The Future Of Financial Advice WealthCare & Modern Portfolio Reality© Through “Goldilocks” Planning David B. Loeper, CIMA CEO Building

©Copyright Financeware, Inc All rights reserved Building PAGE 2 What we will cover… We have learned about a lot of theories… » What are the premises of these theories? » How do we apply them in our advice processes? » Based on our advice process, how do we profile clients? » What is our value… doing “better”? » Is “better” the best that can be done? » Do we perceive any contradictions? Can we learn from REALITIES too? » What premises would reality support? » Does reality resolve the contradictions? » What changes evolve in our advice processes based on realities? » How does this change the way we profile clients? » How does it improve our advice to be “just right”? » Better than better… the best that can be done for each client

©Copyright Financeware, Inc All rights reserved Building PAGE 3 What is the premise of our Nobel Prize winning theory, MPT? Investors will seek the highest return for the maximum risk they can tolerate… Therefore, our advice process is: 1. Identify the client’s risk tolerance 2. Design the optimal portfolio (highest return for a given amount of risk) 3. Monitor performance (measure what happened) Define “Investment Policy”- Risk Tolerance Monitor Investment Performance Select Funds/Money Managers Optimize Asset Allocation For Risk Investment Consulting

©Copyright Financeware, Inc All rights reserved Building PAGE 4 Under this process, we profile clients by: Investors will seek the highest return for the maximum risk they can tolerate… Therefore, our advice process is: 1. Identify the client’s risk tolerance 2. Design the optimal portfolio (highest return for a given amount of risk) 3. Monitor performance (measure what happened) Define “Investment Policy”- Risk Tolerance Monitor Investment Performance Select Funds/Money Managers Optimize Asset Allocation For Risk Investment Consulting Identifying risk tolerance Classifying “current” Setting “return objectives” Making the risk/return trade-off Showing them how they can do “better” than “current”… More return for risk Less risk for return

©Copyright Financeware, Inc All rights reserved Building PAGE 5 Financial Planning is less abstract than risk versus return… It deals with real client “goals” And, the savings needed to achieve goals… (GAP or shortfall analysis) Therefore, our advice process is: 1. Identify client’s goals 2. Calculate savings shortfall (normally based on an assumed return) 3. Update as needed Identify Lifetime Financial Goals Update Plan Annually Or As Needed Implement & Select Investment Products Calculate “Shortfall” – GAP Analysis Financial Planning

©Copyright Financeware, Inc All rights reserved Building PAGE 6 Under this process, profiling includes risk tolerance AND goals And, the savings needed to achieve goals… (GAP or shortfall analysis) Therefore, our advice process is: 1. Identify client’s goals 2. Calculate savings shortfall (normally based on an assumed return) 3. Update as needed Identify Lifetime Financial Goals Update Plan Annually Or As Needed Implement & Select Investment Products Calculate “Shortfall” – GAP Analysis Financial Planning Identifying risk tolerance Classifying “current” Setting “goals” Making the risk/return trade-off Showing them how they can do “better” than “current”… More goals for risk Less risk for goals Savings needed to achieve goals

©Copyright Financeware, Inc All rights reserved Building PAGE 7 Are there any contradictions to these premises and the resulting processes? Has it been difficult to identify risk tolerance? Do clients really have “return objectives”? Do we really understand their goals?

©Copyright Financeware, Inc All rights reserved Building PAGE 8 » A beta of 1.11 » I measure risk by maximum draw down, of which I can tolerate 17% » A standard deviation of no more than 15.22% measured over a statistically sound time period » A Sharpe ratio that shows high efficiency Evidence Of Risk Tolerance Contradiction: Which Answers Do You Hear When Asking Clients About Risk? I hate risk! “Moderate” If you are going to lose my money I don’t need to hire you! As little as possible How much risk should I take? Only as much as needed It depends on… Answers That Contradict Our Risk Premise Answers Supporting Our Risk Premise:

©Copyright Financeware, Inc All rights reserved Building PAGE 9 We Have Perceived The Contradiction…But… We’ve Been Treating The Symptom, Not The Disease Believing That It Wasn’t The Premise That Was Flawed… It must be the way we measure risk… So, We Created New Risk Measures: Maximum Loss/Draw Down Sharpe Ratio Semi-Variance/Sortino Ratio When This Didn’t Solve The Problem… We Decided Math Was Too Hard… Risk Is “A Feeling” Bring In The Psychologists! Create “Behavioral Finance” What’s Next?… Human Genome? Risk Gene? “Ms. Client, would you mind filling this vial?”

