When getting ready to start the financial modeling process, you should consider all your available options. We have worked with many other models in the past and have consistently noticed our clients’ inability to take action from them. As a result, we developed a more effective tool, the GCD Financial Life Planner™ (FLP). We have found that our FLP is a more useful model for clients and results in comprehensive and appropriate action plans. Review the following grid to consider how the FLP compares to other financial modeling tools.
GCD Financial Life Planner™
Brokerage Firm/Insurance Company/Canned Software Model
Ease of Readership
Designed to be easy to understand and the data is simple to interpret. There are no complicated graphs or charts. It simply shows the values of the amounts used throughout the model. It is extremely easy to follow how all the numbers flow from one page to the other.
Usually provided in a large bound book and are very cumbersome. Numbers are hard to follow from one schedule to another. When we ask our clients about the content, they typically have no clue. Many times we have even asked the broker and even they can’t interpret the data without talking to the programmer.
Depth of Information
Takes all the annual recurring expenses and non-recurring expenses, year by year, into consideration. Major costs such as car purchases, weddings, house improvements and the like are all considered. This number is mathematically checked for accuracy to make sure the base assumptions are appropriate going forward.
They allow a client to summarize the annual expenses without getting into the detail. None of the numbers are questioned. Most clients will indicate the total cash out as a recurring expense and forget that they just put an addition onto a house or some other one-time event. For the non-recurring expenses, they normally only question college, not all the other large one-time expenses that we all incur in life. As a result of using less detailed information, the results are dramatically less accurate.
This will determine the projected year end net worth value for all future years. If at any time, you stray off course, it could damage the probability of the model and we can discuss corrective actions. As indicated above, it is very easy to see these numbers. On an annual basis we update the actuals vs. projected numbers and re-project the future to accommodate any permanent changes.
Although most firms claim ongoing monitoring, in most cases we have seen, this is not being done consistently. Without regular monitoring, there is increased risk that your plan can stray off track and, ultimately, you may not achieve your goals.
Having a model prepared by an independent third party gives the client a lot of comfort that their interests are being objectively considered. We are looking at many other factors beside the investments. Issues like insurance, estate planning, option planning, etc. are being considered and many recommendations can come from having an independent third party prepare the model.
There is an illusion (that may not be true) that the model is being prepared solely to potentially uncover more of the client’s assets for the broker to manage.
Cost of Model
Although there is a cost to have the model prepared, it has been proven over and over that this cost creates an emotional attachment for the client to want to complete the model properly and interact with the data in the future.
There is no fee because most of these firms are not set up to collect for their services, only on assets and investments. In general, we have found that since people don’t pay for these models, they don’t spend as much time to gather data to complete them properly nor follow them. As a result, they become ineffective and ignored.
Varying Rates of Return
This model mathematically determines the rates of return you will need in order to attempt to achieve your financial goals. Although it starts out with a specific rate, we have the ability to vary the rate throughout the model to gradually reduce the volatility as you get older.
Rates of return are difficult to identify. They project at different levels that most clients do not understand and in many case are not properly matched up with the clients actual risk tolerance.
This model is prepared by practicing CPAs. Tax calculations are based on actual formulas in place at the time of preparation. This includes federal, state and payroll taxes.
These models include a flat percentage for federal taxes based on your current bracket and typically don’t change as rates change. In addition, there is no provision for state or payroll taxes. These can be quite large in many circumstances.
Flexible and Able to Deal With Current Issues
Because we developed the model ourselves, we have flexibility to deal with current issues and change affected formulas and output. Recently, this has included the change in capital gains tax rates; the change in federal rates; the discounting of Social Security expected to happen in 2042; the reserving of cash requested by a client, etc.
These software programs are typically developed once and not updated for recent changes in tax laws or for other issues. Since they use a team of programmers or an outside firm that is not as focused on the value of the software, they don’t update the software that often. Then, when a new version is deployed, it takes a while to get trained and used properly.
Assumptions Being Used
There are no assumptions in this model made by us. All of the assumptions come from you, with our guidance. This includes issues like inflation rates, college inflation rates, pay raise percentages, etc. The result is a highly customized tool designed to provide accurate, personalized projections.
They do have the ability to include inflation rates but not a different rate for college. These models also don’t have the ability to alter the percentage increases in salaries throughout time. Again, the results are much less accurate.
In the end, because of all of the items above, it has a 100% success rate of getting people to take some kind of action with their investments. We have always felt that if the results of our model were not going to change, or validate, the future path for our client, then why do it?
We have heard many people refer to these books as “doorstops”. We have met clients that have had several of these prepared over the years but few understand the contents, let alone can take an action from them.