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Clive Waller: Why I am going cold on cashflow modelling

I have been a huge fan of cashflow modelling since the days you could write it on a fag packet. I have argued that advisers who do not follow this practice are not doing their job. Yet I am now becoming disillusioned.

This is not least because the regulator is considering making use of cashflow modelling tools compulsory in some situations.

My instinct is to shy away from regulators sticking their noses into process as opposed to outcome. They are becoming too prescriptive, increasing adviser costs and not improving client outcomes.

But it started when I went through the process myself. It was far, far too detailed.

In days gone by most folk in work received defined benefit pensions at retirement. If they were lucky they received two-thirds of salary. They also tended to have life cover/death in service pension and income protection. There was no need for cashflow. Tax-free cash and residual pension was pretty easy to manage and most contingency was covered – the exceptions being divorce and redundancy.

Clive Waller: Beware the mantra

The first cashflow diagram I ever saw was from Skandia. It illustrated income over a working life (a) dropping to almost nothing (b) at retirement. The simple message was, “How much are you prepared to sacrifice from (a) in order to increase (b)?” Since (b) would be less than (a), the second question was, “What are you going to give up doing that you do now (such as holidays)?” Perfect.

The first rule of retirement planning should be, “if I cannot afford it, I will not do it”. It is how most folks live in work and in retirement. Financial planning can make it easier, but it cannot provide a detailed forecast. There are just too many variables.

Divorce damages financial plans more than a grenade, yet most advisers are reluctant to discuss it with clients

My second issue with cashflow modelling today is that too many advisers focus on investment return rather than contingency.

Investment should not be an issue. It should be boring. Just assume a return of inflation plus 1 per cent, or whatever works for you and your client. It tells you how much to invest, for how long and provides a benchmark, so you can tweak it.

The events that cause financial planning chaos are death, divorce, disability and redundancy. Trust me. When my wife tragically died, my financial plan was a total mess.

Paul Lewis: Waking up to poor retirement outcomes

Based on Office for National Statistics data, 42 per cent of marriages end in divorce.

Divorce does more damage to financial plans than a grenade, yet most advisers are reluctant to discuss it with clients. How will you explain to your client that you did not discuss this most likely of contingencies, because you did not want to hurt anybody’s feelings?

My third point is around Parkinson’s Law. Planning tools tend to expand to justify the price the manufacturer believes it can get away with. They are far too complex. If we allow regulators to get involved, it will be just like Mifid II and GDPR – a license for lawyers and compliance consultants to print money.

So, next time you are going through the cashflow process, just remember to ask what will happen on death, disability, divorce or redundancy, and not worry too much how they will survive on a 50 per cent reduction in income. Because, trust me, they will.

Clive Waller is managing director at CWC Research



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There are 23 comments at the moment, we would love to hear your opinion too.

  1. You make very valid observations and I agree that the FCA should focus on outcomes and stop pushing up costs for the client.

    I have another issue with cashflow modelling as it appears that many advisers and the FCA think that basing a lifetime plan on an average life expectancy is sensible. About half of our clients will live beyond the average age (statistically) and medical advances are anyway likely to keep them and all of us going for longer, so how is cashflow modelling allowing for that?

  2. William Burrows 3rd August 2018 at 11:41 am

    Good article.

    I am writing a guide about retirement income planning and my view it is important to plan ahead but you cant be too detailed as things change.

    Instead of a detailed year by year cash flow, for clients with modest financial wealth, you can look at income requirements and their objectives in stages e.g. early retirement, mid retirement and later life.

    This is not perfect, but is an easy way to get clients to think about the future and focus on the essential question; flexibility or certainty and at what stage in retirement it makes sense to start getting guarantees.

    The point is most people can predict what they want a certain age but they can predict what they want at a particular stage of their retirement.

  3. As Eisenhower is alleged to have said: plans are a waste of time but planning is essential. All you points about cashflow modelling are sensible. Silly cashflow modelling is as dangerous as any other bad planning. But a superficial reading of the headline and introduction might lead a reader to think you were attacking the principle of cashflow modelling.The point of the excrete is to get the clients to think about their futures and to try and point some numbers on their thoughts.
    I don’t have a problem with making cashflow planning compulsory but I do object to advisers using the technique stupidly and in a limited, literal tick-box way.

