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Should FCA intervene over advice cashflow planning concerns?

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Concerns are growing advisers are putting too much emphasis on simplistic cashflow planning, with some suggesting the FCA should consider intervening.

Wingate Financial Planning director Alistair Cunningham raised the issue in Money Marketing last month, accusing some firms of acting like “charlatans”.

Cunningham says since the RDR increasing numbers of advisers have been guilty of putting too much emphasis on cashflow planning.

He says: “We have seen a rise in cashflow planning and people don’t understand the limitations of the tools they are using. It’s not for the client, it’s a tool to help us as advisers. And it’s potentially harmful. You wouldn’t go to a surgeon and demand your X-rays so that you can make your own decision. They look at them and tell you what your condition is, but too many people present a cashflow plan as if it’s an end in itself. My biggest concern is people being told don’t worry because you have enough. We need to worry.”

Although cashflow planning itself is not a regulated activity, as it does not involve a personal recommendation, advisers who do it are expected to comply with the FCA’s expectations for treating customers fairly.

An FCA spokeswoman says the regulator has no current plans to intervene further.

“People don’t understand the limitations of the tools they are using”

Nonetheless, Finalytiq founder Abraham Okusanya says the FCA should consider providing guidance for advisers on how it expects them to use cashflow modelling.

He says: “This sort of thing lies right on the edge of the FCA’s remit, and the current thinking is that it doesn’t regulate methods or planning strategies. But you can make a case for them getting involved here.

“There’s no reason why the FCA can’t do a thematic review of this as part of the broader advice review.”

The Lang Cat principal Mark Polson adds: “If the cashflow model has become a thing that drives the whole advice process, then that is concerning. If we have advisers saying that it is gospel then they need their heads looking at, because any of those assumptions behind the model could turn out to be wrong.”

Thesis Asset Management marketing director Lawrence Cook, formerly wealth manager at Towry, describes himself as “a massive fan” of cashflow planning.

However, he adds: “The danger of it is without the skill of a planner to ask the right questions, it can become a very simplistic view of life and you can quite easily come up with an answer that says you are desperately poor, or you have more than enough, and neither is true.”




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

  1. No, the FCA shouldn’t intervene. Some advisers use cashflow tools very well, others less so, some not at all. So what? Some financial advisers consider cashflow planning to be a waste of time and money in which their clients have no interest. The primary concern for most clients is their financial destination. How they get there is a matter of agreement between them and their financial adviser. There is, as the old saying goes, more than one way to skin a cat.

    The FCA should focus its attention and resources on averting the next motorway pile-up, on which I think we can all agree it hardly has a creditable track record.

  2. Remind me wasn’t cash flow planning the whole mantra of the IFP philosophy for certified advisers. Presumeably, Alistair Cunningham was not a great advocate of the IFP, hence his comments. However, he is right to accuse some advisers of using this tool to sell their services as the be all and end all of a financial plan. The one thing the regulator should ensure is that the assumptions used in these tools are disclosed and agreed by the client. There is onl one certainty about using these tools, as soon as the results are produced, they are guaranteed to be incorrect due to the underlying assumptions used and it should be this that is documented to the client.

  3. As I posted on the original article by Alistair – cash flow planning is (and was) mainly used in my opinion to bulk out reports and justify fees. I was a long-time member of the IFP and regularly railed against this obsession. My beef was against lifetime cash flow planning – which is simply madness. I will agree that over (say) 2 – 5 years it does serve a limited useful purpose, provided all the caveats are clearly and forcefully pointed pout. Tax rates change, you may lose your job, you might become ill, you could get divorced, we could leave the EU and WW3 could happen.

    Paul Etheridge as far as I can recall first promulgated the genre and it no doubt helped him to flog his software, as it helped all the other IT providers. A reasonable proficiency with Microsoft Excel is quite adequate to produce a reasonable cash flow projection. Far more important in my opinion is the need for regular reviews and valuations.

    I well recall my early years in industry, when the bank asked for projections. My stock answer was to ask them what work of fiction they would prefer. How would I know whether an order would be cancelled, the cost of raw material would rise, or whether we would have a strike (we never did). In essence, these sorts of forecasts are the greatest work of fiction sine Charles Dickens. The regulator is quite right to cast its beady eye over this practice.

  4. They do not need to regulate this as they already regulate the advisor who is responsible for TCF. If they do not like what they see they can use this old onion as a catch all. End of problem as far as they are concerned -job done

  5. I agree with you completely Harry. One might well say that trying to predict or map out anyone’s cashflow over anything but the shortest time horizon is rather like to trying to forecast the weather over the next decade ~ an exercise in futility.

    • Sorry Julian and Harry, but I’m going to disagree. CFF is not a panacea, but in a way all decent advisers have been doing some form of CFF for a long time (at least in one area.. pension planning).

      It is a tool, no different to the proverbial back of the cigarette packet calculations many used to do, however it’s potentially a much better tool.

      Assumptions about the future, are just that, however you know what the clients situation is now and mapping out whether their current funding is likely to be able to achieve their goals, isn’t that difficult.

      However used correctly, the “tool” also allows you to show them, things like “what would happen if you became disabled, what would happen, if you lost your job, and actually put some reasonable numbers to any form of protection that they might need to cover most potential eventualities.

      However from what I’ve seen far too many people think that cash flow forecasting IS financial planning. Financial Planning is about helping a client understand the “journey” they are on (financially), whether they can afford to visit the destinations they want to, and whether they can afford to end up where they want to be.

      It’s a tool to help enable them to understand how to improve their own situation. Which then needs to be monitored and checked each time their circumstances change, each year and “adjustments” made.

      However if the client has a written “plan” they want to work to, and you use CFF to help them understand what they can and cannot do and remain “on track” to achieve what they want to and then it’s reviewed regularly, this is a good thing.

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