The Role of Ratios in the Financial Planning Experience

I’ve never understood why financial ratios are not front and center in all financial planning software. From the very beginning of my career, I could easily see that ratios are foundational. They’re 101-level content for anyone pursuing designations like the CFP®. Ratios provide the first lens through which you understand a financial situation. And yet, when planning software started gaining traction in the 1990s, ratios never really took off. That surprised me then and it still does now.

Why did this happen? I think the industry’s mindset was that once we had advanced planning software, we didn’t need to rely on what some considered “rule of thumb” guidelines. Software could project thousands of scenarios, calculate probabilities of success, and give advisors and clients the comfort or illusion of precision. But in doing so, we moved away from some of the most accessible and meaningful diagnostics available.

The Ratios We Use Today, And Their Limits

If you’ve ever used financial planning software, you’ll know that most of it still revolves around just a couple of ratios. The most common one is what we at PlanTechHub call the Funding Rate, the proportion of financial needs that are met by the plan. Every software platform has its own term for this, but it’s the same concept. Another is Monte Carlo or Probability of Success, which is essentially a ratio of successful scenarios divided into the total number of scenarios run.

Don’t get me wrong. These two ratios are useful. They help summarize the state of a financial plan in broad strokes. But they don’t tell the whole story. They lack the depth and diagnostic power that a broader set of ratios can bring to the table.

Ratios as Diagnostics

One of the most exciting aspects of ratios is that they allow advisors to begin their services with a bang. Imagine meeting a client for the first time and being able to provide a diagnostic snapshot of their financial health based on familiar, intuitive measures. Instead of diving straight into advice or abstract probabilities, you can start by showing them how they measure up today.

Think about it this way. Most financial plans focus so much on future recommendations that they skip over the opportunity to analyze the current plan in depth. Ratios give us that chance. They let us dive into debt, income, liquidity, and investments in a way that is both approachable and impactful.

The key is to present a wide array of ratios, at least one will resonate with the client. When that happens, you’ve made the planning process personal. You’ve hit on something that matters to them.

Examples of Ratios That Matter

Take the Interest Coverage Ratio, for example. This one looks at debt, a subject that is on almost everyone’s mind. Traditional financial planning software doesn’t really tackle debt beyond cash flow projections. But with ratios like Interest Coverage, you can provide meaningful analysis that helps clients understand whether their debt load is sustainable.

Or consider the Emergency Fund Ratio, usually measured in months of living expenses. Clients instantly understand this one. It’s intuitive. They can visualize three months of expenses, or six, or nine. They get what that means for their security.

On the other hand, ratios like the Solvency Ratio, a broader measure of liquidity might require some guidance from an advisor. But that’s where the value of advice comes in. Ratios create teachable moments, opportunities for professionals to deepen the client’s understanding.

When it comes to investments, clients are used to hearing about portfolio returns and standard deviation. But why stop there? What about the Inflation Protection Ratio? Hardly anyone is showing these metrics to clients, yet inflation is one of the biggest risks to long-term financial success.

Where I Believe We’re Headed

I believe we’re on the cusp of significant advancements in how ratios are applied to the financial planning experience. I know this because it’s exactly what we’re working on at PlanTechHub.

Here’s what I envision:

• Full Ratio Analysis Over Time: Imagine being able to calculate a broad set of ratios for every year of a plan. You wouldn’t just see a snapshot, you’d see the evolution of financial health across decades. PlanTechHub does this today.
• Age Benchmarking: Several academics have already done the work of identifying ratio benchmarks by age. If we can apply those benchmarks directly in planning software, clients would know not only their number, but whether it’s appropriate for their stage in life. This is what we’re researching today.
• Heat Mapping Results: This is where it gets really exciting. Imagine viewing an entire plan, all ratios included, on one page. With heat mapping, you could scan the page in seconds and instantly know where the strengths and weaknesses lie. This is PlanTechHubs plan for tomorrow.

Why This Matters

Ratios are powerful because they connect abstract financial concepts to the real-life experiences of clients. They’re intuitive. They’re relatable. They allow clients to see themselves in the numbers. And they give advisors a way to build trust and credibility right from the start.

I often think about how planning software evolved without ratios at the center. We gained sophisticated tools, but we lost some of the accessibility and immediacy that ratios provide. Bringing ratios back into the forefront is not about going backward, it’s about enriching the planning experience for the future.

At PlanTechHub, that’s exactly what we’re working toward. And I can’t wait to show you what’s next.

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