©Copyright Financeware, Inc All rights reserved Building PAGE 10 Our Theory In Practice…(MPT) Premise of our theory: » Investors will seek the highest return for the maximum risk they can tolerate. » Therefore: » Identify investors’ risk tolerance » POSITION THEM TO EXPERIENCE IT » Regardless of whether it is necessary Our Theory In Practice…(Financial Planning) Premise of our theory: » Investors must save to achieve their financial goals » Therefore: » Identify investors’ goals » (repeat identification of maximum risk tolerance and position clients to experience it) » (also ignore whether risk is necessary) » AND… tell them to save more (AKA… alter their current lifestyle) » OR, compromise their goals (the more the better)

©Copyright Financeware, Inc All rights reserved Building PAGE 11 We keep helping clients to “do better”… By identifying, and positioning them to experience the maximum risk they can bear » Optimal portfolio at 20% downside IS BETTER than optimal at 17% downside AND, by getting them to sacrifice the only life they have… » The “best” financial plan is that which: » The client works until death » Saves all of their money » Spends none of their money Which is why our profiling methods START with negotiation… trade-offs To solve this problem we need two things: 1. NEW PREMISES 2. NEW PROFILING METHODS

©Copyright Financeware, Inc All rights reserved Building PAGE 12 WealthCare is different… Instead of: Achieving the highest return for the maximum risk you can tolerate…OR Calculating an investor’s savings shortfall WealthCare is about three things: (premises of WealthCare) 1. Confidently achieving clients’ most important financial goals 2. Without undue compromises to their financial lifestyle 3. While avoiding unnecessary investment risk It isn’t about merely doing better… it is about doing the best that can be done… getting things “just right” (just like Goldilocks)

©Copyright Financeware, Inc All rights reserved Building PAGE 13 WealthCare is different…NOT TO BE CONFUSED WITH MONTE CARLO WealthCare is about three things: (premises of WealthCare) 1. Confidently achieving clients’ most important financial goals 2. Without undue compromises to their financial lifestyle 3. While avoiding unnecessary investment risk Monte Carlo Simulation may expose how weak our assumptions were (exposed odds of failure) But, we need a new advice process to fix these problems If these premises reflect reality, OUR VALUE CHANGES… From more return, more efficiency, more savings, more compromises, “more better”?! to… The “Best” that can be done for the client…(just right)

©Copyright Financeware, Inc All rights reserved Building PAGE 14 Prioritizing Priorities… A little experiment Have you ever met a client that: 1. Wanted to avoid risk? 2. Didn’t care about leaving an estate? 3. Wanted to retire early? 4. Didn’t want to spend any principal? This is where our profiling has failed us… We may ask these questions, but do we understand the relative priority? Or, do we negotiate to find an answer? Identify “current”? This is where “Goldilocks Planning” enters the picture… Click here to get the WealthCare Goldilocks client profile Click here to get the WealthCare advisor sign-up form

©Copyright Financeware, Inc All rights reserved Building PAGE 15 Are we planning clients’ future to be “just right”? When it comes to their goals, do we ask them what is too hot & too cold? When it comes to investment risk, do we understand what is too hard & too soft? With WealthCare, we can design a solution for clients that is Just Right… Here is how it works…

©Copyright Financeware, Inc All rights reserved Building PAGE 16 To design the perfect plan… First, understand clients’ most optimistic goals… their grandest aspirations… Then, identify their IDEAL tolerance for investment risk (usually near “none”) This is obviously aggressive… We are asking the most from their portfolio in terms of goals… while aggressively AVOIDING risk Starting a relationship by exploring this AGGRESSIVE planning scenario has some tremendous benefits…

©Copyright Financeware, Inc All rights reserved Building PAGE 17 Benefits of an Aggressive Plan (too hot) Confrontation… let prospects be unrealistic rather than starting the relationship negotiating Excessive data gathering… rather than competing with “current”, compete with what has been ignored (the unrealistic) Needing to prove they need advice… let them think that they do not We are however, identifying goals we might never find otherwise… Building a client relationship is a seduction… Not an assault! Start relationships off by giving them what they want We are starting the process without:

©Copyright Financeware, Inc All rights reserved Building PAGE 18 Doesn’t every investor want… To save as little as possible? To spend as much as possible? To retire as soon as possible? To leave an estate as large as possible? To accept as little risk as possible? And, doesn’t everyone (client, advisor & firm) WANT… Planning to be EASY? NEGOTIATING IS NOT EASY!

