Leading with Monte Carlo Analysis for Financial Planning in Uncertain Times

Monte Carlo Analysis Stephanie McElheny blog

Investors tend to get anxious when markets experience volatility. They’re concerned about portfolio performance and the impact that it has on their financial plan, which is understandable when they see their assets fluctuate in value. Like most advisors when markets take a downturn, we spend the majority of our time listening to clients’ concerns and assuring them they’re still on track to achieve their long-term goals.

It’s important for advisors to be prepared to have this conversation when clients are more interested than ever in their financial plans. Helping me with these valuable conversations is the Monte Carlo analysis—a metric that determines a plan’s probability of success and demonstrates to clients how changing investment markets may impact their future plans.

We now start most of our meetings with Monte Carlo analysis. We also put it right after the title page in our reports. We’ve quickly found it’s just about everything clients need to know about their financial plan to feel at ease.

For us, Monte Carlo is a must. Leading with it helps me keep our planning relationships moving forward, even in volatile markets, for greater engagement in the plan.

Preparing for Investor Behavior when Portfolio Performance Is Down

It can be natural to leave things on autopilot when everything is going well. But when the economy takes a downturn, clients start to pay much closer attention to their spending, budgeting, and overall finances.

In uncertain times, we’re reminded of how anything can happen at any time. It can actually be a great motivator. Typically, our clients are more interested in life insurance and estate plans when things aren’t going well. They want to talk through their finances in greater detail—they want to know that you’ve accounted for everything in their plan.

It’s important for advisors to be prepared to have this conversation when clients are more interested than ever in their financial plan. Being able to put their mind at ease can help take the conversation further.

Giving Clients Peace of Mind when It’s Needed Most

While nobody could predict the circumstances of coronavirus, we do have the ability to simulate severe market volatility and prepare the financial plan accordingly. This is where Monte Carlo analysis truly shines.

When clients know their plan has been put through a thousand different market scenarios—including ones worse than their current situation—and the plan still has a high probability of success, they feel a lot more comfortable.

A lot of clients come to us and ask to see their “circle chart”—meaning their Monte Carlo analysis. We start out most of my meetings with this stat because seeing that probability of success is extremely reassuring.

All the typical worries about not having enough for retirement or maintaining a standard of living start to fade away. This way, we’re able to start with their financial plan, and then talk about their portfolio. The conversation around investment performance becomes a lot easier when it’s put in the context of their broader goals in life—when they know regardless of short-term ups and downs that their long-term plan is still going according to schedule.

Monte Carlo allows us to spend less time reassuring clients and more time collaborating with them. It gives clients peace of mind, but it’s also a great relationship builder.

Developing Deeper Client Relationships with Monte Carlo Analysis

When clients are more interested in their finances, Monte Carlo simulations stick with them. They see the impact their spending and financial behaviors have on the overall success of their plan—it’s a powerful way to guide clients towards healthy financial habits that will serve their best interests.

When we talk about things like life insurance or estate plans with our clients, they see the value of these recommendations reflected in their probability of success. Monte Carlo supports our financial advice, but it also reinforces the value of it to clients and they’re quicker to get on board.

The conversation goes beyond investment performance when clients are comfortable with their progress. We dive much deeper into their plans and talk about all aspects of their financial lives, which they’re more open to when they see how their own behaviors impact their probability of success.

In fact, as we dive deeper into their plans, they start to link more of their accounts, and they log on to their Client Portal more frequently. Clients want to do everything they can, especially during times of uncertainty or disruption, to improve their probability of success. In this way, we’re seeing much higher engagement with our plans and we’re building stronger relationships because of it.

Putting Monte Carlo First

We put Monte Carlo at the beginning of all our client reports, and we lead all of our meetings with it. It’s a highly effective way to give clients the reassurance they need. It makes portfolio conversations much easier, and it keeps them calm during times of uncertainty.

For us, putting Monte Carlo first keeps our relationships with clients on track, so we can continue working together to reach their most important goals in life.

Written By

Stephanie is the President of Wealth Planning at Aspen Wealth Strategies. A CERTIFIED FINANCIAL PLANNER™ professional with more than 10 years of industry experience, she is incredibly passionate about identifying opportunities and implementing comprehensive financial planning solutions for both individuals and businesses. As a Chartered Special Needs Consultant™ and Enrolled Agent, her specific expertise includes special-needs planning as well as individual and business taxation. Stephanie is also a proud “Retirement Adventure Roadmap” guide, helping clients discover their best retirement.