The days of a financial advisor presenting a client with a pre-made financial plan on paper are at an end. Clients today prefer to be engaged in the planning process and to influence the development of a plan, rather than be an audience at the end of the process. Leading advisors are finding new ways to create collaborative planning experiences that secure client trust, loyalty and referrals.

Today’s markets are experiencing higher-than-usual interest rates and inflation, along with market volatility. How can an advisor address those concerns interactively, and which planning tools can be used to create that interactivity?

Monte Carlo (MC) analysis, being a mathematical process, is not typically thought of as a tool for interactivity. But more creative uses of MC can spark meaningful client conversations and guide the development of the plan as a client’s life changes.

Asset Spread As A Conversation Starter
A typical visual linked with MC is the asset spread chart, illustrating the projected wealth range over time. This range widens gradually over time, correlating with the expected variance in market returns.

For clients concerned about significant market fluctuations and volatility, utilizing this visual to illustrate planning recommendations that narrow the spread can foster meaningful dialogue between client and advisor.

Many solutions, such as adopting a more conservative allocation or using a RILA-type product, lead to the convergence of both ends of the spread (the favorable and unfavorable outcomes). Risk-averse clients can readily discern the advantage of a more stable spread, while also understanding the reduced upside potential. Using MC to find the optimal solution based on the client’s behavioral tendencies—balancing stability and upside potential—is a highly productive and interactive conversation with clients.

Leveraging Alternate Capital Market Assumptions (CMAs)
An advisor might opt to conduct an MC analysis with clients present, utilizing standard capital market assumptions (CMAs). Then, they can adjust the CMAs to reflect higher inflation and increased asset class deviation. The advisor and client can collaboratively determine the extent of the changes to the inflation or volatility rates, engaging them in the process. Comparing the results of the standard MC score to the revised MC score can generate valuable discussion points. Are the outcomes similar? This would provide clients with a sense of confidence in the stability of their plan even under different market conditions.

If the results are notably worse, it prompts fruitful conversations about potential solutions. How does the client respond to the larger difference in results? Is their situation flexible enough to accommodate a longer-term shift in market behaviors, or is the capital needed from their portfolio fixed? Solutions discussed with the advisor will vary based on these factors.

Some software platforms support the concept of revised CMAs for a specified period, such as a decade, before reverting to standard long-term average CMAs. This approach results in a smaller difference compared to permanently altered CMAs but achieves the same outcome of facilitating joint discussion between client and advisor about the discrepancy in results. Note that we haven't mentioned changing expected returns—instead, the focus is on adjusting volatility and inflation. While altering expected returns is possible, it represents a different scenario from suggesting that long-term market expectations will remain unchanged, but the journey may be more turbulent.

For example, how would the client feel if a significant market downturn occurs at an inopportune time, such as when they are already making substantial withdrawals to fund their children's college education? Altering CMAs for a specified period gives advisors the flexibility to spark these kinds of conversations.

Behavioral Conversations Using Individual Trials
Some software platforms enable you to examine individual trials from the complete set used in an MC analysis. Consider selecting trials from the lower end of the MC analysis (e.g., the 10th, 20th and 30th percentiles) and guide your client through each trial year by year. Emphasize to the client that this is an arbitrary trial—their actual annual returns are unlikely to mirror these precisely, but it provides a reasonable example of what a lifetime of below-average returns could entail.

Navigate the client through the trial, highlighting the potential range in market returns, including negative years. Engage in discussions about how they would react in certain years, particularly those with larger negative returns or heightened expenses (e.g., paying college tuition). Would they be able to temporarily adjust their lifestyle? If not, this may indicate the necessity for specific planning strategies to mitigate downside risk. If they can make adjustments, this prompts a productive dialogue about the extent and duration of such adjustments. This is a powerful way for clients to envision future behaviors and assess whether they find them acceptable.

You may also examine at which ages their investments begin to diminish rapidly and the pace at which it occurs. How would they respond upon seeing this scenario? Again, this can start valuable conversations about the client’s preferences for stability and desire to leave a legacy, which ultimately guides a back and forth towards the optimal solution in their plan.

Embracing Monte Carlo For Dynamic Conversations
Monte Carlo analysis proves to be a vital tool for modern financial advisors seeking collaborative planning experiences. Amidst rising interest rates, inflation,and market volatility, advisors can leverage MC techniques to engage clients actively. By guiding them through simulated scenarios and discussing potential outcomes, advisors foster trust, loyalty and referrals. Embracing MC's capacity for meaningful dialogue enables advisors to adapt plans dynamically to clients' evolving lives, ensuring resilience in the face of market uncertainties.

Joshua Belfiore is manager of group product management for eMoney Advisor.