Scaled advice is only viable if planners are able to introduce new efficiencies into the way they work, which is why some planners are using technological processes that flip traditional planning scenarios on their head.
These planners are starting at the finish line: using their expertise to pick the appropriate strategy and outcome they want, and then letting optimised software determine how this can best be achieved.
Consider how most planners work now: standard calculators require an adviser or paraplanner to either use trial and error to work out the best answer or to just choose an answer that might not be the best outcome for the client. In many cases this can take several hours.
When it comes time to prepare that strategy – whether it is additional contributions to super, a transition to retirement (TTR) or a change in insurance cover – there are some common questions that require calculation. For example:
• If my client can afford to contribute $X a fortnight, what is the best blend of concessional and non-concessional contributions?
• For my client’s TTR, given income requirements, what is the best combination of contributions and pension payments to maximise the benefit?
• If my client keeps doing what he or she is doing now, what income could he/she afford to draw?
What models do
Most planners develop this strategy by inputting data into “modeling” software, which then provides the answers. If the end result is undesirable, the planner has to repeat the process again to find a satisfactory result. And even if the scenario is beneficial, the adviser likely never knows if there was a better combination of contributions or pension amounts.
“Optimisation” software turns this process around by allowing an advisor to start with an end scenario, such as a desired income level during TTR and revealing the correct strategy required. This can reduce modeling time from hours to seconds.
For example, consider a TTR strategy around a target cash flow. By optimising, the tool determines the best combination of pension and salary sacrifice. (Any tool which asks for these as inputs does not optimise.) An optimiser:
• Determines the best combination of pension and salary sacrifice to achieve the required target income, trying maximum and minimum pensions and anything in between.
• It automatically adjusts pension and salary sacrifice each year of the strategy for events such as changes in contribution caps or the client turning 60.
• Switches between concessional and non-concessional contributions automatically to accommodate factors such as contribution limits and tax-free income limits (because of tax offsets).
• Can match client’s existing income as the default or provide a variation in income (both higher and lower) if required. This allows you to begin discussions with TTR with statements such as “you can add $X to your retirement balance without you giving up a dollar of income.”
• Considers part-year calculations and maximising benefits in the first partial year by taking full advantage of the 10-per-cent maximum, and potentially making much higher monthly or fortnightly pension and salary sacrifice amounts.
The challenge for planners is that optimisation tools can throw up scenarios that defy convention and may seem counter-intuitive. For example, it is easy to assume that drawing the maximum pension and therefore maximising the salary sacrifice is the best answer. Optimisers will show that often this is not the case, making it more than just a time saving device.
But because of the speed in determining the strategy, planners can use these systems in front of clients to quantify benefits of potential strategies while talking to them.
Optimisation software has the same smarts as the modeling tools and calculators that planners are used to dealing with: handling contribution caps, Centrelink benefits, tax offsets, and so on. These smarts are vital for ensuring that scaled advice is always good advice.
Cameron O’Sullivan is CEO of Provisio Technologies and director of Ward Financial Group
