Cashflow forecasting as a default mode?
At ValidPath, we've been passionate believers in lifetime discounted cashflow forecasting for many years now. Having experimented with some of those over-prescriptive, fussy systems in the late nineties, our interest in this discipline (and the systems which made it possible) were reignited in the noughties by an excellent Excel-based system called Certior. The Certior system was the product of a collaborative effort between IFAs, and it did a lot of things very well indeed (not least a full Montecarlo simulation). Unfortunately, it was never sufficiently embraced to take off as a commercial exercise.
In swift succession, we looked closely at a number of systems before standardising ValidPath's proposition around what is now the leading cashflow forecasting system in the UK. Given that this provider is about to launch a new enhanced integration with IRESS XPlan, this has led me to think more about the extent to which ValidPath, and indeed any responsible financial-planning firm, should now regard cashflow forecasting as a default component of the advice process. Here are a few pertinent thoughts.
Firstly, one must firmly dispel the notion that cashflow forecasting is some kind of further imposition, "another thing" to have to tick off a checklist, before finally getting to the End Point, the chargeable recommendation, or the transaction. This is a mindset which sees the discipline as a rather expensive optional extra, a hiatus in the real process of advice which just tends to make it all less commercially viable. This perspective is a special kind of problem when the Adviser presents the idea to the client as the kind of unreasonable compliance burden imposed by an over-zealous Network - what client would ever value such a service, and see it as anything other than an unwelcome chore? Far better to see the cashflow forecast as the model, or map, that helps the client to anticipate the future intelligently, and make proportionate, targeted provisions in order to achieve the desired outcomes.
Secondly, I think there is value in distinguishing between the discipline of cashflow forecasting, on the one hand, and the use of a particular system, on the other. As I said earlier, ValidPath have standardised our approach around a particular system, and there are good reasons for that decision - cost, ease of use, functionality, reporting, and integrations with other systems. But we have some Members who choose to use an alternative, perhaps because of a particular kind of feature which suits their own advice model. Provided that a Member Firm has done its due-diligence, has taken reasonable steps to verify that their alternative system is reliable and robust and fit-for-purpose, ValidPath is not going to rain on their parade. The integrity of the discipline is more important than the use of a particular piece of kit.
Now, whilst these are important caveats, one has to be careful when one applies them. ValidPath's emphasis is that, however we define or equip our disciplines, they must be fit-for-purpose. A back-of-an-envelope calculation isn't cashflow forecasting. Neither is a crudely-edited spreadsheet that doesn't reflect all the data, or doesn't contain current data, or which doesn't incorporate valid working assumptions. There is the very real possibility that, where an Adviser is determined to do his or her own thing, rather than use a default solution, the end result is not just less efficient or commercial, but is riddled with the kinds of inaccuracies which, cumulatively, escalate risk. At ValidPath, a great part of our mission is minimising risk - to our Members, to their clients, and to our own proposition - which is why we have standardised around an excellent cashflow forecasting system which ticks all the essential boxes for most advisers. It's freely available, it's affordable, it's eminently usable - so use it.
Which leads me to my last point: cashflow forecasting should be regarded as the default discipline, supporting the delivery of a wide range of advice types. Whilst we think that the jury may be out in relation to investment and pension accumulation advice, or protection and mortgage advice, it is not responsible to be so relaxed about forms of decumulation advice. Pension drawdown requires it. Any in-retirement investment access necessitates it. You can't run what-if strategies for IHT planning without it. The complex decisions relating to Equity Release are informed by it.
In short, the professional Adviser should never be asking the question, 'Can I get by without using cashflow forecasting?', for that is entirely the wrong question. Instead, he or she should be asking, 'How can I use cashflow forecasting to deliver better outcomes to my clients?' And that's going to open up all kinds of valuable opportunities.