel spreadsheet automatically multiplies the raw scores by the weighting factor, and enters the results in the blue-tinted cells labelled "weighted", which are summed in the cell labelled "Total Weighted Score".

This procedure won't guarantee that you'll end up with "the perfect software library", but you will have reduced the task to manageable proportions. At this point, you should have only a few packages to evaluate.

2. What constraints will you apply? This includes:

a. Hardware limitations. Will you use it on a Network? (Some packages won't run on one, or cost a lot more for a Network version). Will you want to swap files between a desktop and a laptop? (Some packages make this easy; some don't.)

b. Who will use it? Consider the "learning curve". A lot of software is purchased and then shelved because it's simply too hard to learn for the folks who will have to use it.

c. Cost. Make sure you take into account the ongoing maintenance fees.

d. Compatibility with other software. Unfortunately, most financial planning software doesn't talk to other financial planning software. But some programs do and most will (eventually). If you expect to be able to use a program with one or more other programs, make sure you ask the software manufacturer for SPECIFICS on this point. (Vague promises of "cross-application compatibility" won't cut it!)

e. How will you and your staff learn the program? Most planners decide on "do it yourself", which is rather curious, given that we're in the business of helping clients to avoid the pitfalls of this strategy. Consider these factors:

i. Are you a "pro" at learning/teaching software? If not, then an amateur will be running your training program.

ii. How much would hiring a "pro" cost, in billable hours?

iii. Do you really want the aggravation?

If you decide to "do it yourself", make sure that you know what sort of training the software manufacturer provides (other than manuals, which aren't "training" at all).

If you decide not to try to learn the program or programs you purchase by yourself, you may want to consider whether you want to make the purchasing decision on that basis. A software consultant who is familiar with the strengths and weaknesses of all the programs out there (or many of them, at any rate) and who understands the financial planning business may save you, not only time and effort, but money as well. After all, isn't that what you do for your clients?