Engaging clients effectively in the financial planning process is essential for business success, says Jon Rolfe, founding partner of Epoch Wealth Management, a financial planning business based in Bath.
For the old-school, transaction-based financial adviser armed with little more than a kit bag of sales ideas and a good company song, the client such as the high earner who worries about breaching the lifetime allowance, presents something of a headache. So too do those attracted by the death benefits available from defined benefits transfers, and those wondering whether an IHT-driven gift might one day compromise their ability to access long term care. Clients who are burdened with a combination of these problems can bring a traditional, product-led adviser out in a cold sweat.
But for the skilled adviser who has embraced the full power of cashflow modelling, and financial planning, these sorts of challenges can be approached with relish not fear. No adviser wants to go into battle not knowing the outcome. Cashflow models may not be perfect, but if used properly, they give the adviser the comfort of knowing that they will provide the best possible answers to the most complex questions that clients can ask.
Modern cashflow modelling software can be transformational for every stage of an adviser’s business, from face-to-face client meetings right through to the back office. Effective use of cashflow modelling software can help us to identify more “need areas” for existing clients, to increase client engagement, help us to deliver less risky advice, as well as demonstrating to the client just how much value the advice process can deliver for them in helping them to achieve their goals in life.
Traditional advice model under threat
I believe the more traditional product-led way of delivering financial advice to clients is under pressure from two sides. At the transactional end of the spectrum, robo-advice and guided solutions are developing fast and this is challenging an increasingly web-friendly and price-conscious customer base. At the other end of the spectrum, Chartered and Certified financial planners are giving all-encompassing, expert advice at overall prices which are often lower than those of the traditional advisers.
Added to this, taking 1% of a client’s return is hard to justify in a ‘lower for longer’ investment environment, where long term annualised returns for investors with a balanced risk profile are usually expected to be nearer 4 per cent than 6 or 7 per cent. Value has to be demonstrated clearly through the provision of a sound planning service.
Advisers in this ‘middle ground’ face the prospect of either being consumed by the robo-advice tide or having to upskill in order to appeal to more sophisticated clients. Either way, their business models must change.
The majority of advisers know that a cashflow modelling approach should be fundamental to the upskilling process. However, a lack of understanding of what transitioning to this structure will actually mean for them, their clients and their businesses could hold them back. Many believe that cashflow modelling is simply about showing a client whether or not they are going to be okay in the future. However, the reality is that this health-check is just one facet of what it can do for advisers and their clients.
Anyone considering making the switch needs to understand the three pillars of cashflow modelling which I will address here.
Pillar 1
This first pillar is the most obvious and the one I have already touched upon – it reveals a client’s long-term financial future to them, often for the first time. With the client details accurately inputted, most models will allow clients to understand, for instance, when they can afford to retire, or what the likely impact of taking a course of action will be. In this way, the cashflow planning model is an educational tool which provokes discussion and debate. It shows the client the likely impact on them of altering core assumptions in different lifestyle scenarios. It empowers clients to make what can be life-changing decisions with some confidence. For once, they’re talking with their adviser about the big picture. About how their money influences their lives and how they would like to live them, rather than technical details such as the minutiae of investment management or pension contributions.
It is beyond this stage that many basic cashflow modelling tools reach their limitations.
Pillar 2
The second pillar focuses on the use of the cashflow model as a critical tool when constructing client advice, and is particularly useful when undertaking more complex planning scenarios. Ask advisers who have used a cashflow model for a period and they will tell you that, on many occasions, they have had their pre-conceptions challenged and proven wrong by the technology.
Using cashflow modelling to stress-test advice is especially important when giving advice on a potentially irrevocable action which could have a profound impact on someone’s long term financial security. Classic examples would be the decisions which need to be taken in retirement or in IHT planning. Being able to create the “disaster scenarios” and see that the client’s primary objectives are still not compromised gives adviser and client conviction that the right decisions are being made. I don’t understand how I ever worked without cashflow modelling tools at my disposal. It is no wonder that a former FCA technical specialist suggested at a recent conference that cashflow modelling is likely to become a prerequisite for advisers wanting to arrange DB pension transfers for clients.
