We ran two webinars on Cash Flow Modelling last month with mixed reactions from advisers. It was good to get some honest feedback. In a nutshell, some thought we covered things in too much detail but others wanted a great deal more insight. This reflects the fact that the profession is still weighing up the ‘use cases’ for CFM, and is divided on what its role should be in front of clients.
What’s our view? We summed it up in the acronym – CASH.
Composure
They say a picture is worth a thousand words. A key benefit of showing certain clients a picture of their financial future is that it can address and overcome some powerful insecurities about what might be around the corner. Handling anxiety is one of the main motivations for seeking financial advice. It’s less likely that every client will be excited about all the detailed mechanics and assumptions involved in how you reached your conclusion. After all, they want your advice. Being made confident enough to relax about money is a wonderful feeling.
Analysis
From the adviser’s point of view, it’s critical to get comfortable that the financial information you’re given by a client is sound – you’re making personal recommendations with the risk of liability. This is obvious in cases of retirement advice. When the big questions are: ‘Can I retire’ and ‘How much can I spend’, it’s vital that spending budgets are based on real, evidenced patterns of expenditure, alongside a view of what might happen in the future. Get the spending budget wrong and retirement advice comes apart.
Scaling
Models don’t have to be penny perfect to be extremely useful. One of the best use cases for CFM is demonstrating to a 30 year old that auto-enrolment won’t cut the mustard when it comes to a decent standard of living after work ends. Getting someone to see the wisdom of saving above 10% of income for most of their career is hugely valuable advice, and was, in fact, the basis of the savings industry for more than a century.
Happy stakeholders
Financial advice is highly regulated. Everything about its delivery is being driven towards the co-ordination of expertise, interpersonal skills, efficient and repeatable process, supported by technology. Consumer Duty is the latest acceleration in this momentum. CFM as a service to appropriate target markets ticks a lot of boxes under the objectives of delivering good consumer outcomes, building consumer understanding and avoiding foreseeable harm.
In its review of the retirement income advice market, published as TR24/1, the FCA make specific reference to CFM as representing best practice when framing advice to clients in retirement.
From another angle, CFM, used consistently, also informs the business about its own risk exposures and its own business value – if only by answering the question, if and when will the money run out?
In our next article on CFM we will share some thoughts on the assumptions about inflation, returns, longevity and tax needed to run a workmanlike model and where to source them.
This article is for financial professionals only. Any information contained within is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity.
Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.