The ease of negligence
Sometimes, it's only when you ask an IFA to complete a form that you have yourself designed, that you get a sense of how an individual interacts directly with data - how they analyse it, summarise it, and enter it into someone else's framework. Recently, we've gone through this process in conjunction with our PII renewal - a majority of responses very clearly evidenced great care and attention, as well as a healthy respect for the value of accuracy in such an exercise. A minority showed a propensity to supply answers which even a moment's thought would have indicated were questionable - thankfully, they were a tiny proportion of the whole, and we were able to counterbalance potential inaccuracies by referencing the extremely good MI that we are in the habit of collecting.
Data is important in our line of business. Recording it accurately and to a sufficient extent is perhaps the core of it - but actually the whole business of what we then do with it is just as important: categorising it, understanding its significance, and then (diagnostically) making sense of it, represents an essential discipline for the financial planner - and this is something which, apparently, does not come naturally to all of us. If we think of negligence as an act of commission, then we are really missing the point: negligence is fundamentally to do with omission, the essential things that we fail to do in the process of delivering advice.
In the past, such a source of negligence was the Adviser's inability to accurately and objectively gauge the client's attitude towards risk. Thankfully, robust systems such as Finametrica, or Distribution Technology, or Parmenion's Edgcumbe profiler supply effective and reliable solutions to that essential part of the advice process - no need to reinvent the wheel, or rely on entirely subjective responses from the client that, in practice, convey little reliable, significant meaning. If risk-profiling is a compliance box to be checked, then we have a solution, one which is fit for purpose.
Or do we? In practice, many advisers still use these systems as a kind of Black Box. If we feed in answers to the questions, and the verdict is the number 6 on a scale of 1 to 10, then (frequently) that's the answer (6) - rather than the beginning of a constructive two-way dialogue about the nature of risk, and its relationship to reward. And, of course, as we all know, the attitude towards risk is only one part of the equation. There's also the client's capacity to tolerate or sustain risk: how do we assess that? How can we test to see if a given risk profile (which, hypothetically, the client is comfortable with) is likely to give rise to problems further down the line?
Thankfully, all ValidPath Members have (free) access to the awesome CashCalc system. It covers pretty much the same ground as considerably more expensive systems such as Voyant and Truth, and is far, far easier to use in practice. In our opinion, it is now impossible for any IFA to provide any kind of decumulation advice without first running a lifetime cashflow, such as the kind that CashCalc handles so dependably and comprehensibly. This vital area of planning is now an unavoidable part of pension-planning, according to the PFS' R08 study guide - just how an Adviser goes about doing it is a secondary thing, but why would a person want to spend more (than zero) on a system which is vastly more time-consuming to use, or attempt to reinvent wheels via spreadsheets? Life is short, and we've taken the decision to make an ideal solution available to all Member Firms.
Of course, even excellent systems such as CashCalc are far from complacent about their functionality - in the real world, average annual returns of 5% simply don't happen. How can the Adviser and client anticipate the kind of volatility which might characterise markets, even if the long-term average hits 5%pa? The answer to this is the use of variable return models, supplemented by an overlay which describes an actual market crisis: both are now an integral part of the CashCalc proposition available to ValidPathers. If you have not already experimented with this, prepare to be shocked. Indeed, if you wish to take seriously the essential matter of determining the client's capacity for risk (as opposed to ATR), then the responsible Adviser needs to be able to model this with the client. Are you?
To help you into this critical matter, here is CashCalc's latest video on variable growth templates:
A key message for 2017
Please don't ever, ever handle decumulation advice, or pension transfer advice, without a decent lifetime cashflow analysis underpinning everything that happens. No ifs, no buts.