Dynamic Planner’s Willcox welcomes FCA’s cashflow guidance

1 April 2024

Dynamic Planner has welcomed the FCA’s review on improving advice firms’ use of cashflow modelling.

Following concern about how firms prepare and use cash flow modelling, the City watchdog has offered a review of usage and guidance into how to improve quality.

In its review, the FCA has outlined five key findings, after warning firms that harm can be caused to clients if advisers do not consider how clients will interpret the output of cashflow modelling; project forward using returns that are unjustified and don’t result in realistic outcomes; and do not consider the inputs and outputs objectively.

Dynamic Planner’s head actuary Steph Willcox said advice firms using its Cash Flow option could be confident that it meets the FCA’s five findings.

The first finding is firms relying on information without considering accuracy, with the FCA concerned that advisers are using out of data information. Dynamic Planner uses a one-system approach with “Client Access”, where advisers are free to challenge anything that seems unusual or incorrect, enabling conversations on life phases, monetary values, goals and time frames.

Secondly, the FCA said firms must use justifiable rates of return, adding that simply repeating specific patterns of past returns is not appropriate.

To overcome this, Dynamic Planner has adopted a forward-looking asset risk model providing expectations of real return and volatility for 72 underlying asset classes. It uses the firm’s stochastic Monte Carlo forecaster, which uses monthly projections over thousands of runs to generate a wide range of results and presented from the 5th percentile to the 95th to ensure clients are aware of the results they might achieve.

The FCA has also called upon firms to plan for uncertainty, after its findings revealed that cash flow planning can be misleading for clients when it is poorly explained to them. Dynamic Planner said that it only uses real figures in its cash flow modelling so that clients can understand the purchasing power of their investments at every point in time.

Consumer understanding has also formed part of the FCA’s review, particularly in the wake of Consumer Duty, and it is keen to ensure that all communications received from an adviser are consistent. In response, Dynamic Planner said it uses consistent projections with ‘one definition of risk’ to avoid confusion.

Finally, the FCA has urged firms to consider the output. This means ensuring that advisers are reviewing the information they are about to provide to check it’s appropriate and based on suitable assumptions. Dynamic Planner said it was “encouraged” to see the FCA’s desired approach to cash flow modelling mirror its own, as its cash flow report shows all outputs from the base scenario, including a focused section on how long the client’s portfolio will last.

Willcox adds: “Dynamic Planner Cash Flow is a quick and efficient way to bring a client’s finances to life.  Our stochastic Monte Carlo forecaster projects thousands of runs monthly, to reflect the way that clients spend their money and to ensure that sequencing of returns risk is adequately captured for higher risk investments. Advisers who use Dynamic Planner can feel confident they have a solution for their clients which meets the FCA’s requirements of quality cash flow modelling.”

Professional Paraplanner