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Alistair Cunningham: Cashflow tools are not all they’re cut out to be

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



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There are 6 comments at the moment, we would love to hear your opinion too.

  1. Well put. Personally I don’t really understand why advisers are so ready to spend money on this software. Cash flow can be easily worked on and XL spreadsheet.

    Before those come back talking about lifetime cash flow I am inclined to say that this is nonsense and seems to be just a way of justifying fees. Cash flow for 5 years is about as useful as it gets. Regular monitoring thereafter. There are just too many assumptions that have to be made and as the old saying goes ‘Assume’ makes an ass out of you and me.

    • I think it’s best to keep an open mind about these things. Like all tools it’s the user as much as the tool that counts. As Alistair has pointed out some of the tools contain problems but I suspect this makes them no worse than some users

      If a lifetime cash flow forecast isn’t worth considering past 5 years then the same can be said of every long term illustration issued in the last 30!!

      At least with cash flow forecasts they can be reviewed each year and adjusted accordingly

  2. I recall a client who needed to give cashflow forecasts to his bank as a condition of lending. His lead time for orders was only around 3 weeks and there were many repeat orders but no ongoing contracts.

    I asked him how he completed it so well every time. He told me “well, I take last year’s cashflow and add on the price increase I delivered this year on every month’s invoices and then add a little for bill increases/and the pay rises I gave on a guesstimate basis”.

    The bank manager was always very happy and approved his facilities.

    Cashflow has limited uses once the figures are over say 5 years. To imagine that you can predict to two decimal places what your income and expenditure will be in 25 years time is fanciful. By the way this can also be applied to Brexit predictions, both for and against.

    It provides a sense test only and will be of benefit to prove that all things being equal it may achieve what you expect, not that it will.

    • @Paul Howorth

      Good points. I too recall my bank manager asking for cash flow forecasts when I was in manufacturing. My response was ” What work of fiction would you prefer?” He tended to agree saying that many were as fictional as Charles Dickens’ novels.

      I always wondered why Prestwood doesn’t put the cost of their software on their website. After all they are keen on lifetime (and beyond?) cash flow planning. I wonder if the software comes complete with a crystal ball?

      • Harry a Prestwood licence which is back office and cashflow planning costs about £300 plus VAT pm. Each extra licence costs an extra £100pm.
        I find it well worth paying as it’s much more useful than just an excel spreadsheet.
        I don’t use the lifeetime cashflow sotware with everyone as it isn’t of use or interest for some people, BUT as a method of storing all client contact and recording fees charged per client etc, it is a very useful tool. It also helps when ti comes to 6 monthly Gabriel reports.
        It does a hell of a lot more than I actually use it for and the limitations are my time in getting better ar using it.

  3. Cashflow planning a tool. And like any tool some tools better than others but ultimately the real value that they add is determined by the user.

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