Articles & Whitepapers

Plan Plus Articles and Whitepapers

Risk Tolerance Stability During Uncertain Times

Nicki Potts, Director of Product Management at Morningstar (former COO & SVP, Product Development at FinaMetrica Pty Ltd), shares historical data that shows FinaMetrica risk scores across the globe remain relatively stable through stock market volatility. This research demonstrates that Advisors who perform a valid risk tolerance profile for their clients are more likely to see their clients stay the course during severe market downturns. -Mike Barad, Head of Financial Planning Software, Morningstar, Inc.

Beyond Monte Carlo Analysis

Our industry is filled with conflicting information. For both advisors and clients it is almost impossible to sort out “truth” from “fiction”.

Sequence Risk – Understanding the Luck Factor

While a distribution portfolio’s exposure to sequence risk changes over time, sequence risk never really goes away unless the withdrawal rate is constrained considerably.A practical method for advisers to meas­ure this exposure to sequence risk is through evaluation of the current proba­bility of failure rate.The fundamental withdrawal rate for­mula is portfolio value ($X) times a withdrawal rate (WR%) to equal the annual distribution amount ($Y).

Income Replacement Vs. Expense Approach to Insurance-Needs Analysis

Financial advisors commonly use three methodologies to determine client life insurance needs: income replacement, expense analysis, or hybrid models. Expense analysis is generally recognized as the more robust methodology, but requires greater discovery and data to perform. This paper compares these techniques to determine to what extent the simpler approaches identify greater or lesser insurance “needs” and to determine whether the differences are significant.

Financial Planning Literature Survey

The FPSC Foundation has engaged PlanPlus to carry out an environmental scan of research carried out between 2003 and 2011, from Australia, Canada, United Kingdom and the United States, in the field of financial planning. Article by Fagan, Brayman will be published in the Journal of Personal Financial Counselling, Summer 2011.

Introducing the Debt Policy Statement

Although investment challenges like those experienced in 2008 and early 2009 can result in consumers losing substantial amounts of their investment capital for a time, many consumers lost their homes in the same period as a result of questionable lending practices or a failure by consumers to understand and plan their borrowing decisions.

Defining and Measuring Risk Capacity

New generation models of assessing a client’s profile for investment purposes differentiates among factors like the client’s tolerance for risk which is a psychological trait, the client’s required risk which is a how much risk a client might be required to take to achieve desired goals, and risk capacity which is how much risk the client can afford to take.

The Illusion that More Conservative Portfolios Address Risk Capacity Issues

The current evolution of “suitability assessment” of investment portfolios has differentiated between risk tolerance, a psychological construct; risk required, a financial construct of the return required to achieve specified goals; and risk capacity, the risk that the investor can afford in the event of a downturn. Application is usually for advisors to recommend more conservative portfolios in the event that the risk capacity of the investor is deemed to be less than the risk tolerance and risk required.

Developing an Algorithmic Certainty of Outcome Forecast

There is a strong desire in the financial services sector to be able to address the uncertainty of a projection or forecast for a client’s financial plan based on two primary factors – mortality risk and rate of return risk. The primary methodology for handling uncertainty has been and remains Monte Caro Simulations for investment returns and randomization of mortality assumptions based on mortality tables. This paper hypothesizes that it is possible to construct an algorithmic replacement to Monte Carlo Simulations

A New Multi-Band Approach for Optimizing Taxes based on Order of Depletion of Accounts

The Common Rule (CR) for order of withdrawal of investment accounts prescribes deferring tax as long as possible. Research has shown that it is possible, in some cases, to reduce taxes and maximize terminal wealth by withdrawing tax deferred funds earlier at lower tax rates, rather than realizing this taxable income at later times and at higher marginal tax rates. This approach is often referred to as ‘topping up to band’ (1B).

I have been using FinaMetrica for over 17 years for onboarding new clients. They like the extensive value of the reports; but what we appreciate is the innovations in technology, the value of the client-facing materials and the development of the life-long client relationships as I get to really know their behavioral tendencies. FinaMetrica has assisted me in building a very successful practice and we highly recommend it for any advisor who wants to enhance the overall value of their client relationships.

Ron Wilkinson - Portland, Oregon, USA
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