There’s no doubt the most important part of a financial plan is the lifetime cashflow; also known as cashflow modelling.
Now, the use of cashflow modelling software is coming to the fore. About time, too. How else can you show clients where they are heading financially? How else can you make sense of the long-term effect of financial decisions made today? How else can you demonstrate the effect of your recommendations? It seems the FCA agrees, too.
If you want to deliver true financial planning in line with the certified financial planner process, lifetime cashflow projections must become a central part of your service for each and every client.
Done right with the right tools it will save loads of time. It will clarify your advice and clearly demonstrate the effects of your recommendations in a compelling and engaging way. And it will also increase your skills and boost your confidence. Quite simply, it will change the way you look after clients forever.
It will show them the information they need to know most. Can they continue to live a good life without running out of money or dying with too much? Can they do more, give more, live more? Clients find this immensely valuable – far more than “this fund is better than that fund”.
And happy clients mean more referrals, so you should also see profits rise dramatically.
Cashflow modelling is incredibly powerful in the right hands. But the trouble is, it is extremely dangerous in the wrong hands. With this in mind, it is essential to devote time to learning about and understanding cashflow modelling forecasts, including the financial assumptions being made.
With more than 25 years experience of successfully using cashflow modelling software, through good economic times and bad, I know the freedom and peace of mind it can deliver to clients.
But since I have been training advisers, I have identified seven huge mistakes they make when trying to incorporate it into their service proposition. Some of these mistakes could get them sued.
Here are the seven deadly sins:
- Using cashflow modelling as a one-off exercise;
- Using over-optimistic assumptions;
- Not including enough detail and treating all assets the same;
- Bending the software to fix clients’ problems;
- Not making clients responsible for their own assumptions;
- Showing clients the lifetime cashflow before they understand what makes up the plan;
- Trying to sell cashflow modelling as a service.
It is not rocket science. Yet I see these easily avoided mistakes made over and over again.
Let’s take a look at the biggest of them all: treating cashflow modelling as a one-off exercise. Perhaps this is to justify a product sale or investment or – dare I say it – a defined benefit transfer.
Any adviser doing this should be shot. It is better not to do a cashflow modelling exercise at all if you are not prepared to constantly revisit and update it each and every year.
Because things change. Clients could make serious decisions and take action (or, worse, not take action) because of what they learn from a one-off cashflow modelling exercise. Remember: a financial plan is always a draft financial plan. It is always a work in progress.
The reality is that any financial plan incorporating cashflow modelling will be wrong. That is right: wrong. What makes it work, though, is doing it every year. Year in. Year out.
One of the best ways to explain this to clients is using the analogy of an aeroplane taking off from London Heathrow bound for New York. The aircraft will set off in the right direction but it will be off course 95 per cent of the time due to the constantly changing air currents.
Any financial plan incorporating cashflow modelling will be wrong. Doing it year in year out is what makes it work
The only reason it ends up in New York and not Zimbabwe is the autopilot constantly pulling it back on course.
It is the same with the sat-nav in your car. If you take a wrong turn, it will adjust the route constantly and inform you to make changes in order to get you to where you want to go. Imagine these examples if the course was just set once, never to be checked or adjusted again.
With the help of decent cashflow modelling software, you are your clients’ financial positioning system.
So, how do you conduct these conversations year in, year out? Not in a boring review meeting but in an engaging forward planning meeting. Speaking from experience, it is the repetition that makes it work. Clients love it – when it is done right.
And crucially, this is what helps you to demonstrate and deliver your consistent financial planning service in return for your ongoing fees. Each year re-engaging your client with their life and their lifestyle, and identifying what needs to happen for them to stay on course. Constantly reassuring them they can continue to live a good life, enjoying their desired lifestyle without fear of running out of money or dying with too much.
As we all know, you cannot go to the gym once and be fit for life. You have to keep going. It is the same with financial planning. The best fund will not change a client’s life but proper financial planning most definitely will.
Paul Armson is founder and chief executive of Inspiring Advisers