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Adviser workshop: how to use cashflow planning tools properly

In the wake of Rory Percival saying that the Financial Conduct Authority had 'effectively mandated' the use of cash flow planning, we ask advisers with experience of the tool for their top tips on getting cash flow planning right.

Alasdair says...

What helped my understanding of cashflow is being very clear and confident about what is going on behind the scenes. Even the simplest cashflow tools are actually really complex.

You can make cashflow forecasting tell you anything you want it to, because you are in control of the variables. Our approach is to know and understand what the variables are and make sure they are consistent all the way through the process. We use Voyant. There are about 25 assumptions built in behind the scenes that you can amend.

Only use the default assumptions in the cashflow software, unless there is a really compelling reason not to. If a client has specific inflation concerns, you might test the plan in a high inflation environment. But it would only be in rare scenarios like that.

Leaving the assumptions alone also means you avoid iteration bias. This happens when repeated changes lead you to lose your starting point and create different results without meaning to. Another bias is the availability heuristic, whereby specific scenarios are factored in solely because information is available about them.

Remember, cashflow forecasting tools are exactly that: tools. 

Top tip: Be aware of your own biases.

Top quote: 

'One school of thought almost presupposes they present objective fact. But a forecast, by definition, must have some elements of subjectivity.'

Alasdair Walker is chartered financial planner at Hunter, Aitkenhead & Walker

 

Alasdair says...

What helped my understanding of cashflow is being very clear and confident about what is going on behind the scenes. Even the simplest cashflow tools are actually really complex.

You can make cashflow forecasting tell you anything you want it to, because you are in control of the variables. Our approach is to know and understand what the variables are and make sure they are consistent all the way through the process. We use Voyant. There are about 25 assumptions built in behind the scenes that you can amend.

Only use the default assumptions in the cashflow software, unless there is a really compelling reason not to. If a client has specific inflation concerns, you might test the plan in a high inflation environment. But it would only be in rare scenarios like that.

Leaving the assumptions alone also means you avoid iteration bias. This happens when repeated changes lead you to lose your starting point and create different results without meaning to. Another bias is the availability heuristic, whereby specific scenarios are factored in solely because information is available about them.

Remember, cashflow forecasting tools are exactly that: tools. 

Top tip: Be aware of your own biases.

Top quote: 

'One school of thought almost presupposes they present objective fact. But a forecast, by definition, must have some elements of subjectivity.'

Alasdair Walker is chartered financial planner at Hunter, Aitkenhead & Walker

 

Andrew says...

If you do cashflow planning, then you need to embrace it and stick with it. It is not something to just dip in and out of. It requires discipline and commitment.

We use Prestwood’s Truth software and we deal with fairly high-end clients. If you are dealing with complex clients such as these, then you must embrace the complexity. That is how you show value.

Cashflow planning with pensions is hard to get to grips with. In particular, care must be taken when inputting drawdowns in a certain way and reflecting the effect of the lifetime allowance on a cashflow.

It is also important to remember the advice you give the client is not the report you give them at the end. Rather, the advice comes from the conclusions shown by the plan. That is what the cashflow is for: not the five-page, nor the 155-page, report at the end. Advisers easily get caught up in the assumption the final report is what matters. Actually, the process is what matters.

Make sure you agree the assumptions behind the plan with the client first. But, if they turn around and strongly disagree, remember it is their plan. In general, it is about them.

Top tip: Be disciplined when using cashflow planning.

Top quote: 

'I do not advocate the use of one specific tool over another. It does not matter which you use, as long as you use it properly.'

Andrew Elson is managing director at Berry & Oak

What Twitter thinks...

We asked financial planners in the Twittersphere to give us their thoughts on how to use cash flow planning tools properly. It was one of our most popular #journorequests online.

Here is what they said:

Comment & analysis

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