Pillar 3
The third pillar of the process ties together the first two. It involves showing the client how the issues raised actually translate into action. Engaging clients in agreeing the inputs to the cashflow process reduces any inertia they may have when it comes to moving forward on the outputs. It is all based on information and details that they have agreed up front. What’s more, giving a monetary value to an amount that could be saved or made is a compelling call-to-action. For example, advising a client with a non-earning spouse that a buy-to-let property should be put into their spouse’s name may not provoke action. Showing them that they can save X hundred thousand pounds for a morning’s admin is a considerably more effective call-to-action. Importantly, it starts to quantify the once intangible “value” of good advice.
With the fact that advice fees are built into the cashflow modelling tool, the adviser can demonstrate that even with the cost of his or her advice factored in and no change in investment returns, the client is likely to be better off as a result of the planning process they have undertaken. No longer is the client questioning whether they’re getting their money’s worth from their 1% fee. They can see it very clearly for themselves.
The tool stress-tests advice in the back office, and facilitates answering those tricky questions real-time, in a client meeting. Using the right sort of models in the right sort of way can provide answers to challenging questions in minutes.
Take the dilemma of the high earner with a £120,000 salary who is considering a pension contribution to reclaim the 62% lost between £100k and £122k but is worried about hitting the £1m lifetime allowance. Which of these two fiscal evils will affect them most? By inputting the numbers and comparing the two scenarios, the technology can provide the answer, personalised to the client in a way they understand. Whilst the advice still needs to be sense-checked and documented, this process will avoid risky, educated-guesses and the hours spent on self-made spreadsheets.
Sensible advisers understand that their advice could return to bite them in years to come. These second and third pillars help ensure the correct advice is given and that the client embraces the advice given with their eyes open. Clearly this minimises business risk.
Answering the critics
Critics of cashflow modelling will argue that many clients have no real idea what they will be doing next week let alone in 20 years’ time. But, surely, basing your planning on something is better than nothing?
Critics also point to the issue of non-linear returns and sequencing risk – a particularly significant issue for drawdown investors. They are right to highlight this, however, the limitation can be avoided if the modelling is expertly used and the adviser exercises skill in interpreting the results to factor in these variations. This is essentially tackling the FCA’s favourite topic of assessing a clients’ capacity for loss.
As well as dramatically enhancing your client proposition, fully embracing cashflow modelling is great for generating referrals, particularly from professional introducers. For lawyers and accountants dealing with big lump-sum settlements such as divorce, personal injury claims or corporate finance restructures, it is a lot easier to say to their clients “this adviser is going to map out your financial future” than “they’re going to talk to you about where to put all your money”.
We are at a tipping point. Many of you will, I know, already have integrated this process into your business and will be enjoying the many benefits it brings. However, many advisers know they need to adopt cashflow modelling, but, as with wraps/platforms over a decade ago, they can be nervous of commitment and of backing the wrong horse. If this describes you – it is time for action. To get started, all it means is researching the market, testing what is out there and finding the right solution for your business. It could be the best business decision you ever make.
Key points
- Cashflow modelling is not just about providing a health check for a client. It’s about combining technology with human expertise to ensure and, most importantly, demonstrate that the right advice is being given.
- Cashflow models are popular with professional introducers such as lawyers and accountants when referring clients with large financial settlements.
- Advisers can stress-test their own advice by bringing cashflow modelling into their back-office processes.
- Cashflow modelling is increasingly relevant for DB transfers. Scenarios reflect the cost of advisers’ charges, enabling the adviser to show, net of charges, the value delivered by the advice process.
- Many users of cashflow modelling tools admit that they have proved their initial pre-conceptions wrong.
About Jon Rolfe
Jon is a Founding Partner of Epoch Wealth Management, an award-winning financial planning firm which is based in Bath. He has been a financial adviser for almost 20 years. He considers himself a cashflow evangelist, having seen first-hand the transformational impact that it has had; mostly the comfort it brings his clients who are faced with difficult financial decisions but also the way it has transformed Epoch’s business.