©Copyright Financeware, Inc All rights reserved Building PAGE 19 Having identified their Aggressive Plan Scenario, next step is to: Identify all acceptable compromises, like: » maximum risk tolerance » latest retirement age » maximum savings » etc. This results in a “Conservative Plan”… Make ACCEPTABLE compromises to goals while accepting their maximum tolerance for risk Then, identify their priorities…

©Copyright Financeware, Inc All rights reserved Building PAGE 20 The process looks like this: Step 1 Define Your Most Optimistic Goals & Aggressively Avoid Risk “Aggressive Plan” Step 2 Identify Your Conservative Goals And Your Maximum Tolerance For Risk “Conservative Plan” Prioritize Goals Step 3 Optimize Plan, Avoiding Needless Compromise To Financial Goals And Avoiding Undue Investment Risk “Recommended Plan” Implement Recommendations Review & Monitor Progress Steps 1,2 & 3 can be done separately, or all at once (each step is 1 page questionnaire) How’s that for EASY?

©Copyright Financeware, Inc All rights reserved Building PAGE 21 Skipping our highest value… priorities What is so bad about this? Aggressive Conservative Typical Profile (negotiation) (too hot)(too cold)(Just Right?) Retirement Age: Ret. Income:$100,000$75,000$87,500 Investment Risk:Risk AverseBalanced45%Stock/55%Bond Savings$10,000$25,000$17,500 Estate$1,000,000$0$500,000 Our typical client profile SKIPS identifying what is too hot & cold and if designed “correctly”, puts the client right down the middle of a goldilocks plan

©Copyright Financeware, Inc All rights reserved Building PAGE 22 Is this plan “GOOD”? Many may need to compare it to “current” to tell Doesn’t it depend on the client? It has a high probability of success… Let’s add the “Goldilocks” scenarios… Aggressive Conservative Typical Profile (negotiation) (too hot)(too cold)(Just Right?) Retirement Age: Ret. Income:$100,000$75,000$87,500 Investment Risk:Risk AverseBalanced45%Stock/55%Bond Savings$10,000$25,000$17,500 Estate$1,000,000$0$500,000 Our typical client profile SKIPS identifying what is too hot & cold and if designed “correctly”, puts the client right down the middle of a goldilocks plan

©Copyright Financeware, Inc All rights reserved Building PAGE 23 Aggressive Conservative Typical Profile (negotiation) (too hot)(too cold)(Just Right?) Retirement Age: Ret. Income:$100,000$75,000$87,500 Investment Risk: 30%Stock/70%BondBalanced45%Stock/55%Bond Savings$10,000$25,000$17,500 Estate$1,000,000$0$500,000 First what the client really wants… Is this plan “GOOD”? Many may need to compare it to “current” to tell Doesn’t it depend on the client? It has a high probability of success… Let’s add the “Goldilocks” scenarios…

©Copyright Financeware, Inc All rights reserved Building PAGE 24 Aggressive Conservative Typical Profile (negotiation) (too hot)(too cold)(Just Right?) Retirement Age: Ret. Income:$100,000$75,000$87,500 Investment Risk:30%Stock/70%Bond60%Stock/40%Bond45%Stock/55%Bond Savings$10,000$25,000$17,500 Estate$1,000,000$0$500,000 Next, acceptable compromises Is this plan “GOOD”? Many may need to compare it to “current” to tell Doesn’t it depend on the client? It has a high probability of success… Let’s add the “Goldilocks” scenarios…

©Copyright Financeware, Inc All rights reserved Building PAGE 25 Aggressive Conservative Typical Profile (negotiation) (too hot)(too cold)(Just Right?) Retirement Age: Ret. Income:$100,000$75,000$87,500 Investment Risk:30%Stock/70%Bond60%Stock/40%Bond45%Stock/55%Bond Savings$10,000$25,000$17,500 Estate$1,000,000$0$500,000 And… the results are… Is this plan “GOOD”? Many may need to compare it to “current” to tell Doesn’t it depend on the client? It has a high probability of success… Let’s add the “Goldilocks” scenarios…

©Copyright Financeware, Inc All rights reserved Building PAGE 26 Aggressive Conservative Typical Profile (negotiation) (too hot)(too cold)(Just Right?) Retirement Age: Ret. Income:$100,000$75,000$87,500 Investment Risk:30%Stock/70%Bond60%Stock/40%Bond45%Stock/55%Bond Savings$10,000$25,000$17,500 Estate$1,000,000$0$500,000 But, Is the “Conservative” plan better because the odds are slightly better? Success is 99% vs. 92% Failure is 1% vs. 6% Let’s agree the “Aggressive” plan is not good 41% Success 38% Failure

