Financial Planning's Future
Planning software is better than ever. A look at what the big four are up to
By Andrew Gluck
From the January 2006 Issue of Investment Advisor Magazine
Financial planning software programs are better than ever, there are more of them, and the landscape of this key technology area is changing. The industry leader, NaviPlan, has undergone a major facelift and simplified its software. Upstart MoneyGuidePro, a Web-based application, has stepped up the competitive pressure with its innovative approach. Meanwhile, traditional competitors like Financial Profiles remain very much in the running.
Yet when it comes to financial planning software, the one thing that has not changed and remains a challenge for these software companies is the market itself: Independent financial advisors continue to have such different approaches and want so many different things. While one advisor may say MoneyTree is imprecise and not comprehensive enough, another may like it because he believes minutely detailed cash flow projections stretching 20 years out are folly. While one advisor may see a Web-based application as a shackle holding his firm prisoner to a technology provider, another sees Web-based applications as liberating.
What seems clear after tours over the past six months of numerous planning programs—including eMoney Advisor, Financeware, Financial Profiles+ Professional, MoneyGuidePro, Money Tree, NaviPlan Extended—is that the independent advisors being targeted by planning software vendors are segmented into two distinct markets. There are a couple of thousand sophisticated planning firms that mostly do business under an RIA, and then there are many thousands of less-sophisticated advisory firms that are usually run by registered representatives of a broker/dealer.
The sophisticated planning firms—those with a CFP or multiple CFPs and other credentialed staffers that create rigorous in-depth plans and update them annually—tend to be different from one another. Yes, all of these firms are investment advisors doing planning. With respect to planning, however, some want goals-based plans, while others want cash-flow oriented plans. Some want detailed tax projections, while others do not get mired in those details. Some demand a stock option analysis tool that is integrated into their software, while others will only be satisfied with a dedicated stock option planning software package that is powerful enough to advise top corporate executives. Some want to model an estate's cash flows, while others don't need such precision or leave estate planning entirely to attorneys.
In addition, sophisticated planners often are uncompromising about the tools they wish to use, preferring two, three, or even four applications for planning. They use one program just for tax planning, another for investment analytics, and yet another just for Monte Carlo simulations, all in addition to a traditional planning program. Using just one application that won't yield the reports exactly the way they want but that can get the job done quickly is simply not an option.
The Fussy Planners
The idiosyncratic nature of sophisticated planners is good for smaller software vendors. Fussy planning shops keep these vendors profitable. It also promotes competition among the vendors.
Since sophisticated independent advisory firms are so opinionated and their business processes are so diverse, it's impossible for any single program to completely dominate the market. As a result, EISI NaviPlan and Financial Profiles, which respectively have 230 and 75 employees, must compete with much smaller shops like Money Tree and MoneyGuidePro, which respectively have 14 and 21 employees.
Keep in mind that the financial planning software field is still in its infancy. A majority of the less-sophisticated part of the independent advisor market, the independent registered representatives, don't regularly use planning software. Based on my own informal polls when I speak at trade conferences, it's pretty clear that most independent registered representatives do not use financial planning software. According to a large broker/dealer that I checked with and that wishes to remain unnamed, only about 40% of its reps currently use planning software. The number of reps using planning software on a majority of clients is, of course, much lower.
Most reps are focused on investing and selling because it's hard to get paid for doing financial planning. Basically, financial planning is a professional service that clients ideally pay for by the hour or by retainer. Not many advisory firms charge a separate financial planning fee or retainer for planning. It's often a freebie that comes when buying investment products, so advisors don't put much labor or thought into it. Because planning is difficult to get paid for, it has historically posed a major obstacle to the growth and scalability of independent investment advisory firms. Planning itself has not been a scalable business because it is labor intensive and requires skill and time, precious resources.
