There is no doubt software tools have improved our efficiency as advisers. But are we over-reliant on these tools and are they fit for the job?
Despite protestations from manufacturers of robo-advice platforms, software does not give advice. It requires a human to translate the output of the tool. Indeed, that same human is uniquely positioned to decide if the tool is the right one for the job.
It is some years since the FCA published its views on risk profiling systems and, while I have seen significant improvement in how they are implemented, I do not believe there is any one perfect system, meaning we must augment off-the-shelf systems to generate sensible results.
I am amazed that many mainstream tools have glaring errors that frequently go unfixed, or at least take a significant amount of time to resolve. This leads to a conclusion that many users are either unaware of the errors or do not care about them.
My weak defence is that I am often too busy to report them or I find workarounds. But can this be the case for everyone?
I am not aware of any final salary transfer value analysis system that handles the lifetime allowance well. One mainstream cashflow planning tool used the wrong level of pensions annual allowance for the best part of a year, while another calculated self-employed National Insurance as zero.
Even HM Revenue & Customs’ carry-forward calculator was generating incorrect results for well over a year.
As a solution (or at least a workaround) I resort to ugly spreadsheets. The benefit of this approach is often that a spreadsheet is more transparent and I can identify any errors more quickly. As we cannot access the third-party tools’ code in most cases, we cannot see the source of these issues.
Cashflow planning tools are invariably an excellent way to help clients to visualise long-term forecasts of their financial position, but they have their limitations. That some use them to work out lifetime allowance charges, pension allowances or other complex calculations is a concern. Even as an estimation of the future, they are extremely limited. And I think this is lost on some of their users.
Where a financial plan discounts by an assumed level of inflation to three significant figures, or breaks down an individual’s expenses into dozens of lines of entries as microscopic as their annual MoT cost, this does not improve the accuracy of the plan. It just makes it more complicated.
A common defence offered to any criticism of a lack of awareness of how tools work is that a car driver does not need to understand how their car works. I can accept this to a degree but if a car gets a driver from A to B without a hitch then the car has served its purpose. If it broke down on the way, the driver would need to get the car fixed. But many of the tools we use do ‘break down’ at certain points — and often without us realising, due to their complexity.
The adage goes that a bad workman blames his tools. When complex software solutions are used, a good workman may not blame his tools but the best workmen will actively look for issues and seek to fix or work around them.
Maybe not as catchy, but a truism where advice is involved.
Alistair Cunningham is director of Wingate Financial Planning