I recently came across a LinkedIn post written by a thoughtful advisor who was proud that his client's Monte Carlo score had held steady at 99 despite the down market. The planner received nearly unanimous kudos from colleagues who lauded him for creating a plan that is withstanding this uniquely negative market.
My post diverged from the others. I wrote: "Your client is not dreaming big enough."
A Monte Carlo score is the product of a Monte Carlo analysis, which is meant to predict a client's chances of success in retirement. To calculate that probability, the software runs the advisor's current financial plan, including assets and spending and savings assumptions, against thousands of various potential market performances. The score represents the percentage of time that the plan "works" — defined as whether the investor will outlive their savings.
So it follows that the higher the Monte Carlo score, the better the plan — at least that is the common assumption among planners.
But let's dig a little deeper. If my goal as an advisor is to maximize the client's score, I can materially reduce the asset accumulation target, which will in turn reduce spending guidelines and thereby dramatically bump up the score. Easy.
But the real value of a Monte Carlo score lies in its ability to shed light on the one threshold question every plan should answer: Will the client be OK? That question raises two additional ones: what is the purpose of a financial plan and is a 99 score always inherently better then, say, an 85?
For some advisors, a plan is the output of whatever planning software they are using. But a quality plan should be a distillation of the client's past, present and projected future actions and of their values and goals. If the score does not reflect the critical assumptions that went into making the plan, it won't accurately point the path forward.
And even if agreed-upon goals make it into the mix, it's on the assumption that clients are sure of them when, really, most of our goals fall somewhere between inaccurate and incomplete. Goals can be ephemeral, emanating as they do from values with emotional resonances like independence, family, education, experience or impact, and will ideally lead to positive emotional experiences like happiness, success, fulfillment and the elimination of fear.
Higher ground
But here's the rub: human beings are terrible at emotional self-reflection, which makes them terrible at defining values and therefore terrible at crafting goals.
Therefore, a skilled advisor should not only guide clients to a clear definition of their values and goals, but factor in and even encourage the evolution of such benchmarks. If, as is almost always the case, the client's goals constitute a starting rather than an ending point, an almost perfect Monte Carlo precludes the possibility of a bigger dream.
For instance, if a client's plan grows to include making gifts to extended family and funding charitable passions, their Monte Carlo score could fall from 99 to 85 as it addresses core goals of making a greater impact. For more aspirational clients, that very high but not locked-in chance of success will, in and of itself, be enough to inspire them to "purchase" additional goals. For more conservative clients, strict execution of a plan rather than evolving goals will determine success, which may well be represented by an almost perfect score.
Regardless of temperament, a well-advised client's spending and planning horizon will be long enough to liquidate investments when the markets are positive and, when the markets are negative, not have to liquidate to support spending. Likewise, a well-advised client will spend for luxuries, experiences and philanthropy in stronger markets and cut back those expenses in weaker markets. Monte Carlo does not traffic in such expense-timing assumptions.
Simply put, a high Monte Carlo score is critical information. It removes fear, but it also creates possibility. It is a means that helps inform our ends. But the number should never be a goal, and higher is not always better.
