Follow The Science: The Power Of Financial Plans

“Follow the Science!” Yes, we have heard this a lot over the last 18 months from both sides of the aisle. Because I do not wish to experience an involuntary early retirement from my Broker World columnist duties, I am not going to discuss politics here. But I do believe in the power of science and probably 100 percent of the Broker World audience does as well.

In discussing science versus art, science is a mechanism for providing “proof” to the person that observes the science. Conversely, art is more subjective to the person that observes the artwork. For example, take a beautiful piece of art, a Van Gogh painting. I, as somebody who grew up in a blue-collar Iowa family, am going to have less appreciation for a Van Gogh than the rich guy in the Grey Poupon commercials would have. Again, art leaves room for interpretation. With science, that is not so much the case. If science says that the sun will come out tomorrow, I will believe it.

The reason I love science when it comes to our business is because science does not leave much room for interpretation assuming the source and data are reliable. In my work, I really love science because science supports the wonderful products that we are offering our clients. The value of the insurance industry’s hedging capabilities, the tax advantages, the mortality credits, the longevity credits, etc., cannot be debated in a “scientific” argument. Through “pooling” insurance companies, and only insurance companies, can do certain things that no other companies can do. So, since science is on our side, we should leverage it.

So how do we demonstrate this science/proof to our clients outside of showing them clever quotes from industry “scientists” that indicate that our products are scientifically viable? You can do it in many ways and one way is through the use of financial planning software.

To back up for a second, I am not minimizing art because much of what we do in our business is artwork. The largest form of art that we deploy every day is in how we communicate in a simplified manner what the science says. The art of storytelling, humor, and simplification is extremely valuable. This art that you deploy takes the sharp edges off the scientific information we need to communicate to our clients. But, you sometimes need to set forth a scientific argument.

In essence, if you can arm yourself with the science/proof that these products work while also using art to explain the science/proof in a simplistic fashion, you will win.

As I help agents in helping their clients with retirement planning, here is what I often observe: That—because these agents are seasoned experts—many times they just know intuitively that these products will help the client when it comes to hedging the various retirement risks. After all, if a client does not want to lose money in the stock market, then it is usually obviously clear that the client should look at a fixed or indexed annuity! Some things do not require rigorous analysis. Additionally, these pro agents are usually great “artists” when it comes to explaining and simplifying the product strategies and, therefore, they have been very successful in selling. However, many times I will observe agents that lack a “scientific process” when it comes to cases that need to be backed by data and science. To demonstrate this point, I often will ask agents, “Let’s say you have a 55-year-old client that wants to retire 10 years from now and this person has just given you all of her portfolio details and then says, ‘So how much can I take in annual income once I retire?’ What is your answer?” Many times, it’s a blank stare back at me because the agent may not have the answer or even a tool/system to scientifically arrive at an estimate. This is where financial planning software comes in!

If you are in the field of retirement planning with consumers, you would likely agree with me that many consumers have the following questions:

  • How much income should I plan to take in retirement based on what I am spending today?
  • Based on what I currently have in savings and what I am saving, how much can I take in retirement?
  • Am I on track or should I be saving more?
  • Will I be able to have the retirement I would like if I retire at X age?
  • When should I file for Social Security to get the maximum amount over my life?
  • What about long term care derailing my retirement? Can you demonstrate how that would impact me?
  • What about inflation?

Good financial planning software will provide answers to all the above questions. Note that this column is not about any one software system as there are several in the marketplace that do what I explain.

Furthermore, good financial planning software will also incorporate Monte Carlo Analysis. Monte Carlo Analysis is statistical modeling using 5,000–10,000 different data points that will help you arrive at an estimate of what the client’s portfolio will grow to and what the client will be estimated to take at retirement, along with corresponding “confidence levels.” For example, the system may estimate that a particular client with a current portfolio of $X in mutual funds can take $30,000 per year out in retirement dollars with there being a 90 percent confidence level that she will not run out of money in retirement. That same Monte Carlo Analysis may also say that taking $40,000 per year ($10k more) in retirement will drop the “confidence” down to 50 percent. Disclaimer: If you are not securities registered, remember to heed regulations in what you can and cannot “recommend.”

Not only will this software model out the client’s current portfolio and what she is projected to have at retirement, it will also allow you to introduce changes to the portfolio and the positive impact those changes will make in the future values. For instance, financial planning software will generally allow you to demonstrate an increase in after-tax retirement income if the client introduces annuities or cash value life insurance to their portfolio! Furthermore, the software will allow you to project the size of the consumer’s estate at various ages and then introduce a great estate planning tool—life insurance!

Now, for some of the more skeptical folks reading this article, you may be saying, “But Charlie, everything you mention above has to do with ‘estimates’ that could be way off.” You are absolutely correct, but that is a part of my point. By introducing the products that we offer that get rid of the “estimates” and introduce guarantees, we can scientifically demonstrate the value we provide to our consumers.

Allow me to demonstrate in a greatly simplified context what I meant in that last paragraph. The following is just a tiny microcosm of what using financial planning software can demonstrate:

Take a consumer that is 65 years-old and wants to retire today. She has $1 million in a 60 percent equity and 40 percent bond portfolio, and her budget requires that she take $40,000 per year in retirement income from this portfolio. Using the Monte Carlo Analysis, the software will show somewhere around a 50 percent “confidence level” that her portfolio will last her 30 year retirement. This is usually displayed as a pretty bar chart or line graph. However, need I say that 50 percent confidence is not enough? If airline pilots were comfortable with a 50 percent “confidence level” my feet would never leave the ground!

Conversely, what happens to this scenario in the financial planning software and the resulting printout when you introduce an annuity that will guarantee her much more than a four percent payout rate? The “confidence level” goes up and the pretty bar chart or line graph goes up relative to the “status quo.” And when the client sees the “proposed scenario” next to the “status quo scenario” it becomes clear to her the value of your recommendation.

Again, the above example was greatly simplified as we did not even get into taxes, social security, estate planning, second-to-die policies, etc.! It was merely a microcosm of my overall point that financial plans allow you to demonstrate the power of the products we offer and allow you (and me) to buck the stereotype of just trying to “sell a product.”

Follow the science and preach the science because the science is on the side of annuities and life insurance!

Charlie Gipple, CLU, ChFC, is the owner of CG Financial Group, an innovative and full-service independent marketing organization (IMO) that serves independent agents that sell life insurance, annuities and asset-based long term care. He also owns “The Retirement Academy” (www.retirement-academy.com), which is a subscription based online training platform for agents, reps, and company wholesalers.

Gipple is recognized throughout the industry as one of the foremost thought leaders and subject matter experts on annuities, life insurance, long term care, leadership, storyselling and behavioral finance. He is also an industry keynote speaker conducting 100-150 speeches per year. He has spoken at the MDRT Top of the Table as well as other large forums and has also appeared on TheStreet.com and AM Best TV.

Gipple has vast leadership experience in the insurance industry as he has been an executive of various insurance companies and large independent marketing organizations. He is unique in his broad knowledge across the life insurance, annuities and securities businesses. Additionally, within these businesses, he has a deep understanding of the distribution aspects of these products along with the actuarial and hedging aspects. He holds a bachelor’s degree in Finance from the University of Northern Iowa, is FINRA Series 7 and Series 66 licensed and also holds the CLU® and ChFC® designations.

Gipple can be reached by phone at 515-986-3065. Email: cgipple@cgfinancialgroupllc.com.