Financial Advisor magazine has coverage on the latest version of MoneyGuidePro to be released on Monday, dubbed G:2.2.
In addition to the buzz on G:2.2's features, Morgan Stanley Smith Barney announced it will private label the software as Lifeview and roll it out to approximately 18,000 reps.
I won't rehash the release features, but I do want to pose one question about a new feature called Bear Market Test.
The Bear Market Test screen is intended to show a client the "loss cushion" in a portfolio, or basically the amount a portfolio can decrease before the projections fall out of the Confidence Zone.
So let's revisit the 2008 investment landscape with a hypothetical scenario. A client's $1,000,000 portfolio has a rating of 85% within the Confidence Zone, and the Bear Market Test shows that approximately $250,000 of loss cushion exists before the sustainability projections fall outside of the Confidence Zone.
Let's say that the equity market downdraft of Q4 2009 results in a loss of 30% in the client's portfolio. What happens when the $250,000 loss cushion is reached? If you were the client's advisor, would you flip a switch at this loss cushion level and go to 100% cash in order to preserve the minimum Confidence Zone?
Think about that for a moment.
So allow me to put this in another perspective. You're constructing a plan for a brand new client with a $700,000 portfolio and run the projections through MoneyGuidePro. The forecasting shows that this client just barely falls within the Confidence Zone, with a rating of 70%, and basically has $0 of a loss cushion projected by the Bear Market Test. How would you allocate this client's portfolio? Overweight equities to increase the chances of raising the Confidence rating? Or put the client in 100% cash to preserve a minimum level of sustainability?
A fairly perplexing paradox, don't you think?
(Astute readers will see parallels of this example to the Kitces Paradox, where two clients each begin a 4% withdrawal rate in the first year of retirement, but the clients begin retirement 1 year apart and that 1 year results in a significant loss in the portfolio value of both clients. How should each client adjust withdrawal rates?)
While the Bear Market Test feature has a "cool" factor to it, advisors need to be prepared to implement a strategy when the test forecasts sub-optimal results. Cool features enhance a firm's planning arsenal, but many of them, such as the Bear Market Test, come with serious risks that advisors must be willing to accept.