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.
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