©Copyright Financeware, Inc All rights reserved Building PAGE 27 Aggressive Conservative Typical Profile (negotiation) (too hot)(too cold)(Just Right?) Retirement Age: Ret. Income:$100,000$75,000$87,500 Investment Risk:30%Stock/70%Bond60%Stock/40%Bond45%Stock/55%Bond Savings$10,000$25,000$17,500 Estate$1,000,000$0$500,000 Or, Is the “Typical” plan better because the odds are high, but so are the goals? (retire earlier, more income, less savings & risk, bigger estate) Success is 99% vs. 92% Failure is 1% vs. 6% Let’s agree the “Aggressive” plan is not good 41% Success 38% Failure

©Copyright Financeware, Inc All rights reserved Building PAGE 28 Goldilocks Plans… too hot & too cold It depends on the client What is important to them Our old solutions may not be the best (like asset allocation & savings) Aggressive Conservative Recommended (too hot)(too cold)(Just Right) Retirement Age:6065? Ret. Income:$100,000$75,000? Investment Risk: 30%Stock/70%Bond60%Stock/40%Bond ? Savings$10,000$25,000? Estate$1,000,000$0? The Conservative Plan Makes Too Many Compromises And Has Too High of a Success Rate (Living Life Based On Remote Disaster- 6 failures out of 1000 tests) What if we only changed Asset Allocation?

©Copyright Financeware, Inc All rights reserved Building PAGE 29 Asset Allocation Alone… Aggressive Conservative Recommended (too hot)(too cold)(Just Right???) Retirement Age: Ret. Income:$100,000$75,000$100,000 Investment Risk: 30%Stock/70%Bond60%Stock/40%Bond 60%Stock/40%Bond Savings$10,000$25,000$10,000 Estate$1,000,000$0$1,000,000 Brings Success Rate to 70%, but Still a 1 in 5 Chance of Failure… What if we changed the savings?

©Copyright Financeware, Inc All rights reserved Building PAGE 30 Increased Savings Hardly Had Any Impact Aggressive Conservative Recommended (too hot)(too cold)(Just Right???) Retirement Age: Ret. Income:$100,000$75,000$100,000 Investment Risk:30%Stock/70%Bond60%Stock/40%Bond 30%Stock/70%Bond Savings$10,000$25,000$25,000 Estate$1,000,000$0$1,000,000

©Copyright Financeware, Inc All rights reserved Building PAGE 31 Retirement Income Has Larger Impact Than Savings Or Asset Allocation Aggressive Conservative Recommended (too hot)(too cold)(Just Right???) Retirement Age: Ret. Income:$100,000$75,000$75,000 Investment Risk:30%Stock/70%Bond60%Stock/40%Bond 30%Stock/70%Bond Savings$10,000$25,000$10,000 Estate$1,000,000$0$1,000,000

©Copyright Financeware, Inc All rights reserved Building PAGE 32 So Does Retirement Age… Aggressive Conservative Recommended (too hot)(too cold)(Just Right???) Retirement Age: Ret. Income:$100,000$75,000$100,000 Investment Risk:30%Stock/70%Bond60%Stock/40%Bond 30%Stock/70%Bond Savings$10,000$25,000$10,000 Estate$1,000,000$0$1,000,000

©Copyright Financeware, Inc All rights reserved Building PAGE 33 So How Do You Build A Plan That Is Just Right? Aggressive Conservative Recommended (too hot)(too cold)(Just Right???) Retirement Age:6065?? Ret. Income:$100,000$75,000?? Investment Risk:30%Stock/70%Bond60%Stock/40%Bond ?? Savings$10,000$25,000?? Estate$1,000,000$0?? ?

©Copyright Financeware, Inc All rights reserved Building PAGE 34 It Depends On The Client’s Priorities… For Example, If Avoiding Risk & Achieving Estate Were Most Important Aggressive Conservative Recommended (too hot)(too cold)(Just Right???) Retirement Age:6065?? Ret. Income:$100,000$75,000?? Investment Risk:30%Stock/70%Bond60%Stock/40%Bond ?? Savings$10,000$25,000?? Estate$1,000,000$0?? ? Priorities

©Copyright Financeware, Inc All rights reserved Building PAGE 35 Aggressive Conservative Recommended (too hot)(too cold)(Just Right???) Retirement Age: Ret. Income:$100,000$75,000$75,000 Investment Risk: 30%Stock/70%Bond60%Stock/40%Bond 30%Stock/70%Bond Savings$10,000$25,000$25,000 Estate$1,000,000$0$1,000,000 It Depends On The Client’s Priorities… For Example, If Avoiding Risk & Achieving Estate Were Most Important

©Copyright Financeware, Inc All rights reserved Building PAGE 36 What If Early Retirement Was The Priority? Aggressive Conservative Recommended (too hot)(too cold)(Just Right???) Retirement Age:6065?? Ret. Income:$100,000$75,000?? Investment Risk:30%Stock/70%Bond60%Stock/40%Bond ?? Savings$10,000$25,000?? Estate$1,000,000$0?? ?

