With cashflow planning, advice firms can demonstrate they are delivering the better outcomes for their clients required under the incoming Consumer Duty rules, says Richard Phillips, Network Development Director, ValidPath.
Those working in the financial advice industry consider cashflow forecasting or modelling as an important tool in the advice process. It provides clients with a visual representation of their financial situation, allowing them to make decisions about their future and showing them how long their money will last in various scenarios. With the introduction of Consumer Duty in July, firms will be required to act in their customer’s best interests, ensure that products and services are suitable for their needs, and communicate clearly and effectively with their clients. Cashflow planning is an effective way for firms to show that they are providing suitable advice and products for their clients.
One of the key requirements under the new Consumer Duty rules is that firms must put their customer’s needs first and act to deliver good outcomes for them. By using lifetime cashflow planning tools, advisers can create a detailed projection of their client’s financial situation over the long term, considering factors such as income, assets and liabilities. This can help advisers identify potential shortfalls or risks in their client’s financial plans and recommend appropriate products or strategies to address these issues. In addition, lifetime cashflow forecasting can provide a clear record of the advice given by the adviser and the rationale behind any product recommendations, which can help firms to demonstrate compliance with the new Consumer Duty rules and provide evidence to the FCA.
The use of technology in cashflow planning has dramatically improved the speed, accuracy and efficiency of the process. Long gone are the days of using “crudely edited spreadsheets” or doing sums on “the back of an envelope”, which can lead to errors and have serious consequences for their clients and themselves. Modern cashflow planning solutions provide standardised reports based on scientific calculations and proven working assumptions, all of which can help minimise the risks of errors. Using a cashflow planning solution can also provide a more comprehensive and detailed analysis of a client’s financial situation, taking into account a wide range of factors, such as inflation, interest rates, and market performance, all of which provide a more accurate projection of the client’s situation.
The primary purpose of cashflow planning is to help clients understand their financial situation and plans for the future. By projecting their future income and expenses, inflation, investment returns, and life expectancy, advisers can help clients answer important questions such as whether “Can I afford to retire?”, “Will I be ok in retirement?” or “how much do I need to save now to achieve my financial goals?”. Running the forecast to age 99 or beyond is a common practice because it considers the possibility of clients living longer than expected. This can help clients plan for a longer retirement, provide them with “peace of mind”, and ensure that they have enough money to meet their needs, the ability to do what they like, perhaps travel or even needing care.
By visually representing the client’s financial future, cashflow planning can help clients understand the impact of their financial decisions, answer the “what if?” questions, make informed choices and feel more in control of their finances. It can also help advisers identify potential problems before they occur and take appropriate actions to mitigate them. Overall, lifetime cashflow planning is an essential tool for any adviser who wants to provide holistic financial advice to their clients.
Cashflow planning is a tool that can help advisers objectively deal with key areas of financial planning, such as retirement planning, estate planning, and investment planning. The calculations can be automated using the software by inputting information relating to their income, expenses, assets, and liabilities.
Cashflow planning is not a one-time analysis but an ongoing process that should be revisited regularly. It can be beneficial when a client reaches key milestones in life, such as retirement or purchasing that “around the world cruise”.
While there are certain situations where cashflow forecasting might not be necessary or appropriate, such as when advising or protection policies or a mortgage/ remortgage, in these cases, other tools and methods might be more suitable, but for other areas, such as Defined Benefit Pension Transfers or Decumulation advice cashflow planning can be an indispensable tool for both advisers and the client.
While cashflow planning has not always been used, the FCA, in PS18/6, has made it clear that Defined Benefit Pension Transfers should only be advised upon after considering whether it is suitable for the client and that cashflow planning is a crucial component in that assessment. With the new Consumer Duty rules being introduced, we will likely see an increase in the use of cashflow planning across the industry – which can only be a good thing for everybody.
