Advisers remain divided on the benefits of cashflow modelling as the eyes of the public, and the regulator, turn to sustainable retirement.
Since the arrival of pension freedoms people have been facing the prospect that their money might run out before they die.
Their lives are complex. Divorce among the over-60s is rising and people are retiring with more debt. At the same time, the range of financial products is expanding. All this is making retirement decisions more challenging.
Yet just under four in 10 advisers use cashflow planning for at least three-quarters of their retirement clients, latest surveys show. A greater number, 43 per cent, use it for less than a quarter of those clients — or none at all.
KPMG pensions partner David Fairs notes that, as cash demands can now vary significantly through the stages of retirement, accurate cashflow has taken on a greater importance.
For some advisers, cashflow planning has become indispensable. Carl-son Financial Management man-aging director Steve Carlson says his choice of tool, Voyant, is “absolutely integral” to the firm.
He says: “Financial advice without the use of cashflow modelling tools is completely meaningless.
“Clients want to know simple things like when they can afford to retire and what they can afford. Just ‘managing’ their pensions and inv-estments does not answer those questions.
“Only by using cashflow modelling tools and taking a broad and detailed view of a client’s entire financial situation can you hope to come close to answering those questions.”
Red Circle Financial Planning dir-ector Darren Cooke adds: “Any adv-iser not using cashflow analysis is asking for trouble, to put it mildly.”
Carlson, however, thinks tools should still be treated with caution.
“Long-term assumptions for things like inflation and growth rates need to prudent and evidence based, otherwise there is a high likelihood that the plan will fail.”
Eldon Financial Planners adviser Jon Bean agrees: “Lifetime cashflow modelling, whichever software you use, brings together much of the information we use, projects into the future, and allows us to undertake more holistic planning. It does, however, augment, not replace, well-thought-out financial planning.”
Some critics, however, have seen cashflow illustrations more as marketing tools that were used to impress clients, or employed poorly by advisers.
Financial advice without the use of cashflow modelling tools is completely meaningless
Carlson admits he has seen IFAs using simpler tools, or those with excessive growth rates, which give clients a falsely optimistic impression about their retirement.
Penney Ruddy & Winter financial planner David Penney uses Voyant as well, but recognises that “some IFAs are over-reliant on cashflow analysis, which can be dangerous”.
Wingate financial planner Alistair Cunningham says the tools are useful but in the wrong hands can be very unsafe because they can give a false sense of confidence.
He compares them to a weather forecast: “If there is a 20 per cent chance of rain, should you take your umbrella?”
Carlson says: “These systems aren’t perfect because they are based on various assumptions such as growth, inflation and tax rates, all of which are subject to change. No one knows for certain what these numbers will be in the future, which is why you can’t just do a one-off plan today, leave it and come back in 10 or 20 years and expect it to be on track.
“These plans need to be monitored and adjusted regularly for major change — although a spike in inflation for a few years is going to make very little difference to the overall plan, and if you have been prudent in your planning then you will have already factored in such spikes and market downturns.”
For Bean, a cashflow tool “will never replace a conversation with an experienced and well-qualified financial planner”.
He adds: “What it does do, however, is allow a picture to replace a thousand words. We feel that anything that enhances client understanding of what we do, and more importantly why we do it, should be welcomed.”
Bean says his firm has learned from past mistakes, where it allowed a few clients to input their own data into the models without necessarily understanding the technical issues involved.
Another common criticism concerns whether the models are any use in a disaster scenario, for example, a stockmarket crash or hyperinflation.
Some new entrants are trying to develop alternative tools to either improve the modelling or offer something different from existing providers. Finalytiq director Abraham Okusanya, for example, has recent launched an app to help advisers calculate sustainable drawdown rates.
For existing cashflow models, he thinks coping with disaster scenarios is a key weakness.
He says: “Cashflow modellers are what they are. Their primary use is for inflows and outflows. Their fundamental flaw is that they can’t cope with unexpected stockmarket crashes and spikes in inflation.”
Bean says: “Any simulation is just that and I think that using a tool such as Voyant helps to convey our understanding of the mechanics of such a correction but is no substi-tute for the provision of advice during one. We’re pleased that, during the financial crisis, none of our clients encashed their portfolios. Ongoing client education is part of our service.”