TOTAL allows investment strategy changes to be reflected in a client’s financial plan at any age thanks to the flexibility provided by the future change tables.
TOTAL is not focused on portfolio management or portfolio evaluation, but rather on projecting the client’s income, expenses, and investment values over time. The current year investment strategy/portfolio mix is reflected in the client’s plan with the asset allocation reports. The asset allocation report is a single year snapshot and the asset allocation does not impact the forward-looking projections*. The asset mix set by selecting asset classes does not drive the investment returns for the projections. Instead, the projections groups the assets based on taxation type: taxable, equity, tax-free, tax-deferred, and retirement plan, and the asset type drives the rate-of-return.
The key is changing the assumed rates-of-return on the client’s investments to reflect the strategy shift. The rates can be changed for each asset type.
For example, here is a set of sample asset mixes from Fidelity Investments.
As the client’s investment strategy changes, the rate-of-return on the investments can be changed to reflect the assumed performance of the new allocation.
Let’s look at an example. The client is 50 with and the client’s assets reflect a growth portfolio strategy. The client’s investment strategy will change at 60, to reflect a balanced portfolio.
The client has investment multiple accounts, some of which are taxable (checking, short-term savings, emergency funds), equity (non-qualified investments geared for retirement) and retirement plans (401(k), IRA, Roth IRAs). With the assets entered and rates-of-return assigned, we can see the portfolio is set to earn a weighted average return of 8.78% for the projection.
Reflect changing investment strategy at age 60 by making changes to the rate-of-return. Lowering the return reflects the changing asset mix as the client moves from a growth portfolio to balanced portfolio. In this example, the projection included a weighted average return on the client’s assets of 8.78%. With the asset mix changing, the rate-of-return changes to reflect the projected portfolio return, which we will say is 7.91% based on the average return of the sample balanced portfolio included above.
Go to Assets and the Rate Changes tab. For each asset type, set the new rate-of-return using a future change entry. In this example, the client’s taxable asset rate would remain unchanged, while the rate-of-return for equity and retirement plan investments would reduce at age 60.
The projections now show the rate-of-return changing for each asset type, reflecting the change in investment strategy.
Additional changes to investment strategy can be reflected by adding future change adjustments in the rates section. If this client’s investment strategy was planned to change to a conservative asset mix at 70, we would simply add a new future change entry under rates for age 70 with the revised rate-of-return.
*It is possible to assign rates-of-return based on asset class assignment in TOTAL. The asset class will impact the asset projections due to the rate-of-return assigned to the asset. The projection would be the same if the corresponding rate was manually entered without assigning an asset class.