You have created your client's household plan, examined the Household Balance Sheet, maybe even watched our video on Understanding the Household Balance Sheet, explored the Cash Flow Planner with the aid of our post, and now you are ready to generate the Goal Achievement Report in goalgamiPro.
After clicking on the "Generate Report" button in the upper right hand corner of your dashboard in goalgamiPro, and scrolling through the PDF, you might have some questions. Your client might even be at arriving at your office in the next 15 minutes. Not to worry. Take a breathe, and now read:
It is natural to have many questions when trying out new software, which is why purpose of the Goal Achievement Report will be explained first.
1) The Goal Achievement Report is first and foremost, an alternative to the comprehensive 70 page financial plan given to clients--who after one look tend to not understand their financial state. Instead, the Goal Achievement Report is five pages, designed to provide a client-focused assessment of your client's financial state. In other words, the first page shows your client's resources, when their future savings and benefits will start and end, their current balances in financial accounts, and a listing of their future goals (expenses) and the amount needed to achieve them. This information, as well as a your client's personal information, will be be the first item on the financial meeting's agenda to review and discuss.
2) Can your client afford his or her goals? This is the second main purpose of the Goal Achievement Report and it is answered with a visual printout of the client's Household Balance Sheet, derived from the particular plan you created in goalgamiPro and chose to view. When verifying information and reviewing the Household Balance Sheet with your client, ASI recommends you break the page into two major parts--resources (Left side, think Assets) and goals (right side, think expenses; liabilities). The following pages are also critical--discussing an extension of household expenses--saving for retirement, and therefore should be given due time and diligence to helping your client understand as well.
Once again, these is a summary of the main purpose or functionality of the Goal Achievement Report. But another critical purpose to this report, that most advisors miss out on, is the opportunity to deepen the relationship with their client by really digging in and discussing goals. It is also an opportunity to discuss the concept of present value to your client, so they understand how goal-based planning is calculated to show what they can afford today, therefore afford later in the future. Not sure how to explain this concept to your client? Not to worry, watch our video here.
Now for the heart of the matter--explaining the individual sections:
1. What Is My Plan?
The resources and goals included in your Goal Achievement Plan
Remind your client that this Goal Achievement Reports was designed to provide a view on a particular date – the date on the report. It captures your (the financial advisor) notes, assumptions after speaking with the client, and integrates as much information as is given. With the client's financial and personal information, the affordability of the client's lifetime goal plan can be gauged. We here at ASI, recommend you move from left to right when reviewing this page. Review their resources by verifying their accounts, account balances, frequency of contributed savings to those accounts, and all start and end dates. Then move to the right, verifying their personal information. We highly suggest going over the "Plan FAQ" afterwards, to clarify the use of the terminology used in this planning approach to give clarity for the next last part on this page: Goals. Only then will your client know the difference between Anticipated Benefits and Anticipated Savings, as well as the three-tier goal-planning structure: Necessary, Target, Aspirational. To further explain this concept, we recommend using the shopping cart analogy shown in our Household Balance Sheet video. This will further solidify the concept of goal-based planning for understanding the next section you will review.
2. Can I Afford My Goals?
Analysis of your Household Balance Sheet in today’s dollars
Now the Household Balance Sheet is an effective way to capture a snapshot of your client's financial standing, and provides a continuing diagnosis of the affordability of your client's goal plan. Again it is beneficial to move from left to right when reviewing this page with your client.
We recommend reviewing the structure of a typical balance sheet (Assets=Liabilities +Equity) and then summarizing the left value of the Household Balance Sheet:
Your Resources include:
- * NPV of household taxable accounts, that is to say these are amount are listed after accounting for taxes and transaction costs
- * NPV of household retirement accounts - net of future tax obligations, transaction costs, and any early withdrawal penalties
- * NPV of all future anticipated social security payments and pensions
Remember to mention for the Balance Sheet Value, commonly accepted accounting practices are used to bring the value into the date when the report was created. It is often helpful to suggest to your client to think of Balance Sheet values as account balances after taxes and any other charge. Savings and benefits, such as social security, are totaled up and expressed as their value when the reports were created. In other words, the balance sheet values are stated in Net Present Value (NPV). NPV compares the value of a dollar today to the value of that same dollar in the future, including an estimate of inflation and the projected rate of return on investment assets factored into the formula.
