This Small Business Innovation Research Phase I project aims to develop a financial expert system that considers the totality of a household's current and projected financial situation (income, taxes, expenses, assets, liabilities, financing options) to automatically create a highly personalized multi-period savings and spending plan designed to achieve the household's financial goals. The proposed research is innovative in two fundamental ways: it takes a holistic view of financial planning and explicitly addresses market uncertainty and the risk of households falling short of reaching their goals. Based on state-of-the art mathematical programming techniques and in particular recent advances in robust optimization, the proposed system will make the appropriate use of special tax treatment of different accounts, recommend new accounts to open based on the client's unique needs over time, fund them and use them for distributions, and finally determine robust asset allocation solutions across all accounts. The resulting tool with its actionable comprehensive plan will represent a substantial improvement over the current state of the art which consists of illustrative calculators that do not propose strategies but merely project the potential outcomes from plans supplied by the user, and tools which solve one aspect of the interconnected planning problem in isolation.
The broader impact/commercial potential of this project is to develop an empowering and educational tool that can be marketed to households through their employers or their financial service institutions. The proposed technology will be able to serve a wide range of economic and age demographics strengthening their financial future. Users will be able to apply the tool throughout their life: from wealth accumulation years, to the years of achieving home-ownership and funding education, and into retirement when they will create a retirement paycheck. There is no such tool in the market today and the need is urgent. Recent surveys show that retirement confidence has plateaued at the lowest level in two decades, and less than half of parents who expect their kids to go to college can fund their education. A well designed and executed personal financial planning tool can enable people to see the long-term effects of increased savings, and better evaluate the trade-offs between different goals that occur during their life so that they stay in the path to success. In the long term, it can lead to a population who is better prepared to deal with financial complexities and as a result more confident in its future.
In this Small Business Innovation Research Phase I, we developed a financial expert system that considers the totality of a household's current and projected financial situation (income, taxes, expenses, assets, liabilities, financing options) to automatically create a highly personalized multi-period savings and spending plan designed to achieve the household's financial goals under market uncertainty. Today, more than ever before, people are required to take personal responsibility for their finances, investments and selection among a proliferation of financial products and services. There exists a wide gap between these complex financial products and the information, tools and knowledge people need to make the best financial choices. Indeed, most clients are only exposed to basic, often product-related, information. Through this research project, we developed a system that makes it easier for customers to access financial advice, more efficient for financial institutions to deliver investment and financial products and, most importantly, creates an advice process that customers can trust. Our actionable advice provides guidance to clients at all different points in their life and answers a plethora of questions including, (i) how to save for college and how to pay for college, (ii) when to replace a car, (ii) if and when to covert to a Roth-IRA, (iv) if and when to spend from an Health Savings Account, (v) when and how much to finance, and (vi) when to retire and when to start taking Social Security in order to be able to cover their retirement expenses. Its unique capabilities make our system an ideal solution to pre-retirees as they chart their retirement years and to retirees who need assistance in creating the retirement income paycheck. Our innovative technology offers unique capabilities in Plan/Proposal generation, creating comprehensive holistic plans for a lifetime of goal spending, investing and account utilization Household Allocation/Rebalancing, generating household and account-level diversifications that balance overall portfolio allocation and risks Tax optimization and management, minimizing impact of tax payments over lifetime by solving through an annual tax filing Money Movement, managing transfers between accounts to achieve optimal allocation Income Distribution, managing withdrawals across accounts in tax optimal way Household Reporting, providing full view across custodians in context of goals Given the complexity of the problem we are solving we had to create a highly sophisticated core engine, which is powered by big-data analytics and advanced optimization techniques, in particular robust optimization. We built upon our team’s extensive academic credentials and multi-decades industry experience, to create for our clients a customized strategy that is informed and adaptive to different realizations of market uncertainty, therefore addressing the inflation and asset allocation risk. Moreover, we developed an independent simulator to stress-test our proposed actions under normal as well as extreme market scenarios, to help the clients better understand the impact of market uncertainty to their success in meeting their goals. In the next release, the system will incorporate life uncertainty by addressing longevity risk and the survivorship problem, therefore integrating financial planning, investment management and estate planning. As a result, our fully developed financial expert system will be able to take advantage of the various tax treatments that different accounts receive, of the investment as well as estate planning possibilities provided by annuities and life insurance products, and finally of the leading role that health care savings accounts and long-term care insurance policies can play in an environment of increased health care costs. Moreover, it will generate a proposed strategy that will be robust and adaptive to different realizations of market return and life expectancy scenarios. The technology has a wide range of real world applications for both consumers and Financial Institutions. We have started working with partner financial services firms who are seeking to improve efficiencies in operations and profitability, to attract and retain more clients and to enhance the quality and reliability of product placements. With our technology, partner firms are able to deliver customized high-quality advice and products consistently across the entire client base with greater transparency and lower costs. For clients, the system provides access to unbiased, personalized, fiduciary advice resulting in them being empowered and confident about achieving their financial goals. "MoneySavvi quickly and accurately formulates a complete financial strategy that recommends where clients' existing assets should be held, saved, invested and spent over a client’s lifetime." -Dr. Dimitris Bertsimas Professor of Operations Research at MIT Founder Dynamic Ideas, LLC