  4. Neil Liversidge 3rd August 2018 at 12:11 pm

    I have never been a fan. Napoleon famously said, “No plan survives contact with the enemy.” Replacing “enemy” with “life” sums up why cashflow modeling is a counterproductive waste of time and money. Every time I’ve seen it used the victim – sorry, the client – ends up being oversold every conceivable product under the sun with no money or flexibility left in their lives. It’s the personal finance equivalent of the Maginot Line. Our way of planning aims to build in as much flexibility as possible, so clients can cope with unexpected unknowns. Returning to French military analogies, you could say we prefer what Churchill, in his rather bad French, referred to as ‘la masse de manoeuvre’- the mobile reserve – to Maginot Line type solutions.

    • The whole of NATO had/have a pneominic for planning and giving orders and whenever you have time to you do so.
      Service and Support
      Command and Signals

      Once contact is made and as you say, nothing ever goes to plan, you then deliver a fresh and briefer plan Quick battle orders”, which just tend to cover direction of travel and where you fight through to before going in to an all round defence and then sending back to deal with enemy and own casualties.
      Cashflow planning and planning meetings can and should work on a similar basis with an overall pl an and then quick reviews as circumstances change.

  5. Well, the headline bait worked. I agree with Clive, but when I speak with other advisers, all say that they use cashflow as a conversation about the future, not a forecast (or words to that effect)… Absolutely on the divorce issue, I make several points to clients.

    1. This is a version of the future, but it is highly unlikely to be right

    2. We are making loads of assumptions, we can tweak them endlessly, but the biggest is that you stay together

    3. Review, review, review for progress and adjustment.

    Looking forwards to the Great Pensions Debate in November…

    • Pretty much agree with you. We tend t use it to show them their either well on target or have no hope of achieving it. It is good at showing the extremes.

  6. I think it is wrong for it to be prescribed by the regulator. That said I am a big fan of cash flow modelling as part of the financial planning process.

    What I have experienced is that a thorough process considering what if scenarios, client involvement in the assumptions used and a clear understanding that plans need to be reviewed results in a high level of client engagement.

    I have just come out of a meeting with a client where his attention to the detail of the multiple potential outcomes was great to witness.

    Financial planning makes for better financial advice with an engaged client. Frankly it’s much more valuable than banging on about boring products like ISAs and Pension plans!

  7. As I’ve written elsewhere, cash flow modelling is akin to setting your sails according to how the wind’s blowing today, in the certain knowledge that tomorrow it’ll be blowing in a different direction.

    How frequently do you adjust/revise your forecast, how many different assumptions do you use and how many What if? scenarios do you build into each CFM exercise? You can produce a truly massive range of possible, theoretical outcomes, not a single one of which may actually come to pass.

    • Sailing is a great example of cashflow planning. Without a plan, it’s akin to not using a chart/map and the weather forecast. Of course, the weather and the course changes but the alternative is to trust the boat will get there!

      • Well, yes, but what it all boils down to is: How complicated and infinitely variable does the course plotted to reach a desired outcome need to be?

        In simple terms, using a notional fund:income conversion rate of 1/20th (5%), a pension of £25,000 p.a. from age 65 is likely to require an accumulated fund of about £500K (plus an allowance for inflation). Or, if you use a more conservative conversion rate of 1/25th (4%), £625,000. Depending on what rate of future investment growth you assume, you can then tell the client the level of input required to achieve that target.

        But, of course, if the client says he can’t possibly afford that level of input, that plan goes out of the window and you’re back to: Well, what level of input CAN you afford which, I suggest, is what most people have to settle for.

        • I am reminded of a client who, many years ago, once said to me: I want a comfortable retirement, naturally, but I don’t want to bankrupt myself getting there. And another who said: You can spend so much money on insurances of one sort or another that you don’t have enough left to enjoy life as it is today.

          Life in the real world is about balancing the costs of future needs against immediate ones.

