"It’s worth spending some time thinking about how to make the most of these tools to ensure you’re getting the best outcome for your clients."
Over the last few years lifestyle planning has been increasingly popular and is fast becoming a fundamental element of the advice service provided to clients.
Cash flow planning tools are being used to bring client goals into the centre of a lifestyle financial plan with the products, investments and tax planning sitting beneath as the tools to achieve the desired outcome.
Below are ten impactful tips to help advisers with cashflow planning:
Tip 1 – Carefully consider the assumptions
The assumptions used in a cash flow plan are of critical importance. These assumptions will be used from the start of the plan to increase asset values, grow investment and pension accounts, increase expenses with inflation, and more. Over a 40-year period the difference in a growth rate of just 0.5% can make more than a 20% difference in the value of the pot and could mean the difference between running out of money too soon or assets being left over on death. Cashflow planning tools will do a lot of the heavy lifting for you but it is important to review and edit any assumptions where justified and relevant.
Tip 2 – Be accurate but keep it simple
Where possible keep it simple, not at the expense of accuracy, but if five similar bank accounts can be entered as one account instead of five then all the better. This will simplify the outputs for the client and save you time inputting the data. After all, the plan is an approximation, not a regulatory illustration, and it depicts one view of the future that will need to be regularly reviewed to update it with real outcomes.
Tip 3 – Nail the expenses
One question that often gets asked is how much detail is required when entering client expenditure. The answer is that, whether you have two categories of expenses or ten, the figures need to be accurate in terms of what the client is spending today and how they think that may change over time. The further away the client is from retirement, the more considered thought is required from the client to work out what they estimate they will need in retirement.
Tip 4 - Check and double check
Always check your inputs, or, even better, get someone else to check them such as a support assistant or paraplanner. It’s so easy to make an error but missing off or adding a zero on an asset balance, mis-typing the numbers or entering an asset with the wrong ownership can make a massive difference to the outcome of the plan.
Tip 5 – Help the client to set their goals
This is the fun part as it gets clients talking about what’s important to them and why. As the adviser, you may need to prompt the client, as articulating their goals and future aspirations may not be at the forefront of their minds, and you might need to dig a little bit and ask pertinent questions to get them thinking. You will need to help clients see their vision for the future and think about what’s important, which in turn will ensure they are wholly invested in achieving their ambitions.
Tip 6 – Start with a pre-advice scenario
In most cash flow tools, you can start off with a pre-advice scenario that should reflect the current position of the client without incorporating your advice recommendations. It can also reflect the client’s goals and aspirations. It will enable you and the client to see if their goals can be met. If goals can’t be met a shortfall will be visible in the plan. If goals can be met, there may still be plenty of opportunity to demonstrate an improvement to their current position. Additional scenarios can then be created to incorporate your advice recommendations, the outcome of which can be compared back to demonstrate the value of your advice.
Tip 7 – Review regularly
There’s no point in providing a client with a cash flow plan unless it is reviewed regularly. This is imperative in order to track actual progress against the projected forecast. Actual results will differ from the cash flow plan from day one and will increasingly diverge as time goes on. Reviews are therefore essential to update the plan with real performance upon which any required adjustments can be made, although review frequency will depend on the client.
Tip 8 – Learn the tool inside out, and practise
Significant value can be added when using a cash flow tool interactively in a client meeting. This enhances the client’s focus and involvement with their plan and allows the client to ask supplementary “what happens if...” questions. It also means you can update the plan there and then if there are any mistakes or omissions. But live use comes with its dangers if you’re unsure how to use the tool or you make a mistake and break the plan. The best thing you can do is practise, either on your own or with someone else acting as the client.
Tip 9 - Define your proposition
Know which clients you want to use cash flow planning with and how often you want to review plans. You may wish to segment your client bank and only use cash flow with a specific subset of clients. For example, you may only want to offer it to those who have a certain degree of complexity to their situation or those who are at/in retirement where you need to evidence the sustainability of your retirement income recommendation.
Tip 10 – Show a range of outcomes
There are stochastic and deterministic cash flow tools available in the industry. There is no right or wrong in choosing either type of tool. The stochastic tools by their very nature will build in a range of possible outcomes in terms of investment variability but are arguably more complex to explain to clients. The deterministic tools will produce a simple, straight-line forecast using a growth assumption which is easy for a client to understand. With a deterministic tool it is therefore important to show a range of outcomes to the client.
Cashflow planning can really elevate the service provided to a client. It’s worth spending some time thinking about how to make the most of these tools to ensure you’re getting the best outcome for your clients.