[One of the greatest benefits of financial planning is its ability to map out and be proactive in building, guiding and protecting a family’s wealth and directing it to achieve important goals. The value proposition of providing clarity and prioritizing next best actions to mitigate negative household impacts is game changing. It is a great challenge though for financial professionals to be able to “see” and diagnose potential financial events that can knock a client off-course from their financial goals. That is why financial technology has become such a vital part of advisors’ tool kits and their greatest engine for delivering that value.
The diverse nature of a modern-day client portfolio and managing it in a VUCA environment of volatility, uncertainty, complexity and ambiguity can get confusing and requires an efficient and encompassing level of vigilance. The military origins of the VUCA descriptor are apt here as the advisor’s role in this scenario bears a strong resemblance to the role of military logistics in preparing, strategizing and supplying resources for the battle at hand. Financial technology becomes an indispensable resource that can level the playing field and alert advisors to potential perils before they can damage a client's financial well-being. FinTech tools can efficiently and thoroughly analyze a household’s financial data and help advisors communicate clear financial risks.
To explore this further, we reached out to Institute Founding Innovator Member H. Adam Holt, CEO of Asset-Map — a Software-as-a-Process FinTech company for financial professionals who provide in-person and remote advice in the wealth management, investment and insurance markets. The recent enhancement to their visual, financial planning software with their algorithmic tool Signals uses attractive and easy-to-understand graphics to proactively help advisors identify and communicate to their clients the risk of disruptive financial events.]
Bill Hortz: What was the motivation behind the expansion of your advice platform with Signals?
H. Adam Holt: This was actually a really interesting project because the foundation of Signals is based on a framework we have been teaching financial advisors for many years called the “Six L's Financial Fire Drills.” They are a set of questions that challenge a household member to ask themselves ‘What will we do if we experience a financial disruption event?’
The phraseology tends to start with ‘What is the household plan to deal with the following six events that will typically seriously interfere with all our good financial planning?’. It’s a way to address this typical idea of going on a road trip and someone needs to check the level of oil, the gas, the tire pressure, whether the car is in good order, all before you leave the driveway, and someone has confirmed that they have checked the critical safety systems.
The Six L's were framed around disruptive life events. Interestingly enough, we got them to all start with the letter L because people need mnemonics to remember these events. And these questions are typically asked at the end of an early engagement around advice or an annual review meeting for those advisors who do deliver holistic or comprehensive financial planning or guidance. The six L's are ordered from short-term to long-term scenarios including a liquidity event, long term disability, loss of life, long-term care, longevity, and legal or liability, and in some cases, legacy, with the idea that the last is the longest term scenario. We knew that financial advisors know inherently that they have to bring up these topics, but many are having a hard time weaving them into the typical investment management conversation or financial planning/retirement planning conversation because there is so much usually to go over when you have these discussions with clients…and performance and allocation tends to be more interesting to many people.
However, even having taught these frameworks to thousands of advisors using Asset-Map, the data shows there are a significant number of under-protected individuals along several of these different categories. And we do not understand, if they are working with financial advisors, why these areas are not being addressed. It would be literally like learning that most of the auto mechanics out there are allowing cars to leave the shop without air in the tires or checking the air filter and all fluids. That is not an auto inspection that I would feel confident about.
So, the goal with Signals was to try to create an automatic feedback system based upon the premise of the Financial Fire Drills that gave an advisor, at the point in time of advice delivery, an indicator set of red light - yellow light - green lights as to whether a household could mathematically withstand these challenges without massive financial disruption. It does not ask the question of whether someone has too much or too little life insurance. It simply asks the question “Can you financially live the current lifestyle you are living without a major financial impact?”
Hortz: What does the Signals algorithm look for? What exactly can it identify?
Holt: The algorithm looks for the relationship between the current level of household income (as a barometer of lifestyle) and matches it against the expected cost that it would take to fund these disruptive events, less any existing insurances or assets that you might have to cover those replacement costs. Think about it like this - If I know that you have an expensive car, I can estimate how much those tires likely will cost to replace a flat tire. Now the answer is based upon the information you give me. Can you handle the cost of replacing those tires?
It is not a great analogy. But what it does is, if you can apply that, let's say to a loss of life scenario or a disability scenario, you can see that that most people experience significant disruption in their finances when they lose the ability to generate income. So, the question is, are there adequate insurances and resources in place to replace a certain level of one's pre-event earnings, and if that replacement goes below 60% of your pre-event earnings, we know we are going to get a yellow sign and a red sign if we are less than 30% funded, a massive disruption. Most people cannot manage a 70% reduction in household income for life. And yet, we still see an under awareness of this risk significantly across the board. Tens of thousands of households still are coming up as red lights in these income-loss indicators.