| Modelling the ability of your current and future assets to meet your present and future financial needs and objectives over time is a primary function of any wealth manager. The objective of modelling should not be to forecast how much capital you will have at a certain point in the future, but to assess the ability of your assets to meet your needs and objectives irrespective of stock market and economic risk. This means the return assumptions used should already have been hit with stock market crashes and recessions as well as risks of higher inflation. What this means, is that irrespective of stock market crashes and recessions, the ability of your assets to meet your financial needs should not be affected by risk. In fact, even during long periods of stock market declines you should be able to increase your financial needs in line with inflation. A precursor to effective modelling and planning is a portfolio structure which is able to manage risks and your financial needs. The problem with most industry modelling is that it is not actually backed up by a portfolio capable of managing short terms risk. The second major problem is that quite often the return assumptions used do not reflect the risks of the stock market and economic cycle.  At the top of the last bull market in 2000 many industry standard assumptions were strongly positive going forward. In fact, the return assumptions should have been strongly negative. This is a common feature of many standard retail wealth management software and is a key reason why many individuals’ financial security is adversely affected during stock market downturns. Expertise needed to model the long term returns of assets over time includes the ability to value both the economic and the stock market cycle. Analysis of the variability of past returns should not be relied upon as a guide to future returns. A great deal of academic research is focussed on this particular area, although this is almost entirely focussed on institutional pension fund management. The major weakness as far as the asset management industry is concerned is its inability to seriously consider the risks to the ability of assets to meet future financial needs. For asset managers there is little personal consequence from getting the forecast returns incorrect. While financial planners often have significant expertise in the use of compound interest calculations, most financial planning modelling is not backed up by the necessary portfolio structure and asset management expertise. One insight into the industry is this. Asset managers tend to view the long term investment planning as a financial planner or investment advisor function. TAMRIS has significant expertise in this particular area and has wide knowledge of industry techniques form the basic to the most advanced techniques currently used in institutional asset liability management. Please see Asset Liability Modelling in the technical section for further information on modelling and return assumption generation.
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