The right side of the Household Balance Sheet values depict your client's goals (expenses)--at a snapshot.
Your Goals include:
- * The discounted Present Value of all future goals funded at the levels you have indicated
- * Three values for each goal - Necessary / Target / Aspirational
Each goal level has total value in bold, followed by a list of the different goals corresponding to each funding goal level. We suggest emphasize to your client that this gives a clear picture of necessary goals or expenses in order to live, versus the aspirational goal level which is the nice-to-have. Necessary goals receive funding first, then Target, and then Aspirational.
The Necessary value is the minimum goal funding level – what is needed or essential to achieve a goal, Target is an incremental amount higher or identical to the Necessary amount depending on the goal, and the Target Amount is the amount set as the intended funding level. The Aspirational level is the maximum funding should the situation change in a way that neither of the prior two values is appropriate.
Goals are also listed and discounted to their current Present Value. In other words, how much your client would be charged today to satisfy the expenditures for the goal. You will notice that the future goal has a present value of less, again taking inflation and returns into account. In other words, all goals are stated as a present expense to answer your client's question: what if I paid the goals today?
Explaining Total Surpuls or Deficit: In order to create a Household Balance Sheet, the net present value of resources is compared to the present discounted value of the cost of goals. If resources equal or exceed the cost of goals your client is in balance or has a surplus. If your client's goals exceed the value of their resources, they have a deficit that needs to be overcome by additional savings or larger return on investments, reducing costs of goals or some combination.
3. Can I Afford My Three Goal Levels?
Analysis of your Household Balance Sheet with a side-by-side comparision of your three goal funding levels: Necessary, Target and Aspirational
goalgamiPro compares your client's resources to their goals, bringing up a critical question that should be discussed in your meeting with your client: “In today’s terms, can I afford by goals?”
Remember, goals are a process of discovery between you and your client. Over time, work to help your client break down, modify, achieve, and end Goals. Another key point to discuss with your client about the Household Balance Sheets and goals, is that in order to understand how goals and resources are achieved, some economic assumptions need to be made. One important assumption is determining how long the household will exist. That is determined by the life expectancy of the principals. We suggest informing your client of not only this, but that to calculate life expectancy, actuarial tables are used (the same as life insurance underwriters) or a specific age is entered during the creation of the Household Plan.
If the actuarial approach is used, once net present values are arrived at, they are multiplied by a "survival probability" to arrive at an actuarial net present value (ANPV) for each of the three goal levels. This helps account for Longevity Risk...could you outlive your resources?” And is solved for using ANPV.
If we set one or more specific longevity dates, then the survival probability is set at 1 until those dates.
Ideally a goal has a "safety margin" over the funding need total. So, if a goal is funded at 110% it has a 10% safety margin. Pages 2 and 3 of the report package have identical data but are presented in two different formats in order to allow a complete view, and then look at each goal level independently.
4. How Do I Pay for My Retirement?
Year by year analysis of your cash flows during household retirement:
- Funding your Necessary Goal Level
- Funding your Target Goal Level
- Funding your Aspirational Goal Level
As a complement to the balance sheet, you will now present the cash flow statement to your client. The cash flow statement starts with the current values as defined in plan resources and illustrates the inflows and outflows. The household is assumed to be retired when all of the Principal Household Members are retired and the cash flow projection continues until the end of life expected date of the last remaining Household Member.
Following the three-goal tier structure of the balance sheet, cash flow projections are shown for each level. At each goal level, retirement is shown with two charts (color-coded to match key of accounts in the upper right):
1) Top chart shows: the total amount needed to fund goals and the sources of funding in each year of retirement.
2) Bottom chart shows: the total balance of all of Household Accounts over retirement years.
Last notes to end with:
Remind your client that:
- the report is designed to provide a view on a particular date – the date on the report.
- the report captures the financial advisors' (your) notes, assumptions after a conversationof goals (expenses) and resources, and as much information as is given. It has the client's financial and personal information and provides a tool to gauge the affordability of their lifetime goal plan.
We hope this helps you better read the Goal Achievement Report and serve as a guide when presenting the report to your client.
Advisor Software welcomes all feedback and suggestions for improvement, please do not hesitate to contact us anytime (Tweet us: @advisorsoftware or email us: [email protected]). Don't forget to check out ASI's other vides for further assistance with goalgamiPro.