Where is the planning in financial planning? One financial software company says it's largely missing and that they have the key to bringing it back.

Financial advisors create “plans” for clients’ futures, but the plans are little more than recommendations for current asset allocations, says Dan DiBartolomeo, president of Boston-based Northfield Investment Systems.

“We think that is really inefficient because it implies that the portfolio would be rebalanced from time to time,” DiBartolomeo says. “While that’s sometimes a necessary thing, it’s also a costly thing for private investors.”

DiBartolomeo and his portfolio strategy and analytics firm have created WealthBalancer, a tool for financial advisors that attempts to project clients’ financial decisions across their entire lives.

The tool anticipates upcoming events within a household’s financial life—a student graduation, retirement, the birth of a child—to illustrate how an investor’s portfolio allocations may have to change over time.

“Your typical wealth management client is taxable,” DiBartolomeo says. “Their ability to bear risk changes over time. ... We know life cycles change—that’s the conceptual basis of target date funds. Technology is taking that to a higher level. We’re not just thinking about someone’s retirement date anymore.”

Most allocation is currently done either in an ad-hoc manner or through Harry Markowitz’s Modern Portfolio Theory, explains DiBartolomeo.

“The Markowitz concept for allocation needed updating,” DiBartolomeo says. “The original concept was no taxes, no transaction costs, everyone has uniform preferences for risk and return. That’s a laboratory environment that doesn’t carry over to the real world, but we believe there are analytical solutions to these issues.”

Traditional portfolio rebalancing is done with the assumption that conditions do not change between the time investment and portfolio analyses are conducted and when trades are made to reallocate assets, which could cause costly mistakes for investors, says DiBartolomeo.

While WealthBalancer’s heavy use of client questionnaires may seem rudimentary to most advisors, it uses a technique called the Analytic Hierarchy Process to synthesize allocations out of a client’s answers.

“The Analytic Hierarchy Process is widely used for things like figuring out where to put an assembly plant for a particular product, which is a very complex decision,” DiBartolomeo says. “There are a lot of variables and you want to make the most careful decision possible. There’s been little use of these analytical techniques in finance.”

WealthBalancer uses another innovation, the Discretionary Wealth Hypothesis, to project a household’s changing financial needs.

The Discretionary Wealth Hypothesis expresses a client’s risk tolerance by taking into account what a client can afford to invest over time

The software creates a “life balance sheet” that charts the investor’s current and future financial circumstances. Just as an investor has real assets and liabilities, WealthBalancer projects contingent assets, like an inheritance or a raise, and contingent liabilities, like a college expense or a health-care cost.

WealthBalancer also includes more qualitative inputs, like a client preference for faith-based or tobacco-free investment products.

“These questions aren’t uncommon to the industry,” DiBartolomeo says. “The problem is that what happens behind the scenes is usually very ad hoc. “

Client onboarding with WealthBalancer typically takes less than 10 minutes, says DiBartolomeo, after which advisors can access a projection of a client’s portfolio allocation and asset location.

“To the extent that we have some workable knowledge of what’s next about our asset allocation going forward, I can make as many of those shifts as possible out of cash flow,” DiBartolomeo says. “It becomes about where I withdraw from and where I add to as opposed to rebalancing through trading, and that minimizes transaction costs and taxes, which may become cumulatively large through a household’s life cycle.”

WealthBalancer is divided into two modules—an expert module to be controlled by a firm’s headquarters and a client-facing advisor module.

The expert module includes all of a firm’s market assumptions and outlooks as well as its investment philosophy, while the advisor module includes an input component comprised of client questionnaires and an analytical output component formatted in reports and graphics that includes firm or advisor branding and personalization to the client.

WealthBalancer may be expanded to include insurance and estate planning, DiBartolomeo says.