  8. Hmmm…I’m definitely a sceptic when it comes to these overly-complex software packages. This is for a very simple reason: The unexpected has a very strong chance of occurring, thus rendering the best-laid plans into dust.

    It’s all very well flying off to Canada (or somewhere) to be preached at by a cashflow modelling advocate/guru, but I meet too many IFA’s that seem to disregard the basics in their ‘vision’ of ‘investment management & tax planning’.

    As I was reminded by Henry Tapper in a recent piece he wrote: –

    “One of the first things I learnt in my training as an insurance salesman was that there were three insurables; people could insure against dying too soon, getting sick and living too long.”

    He’s right and I was astonished at a recent seminar I attended to be met with the following response to my question about how much life cover, critical illness insurance, income protection and annuities those sitting on my table had arranged in the last couple of years:-

    “None – I’m after assets under advice” or “what…too much trouble” and even “I don’t know how to” (yes, really!).

    So, drop the fancy software (which clients don’t understand) and concentrate on what really matters.

    Set up the insurances – where needed – first, then start looking at tax-wrappers and all the other sexy stuff!

    • Some good points Mark

      Of course if we dismiss cash flow planning in its entirety I assume that we must all agree that the regulatory illustrations we are forced to issue are also pretty pointless and mislead the consumer, assuming as they do a straight line investment return?

      The clients don’t need to understand the software but advisers do. And one real benefit of the cash flow forecasting software is the catastrophe scenarios that demonstrate if a client needs more life cover, CIC and income protection, the important stuff as you call it

    • Totally agree with Mark, after nearly 30 years nearly all my clients have protection to suit their circumstances.(do not take on many new clients)
      When it comes down to future income planning (not retirement) most of my clients do not really see themselves stopping work totally.
      The question is, how much can you put away without affecting your life today as you may be dead tomorrow.
      The good investment management planning then becomes relevant.
      No predictions , no promises, just the view that if they put it into an ISA or Pension (debate which is best between you) they will have something in the future and then they can decide if it is enough for them to “retire”
      I have a client of 48 who asked me the question last month and I said if you can live on £25k a year then yes – he said good, didn’t retire decided to work until 50 and have another look then.
      Another, teacher of 55 asked the question and I asked the same question and she said Yes and she stopped work 3 years ago, since then her has husband died but she was able to spend some quality time with him. Oh and then the Life cover paid out, so now she will never have to go to work again.

  9. Well said Clive. If you get all the different scenarios on course, then not only will clients not have horrible surprises if they occur, but they will have the assurance that cashflow modelling can bring. Cashflow planning can be a very creative tool, but in the wrong hands it becomes a dull instrument. it is not the be all and all, but a good indicator of what clients can expect if expertly used.

  10. What a breath of fresh air. Should be made compulsory reading.

  11. Didn’t the industry use cash flow modelling (in reverse I guess) to work out how much a client needed to pay monthly into their mortgage endowment 20 plus years ago?

    Is cash flow modelling for pensions not just repeating that mistake, and not managing expectations?

  12. Cash flow modelling, in the right hands, can be invaluable but trouble may be looming for advisers using more optimistic growth rates than product providers are allowed to illustrate or not showing reflecting the effect of charges or reducing growth rates to account for them.

  13. Stewart Hutcheson 23rd August 2018 at 4:31 pm

    Good article which had sense and balance after you got past the headline. Great to see such constructive “well behaved” additional comments that genuinely add to the article.

  14. To be honest, reading both the article and the comments, I’m a little concerned at the number of people who clearly have or did buy into the concept that Cash flow forecasting was anything more than a tool to show what may, or may not be possible.

    That’s all it ever was and all it ever should be, it’s there to prompt conversation and help a client understand how changes now can help prevent issues in the future.

    Nobody knows what the future holds and as for divorce, you cannot plan for it.. and I doubt many clients would even consider discussing it.

    Life throws curve balls at you on a regular basis and if it doesn’t, count yourself lucky. You cannot plan for them, because you have no idea what they might be.

    Roll with the punches and adjust your goals if you need to..

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