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Nick Bamford: The Marmite issue of cashflow forecasts    

Financial planners should be constantly challenging the efficacy of things they do for clients.

One area of recent attention has been around lifetime cashflow forecasting.

Demonstrating the future financial position of a client this way is a bit of a Marmite issue for advisers: some love it, others hate it.

I have heard some challenge the durability of cashflow forecasts, asking how anything that long-term (usually up to age 100) can be robust. But this view ignores the need for any projections to be reviewed on a regular basis. After all, a person’s circumstances, goals and objectives can significantly change over time, and projected values will need to reflect that.

Any guesstimate of the future is going to require assumptions to be made and some advisers challenge those underlying assumptions. To which the obvious answer
is that if you or the client do not like the assumptions, change them to ones you believe are more suitable. Cashflow forecasting is a journey, not a destination.

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The quality of the software used can also be challenged, in which case the solution would be to change to another provider or create your own spreadsheets.

Financial planning is a process and encompasses much more than advice. I suggest reading the Personal Finance Society Guide to Financial Planning, a series of articles and client stories by practitioners who have a great deal of experience in this area.

We all have different ways of answering client questions. One of my favourites is “when can I afford to retire?” which is often accompanied by “and never run
out of money?”

Answering that question is one of the things financial planning is all about. However you answer it must surely require some numbers. How much is enough needs to be determined by what a client thinks their expenditure is going to be. Identifying their retirement income must take into account all of their assets and their ability to create sustainable income.

Of course, financial planning needs to consider other aspects of a person’s financial wellbeing. What if they want to make gifts to their children? What if they want to downsize their home? And what if, later in life, they expect to have to pay care fees or want to minimise the amount of inheritance tax payable on their estate?

When you consider all the important questions a client has to ask about their financial future, the financial planning process is the best way to provide them with suitable answers.

That said, financial planning is subject to the same weaknesses as other types of planning. The old rule of “garbage in, garbage out” applies. One challenge is how to encourage the client to provide detailed and high quality data, particularly about expenditure both now and in the future.

But the skilled planner is used to difficult client conversations and knows that, if they plug away long enough, they will be able to get the data they need. Financial planning makes for better financial advice.

Nick Bamford is executive director at Informed Choice


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

  1. I agree wholeheartedly and would add that it allows a proper risk (needed) analysis to be carried out. To make reasonable assumptions, they must be reasoned and evidenced but a back testing model for medium to long term averages for say inflation and investment returns will help.

    The key as Nick says is this can never be a once and for all exercise and ongoing monitoring through reviews is imperative

  2. I completely agree Nick; if the data is regularly updated and reassessed then it makes more sense for a client. In any event; being 50% accurate is far better than the crystal ball gazing of old as long as the client understands the ramifications of poor date and guesswork on their part

  3. Its a difficult one. I understand why some advisers love cashflow and also why some dislike them so much. The truth is that once it gets over about 5 years it is an outline of a vague possibility of how it may be, not a prediction of the future.

    My attitude is you need to start somewhere and generally the cashflow is very good at showing that client’s dreams of a healthy retirement with contributions of only £100pm to a pension are unlikely to occur. This for some people is a reality check which makes them focus on addressing the shortfalls in evidence. For those who from cashflow it looks like what arrangements are in place will mean they are on track it gives a framework to review their progress and assess if things need a tweek or is their situation/expectation of retirement changing.

    On balance cashflow is a positive, so long as the client realises the limitations of the data and the need for regular review.

    • I agree Paul. I wouldn’t be without it now as it allows me to visualize rather than solely number crunch and for those clients who think visually it is really useful.
      I don’t like Marmite or burnt tobacco, that doesn’t mean it’s not something other people absolutely love and some are addicted.

  4. may be Nick you should suggest advisers contact CISI and consider obtaining the CFP exam
    Having read the the PFS guide to financial planning it a it rich that one articles use Financial Planning Stand Board content when the PFS does not have the authority to use it

    • Hi James

      They could choose to do that but I think that’s the role of CISI to promote rather than me.

      in respect of your second point you may wish to take that up with the PFS

      best wishes

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