Steph Willcox, head of Actuarial Implementation, Dynamic Planner provides five key points to help get the best out of cashflow planning for clients.
Cashflow planning plays an important role in financial advice. It can be used to help demonstrate the value for money of financial advice, to educate the end client on the possible outcomes, or to give a holistic view of the client and their financial life plan in order to make better choices today about what to do with their money.
To get the most out of your cashflow planning you need to understand what conversations the adviser will be having, and therefore the scenarios that might be of interest for the adviser and client.
I’ve worked in cashflow modelling for over 15 years, with a focus on individual modelling for advised clients for eight, and while I’ve observed a myriad of approaches, these five key points will help get the best out of cashflow planning for clients:
1. Understand the modelling
Cashflow planning can be as simple or complex as you need it to be, but you need to understand what your cashflow modelling solution should and should not be used for.
We need to know where our solution can be used to give advice and where a different tool would be more appropriate, to add value to the financial advice process, not complicate it. It will be important to ensure that not only do you understand these limitations, but that the adviser and client do too, and that any reporting covers these uses and caveats thoroughly.
2. Collect the right data
Cashflow modelling is built on data, so we need to be careful about the data we are collecting and ensure we’re sense checking what we have been given rather than trusting it implicitly.
Naturally, we need to collect information on current levels of incomes and expenditures, as well as any anticipated changes, which may be due to personal situations or the financial environment. This should not just be taken from a client’s bank statement without consultation and should be representative of the client’s current lifestyle.
We also need to capture all of the clients’ investment, savings and debt products, including those not under advice to give a holistic view of the client’s finances.
3. Make realistic assumptions
Some cashflow solutions will have their assumptions in-built and so little input is required from the paraplanner or adviser, but even if you are not inputting investment returns assumptions there is a lot still in your control.
We need to make assumptions about how long someone will remain in employment, how much their income and expenditure is likely to increase each year, even what their spending might look like many years into the future. Whilst we’d like to be able to use the client’s own goals some of this may simply be so far away as to not be considered.
The retirement standards from PLSA may be appropriate to use where you have no other retirement objectives available.
4. Create alternative plans
The real value of cashflow modelling comes when demonstrating how the client’s financial journey could look if they took different action today. Most often by showing how their surplus funds could be put to better use, or what delaying retirement by a few years could do to their retirement pot.
The alternative plans you produce need to be relevant to the client so it might be worth considering the target market your client falls into as they are likely to want to see similar alternative plans.
5. Demonstrate the value of advice
Cashflow is also the ideal place to demonstrate how taking financial advice can improve a client’s financial position.
By modelling assets under management as well as those not, you can quickly demonstrate the outcomes you can create by taking over more assets, and the value you can add to your client’s investments.
Similarly, it may be that you want to show the power of investing against holding funds as cash, or of taking more risk earlier on in your clients lifetime where the time horizon is so long that more risky investments can be tolerated.