©Copyright Financeware, Inc All rights reserved Building PAGE 37 Aggressive Conservative Recommended (too hot)(too cold)(Just Right???) Retirement Age: Ret. Income:$100,000$75,000$75,000 Investment Risk:30%Stock/70%Bond60%Stock/40%Bond 60%Stock/40%Bond Savings$10,000$25,000$25,000 Estate$1,000,000$0$0 What If Early Retirement Was The Priority? That Can Be Confidently Achieved As Well BUT DON’T FORGET THE WEALTHCARE PREMISES… LIKE AVOIDING UNNECESSARY RISK

©Copyright Financeware, Inc All rights reserved Building PAGE 38 Recommended?Recommended?Recommended? (Just Right???) (Just Right???) (Just Right???) Retirement Age: Ret. Income:$75,000$75,000$75,000 Investment Risk:45%Stock/55%Bond45%Stock/55%Bond60%Stock/40%Bond Savings$10,000$25,000$25,000 Estate$0$0$0 We Should Avoid Unnecessary Compromises or Undue Risk! Is a 1% improvement in the probability really worth the additional RISK or Savings? BUT DON’T FORGET THE WEALTHCARE PREMISES… LIKE AVOIDING UNNECESSARY RISK & UNDUE COMPROMISES TO FINANCIAL LIFESTYLE

©Copyright Financeware, Inc All rights reserved Building PAGE 39 Recommended?Recommended?Recommended? (Just Right???) (Just Right???) (Just Right???) Retirement Age: Ret. Income:$75,000$75,000$80,000 Investment Risk:45%Stock/55%Bond45%Stock/55%Bond 30%Stock/70%Bond Savings$10,000$25,000$10,000 Estate$0$0$0 We Should Avoid Unnecessary Compromises or Undue Risk! These odds are sufficient IF you monitor your progress BUT DON’T FORGET THE WEALTHCARE PREMISES… LIKE AVOIDING UNNECESSARY RISK & UNDUE COMPROMISES TO FINANCIAL LIFESTYLE

©Copyright Financeware, Inc All rights reserved Building PAGE 40 Recommended?Recommended?Recommended?Recommended? (Just Right???) (Just Right???)(Just Right???) (Just Right???) Retirement Age: Ret. Income:$75,000$75,000$80,000 $80,000 Investment Risk: 45%Stock/55%Bond45%Stock/55%Bond 30%Stock/70%Bond Savings$10,000$25,000$10,000 $10,000 Estate$0$0$0 $0 We Can Also Put This Into Perspective By Evaluating Using History… Historically, Only a 1 in 50 Chance of Failure! Expecting a ’29 Crash & Great Depression? BUT DON’T FORGET THE WEALTHCARE PREMISES… LIKE AVOIDING UNNECESSARY RISK & UNDUE COMPROMISES TO FINANCIAL LIFESTYLE Monte CarloHistorical Audit

©Copyright Financeware, Inc All rights reserved Building PAGE 41 The WealthCare Process has everything needed for success… It has the three “D”s of Success: » DIFFERENT than what everyone else does » DISTURBS prospects into action » DYNAMIC with ongoing value as goals, priorities and markets change AND It is easy… save the “current data” gathering until AFTER you have “closed” the prospect (Save the account statements for ACATS forms) Most importantly, it truly helps clients achieve their goals… THIS IS THE FUTURE OF FINANCIAL ADVISING

©Copyright Financeware, Inc All rights reserved Building PAGE 42 Check your premises… Delivering the best advice: The WealthCare Advice Process Is The ONLY Way You Can: Confidently Achieve Clients’ Most Important Goals Without Undue Compromises To Their Financial Lifestyle While Avoiding Unnecessary Risk

©Copyright Financeware, Inc All rights reserved Building PAGE 43 Questions? Visit us at Or, complete these forms to get your own WealthCare Plan: Click here to get the WealthCare Goldilocks client profile Click here to get the WealthCare advisor sign-up form