FREE FOR ALL TRUTH® USERS

Prestwood® Software, maker of Truth® cashflow planning tools, today launches the first portal which will allow planners to capture all the data needed to produce a detailed lifelong cashflow model for their clients.

Ritchie Walton, MD of Truth® Software, said: “We’re hugely excited to be able to offer all Truth® planners access to this unique tool.  While other tools offer onboarding portals and affordability checks, our ethos has always been that you cannot do proper lifelong financial planning without in-depth cashflow modelling.”

The FCA’s thematic review of Retirement Income Advice highlights how firms fail accurately to plan for future expenditure changes.  Prestwood’s Cashflow Fact Find Portal encourages clients to develop an understanding of how their spending will change over their lifetime and share this data with their planner.  When clients engage with the planning process on a deeper level, this helps nurture a long-term relationship between client and planner.

The new Cashflow Fact Find Portal makes it infinitely easier for planners to:

• Ensure client data is correct
• Communicate effectively with their clients
• Capture comprehensive planning data
• Understand clients’ future plans, goals, and objectives
• Accurately model clients future spending plans
• Plan for the impact of death or disability

Meanwhile, the data-entry burden is passed on to the client.  This means planners can focus on planning for and with their clients.  “Since using the portal, we’ve seen a significant improvement in our workflow efficiency. Tasks that once took hours are now completed in a fraction of the time, allowing us to focus on delivering exceptional service to our clients. It’s intuitive, reliable, and a game-changer for our team and clients,” said Warren Shute MSc. CFP, Lexington Wealth.

Prestwood understand that different firms work differently, and that each client is unique.  Truth® planners can white label their Cashflow Fact Find Portal, create bespoke invites for clients, and customise the content of the portal for each individual client.

Clients can create a secure account with two-factor authentication.  The portal experience itself has been fine-tuned over months of beta testing and feedback from hundreds of consumers to enable in-depth data entry via an intuitive and slick user interface.

Clients can tell their planner not just about their current assets, income, and expenditure, but also their future plans, goals and objectives, and the lifestyle they want to achieve.  This allows the planner to create powerful cashflow models projecting the client’s future position.

Rather than simply assuming data is correct, every addition, deletion, or change the client has proposed can be accepted, rejected, or flagged for the planner to challenge the client during their planning meeting.

Jim Cooper CFP Chartered FCSI, Director of Radcliffe Cooper

“The new Truth portal is groundbreaking.  It guides clients to quickly check and return annual figures to us and being much more interactive has meant clients engage more with their plan and are returning more accurate figures. Client feedback has mentioned that it has helped highlight areas of expenditure where perhaps they are paying too much and have gone on to renegotiate contracts to make significant savings to their annual expenditure.”

The Cashflow Fact Find Portal is available exclusively to Truth® users.

NOTES TO EDITORS
1. Prestwood Software Ltd design and develop Truth® Software www.truthsoftware.co.uk – recognised as the pioneer of lifelong cash flow modelling in the UK.
2. Since 1984, Prestwood® has been developing comprehensive financial planning tools for many of the best Financial Planners.  It was instrumental in the formation of the Institute of Financial Planning (IFP), which was subsequently acquired by The Chartered Institute for Securities & Investment (CISI).

Press Enquiries: Sandra Paul 07795810171

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For the full article, see:

https://www.professionaladviser.com/news/4370399/cashflow-modelling-goes-giving-client-report

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For the full article, see:

https://www.ftadviser.com/your-industry/2024/10/18/cashflow-planning-is-where-the-value-lies/

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A little over 2 years ago, we saw inflation hit a worrying, 20-year high of 8%.  With a surge in the usage of cashflow modelling tools amongst financial planning firms, many financial planners found themselves in uncharted territory.  Suddenly, clients were querying the assumptions they were using and they simply couldn’t justify them.

Picture this: you are a well-to-do client, concerned about your financial future.  It’s April 2022 and the Times has just run an article about inflation hitting 8%.  You sit down at a meeting with your financial planner and they attempt to reassure you about your future using a cashflow model.  You ask them about the inflation rate they’re using and they tell you it’s 3%.  When you ask them why, they hesitate… “let me get back to you on that…”

The problem wasn’t that the assumption was unreasonable, but that many advisers didn’t understand the assumptions they were using.  They’d never NEEDED to understand them because clients had never questioned them.  Suddenly, advisers started posting on Social Media and adviser forums suggesting changing all cashflow models to use 8% inflation.  These posts met with positive responses and we felt the urgent need to challenge this and address a perceived knowledge gap.

Our advice at the time?  Do nothing!  But were we right to suggest this?

28 months later: we’re now in a position to judge.  Did the feared Inflation Apocalypse happen?  Was it like a low-budget Danny Boyle movie, where civilisation as we know it was brought to its knees, or was it more of a storm in a teacup?

March 2022 – DON’T PANIC

Let’s set the scene by reminding you of what was going on way back in March 2022.  Economically, a lot has happened, since then! 

Inflation had just hit 8% for the first time since 1991 and nobody quite knew what it meant.  As a lot of firms were fairly new to Cashflow Modelling, they were using assumptions that might have been built into the tools they had purchased, or selected in more stable economic times.  Clients were questioning the sanity of modelling using inflation rates that were a fraction of what they were hearing about in the news.

When we saw positive responses from the advice community to posts recommending using a long-term inflation rate of 8%, we felt the need to offer an explanation of long-term measures of inflation that advisers could share with their clients in order to justify the assumptions they were using.  We didn’t dictate what people should be doing, but we provided them with the information they would need to come to their own conclusions about what was reasoned and reasonable.

Long-term inflation trends

Our recommendation, at the time, was to use long-term inflation measures as a guide for the assumptions you use in cashflow models.  If you’re modelling for 20, 30, or even 40 years of a client’s financial future, it’s reasonable to look at changes over a similar period in the past to justify our assumptions.  We looked at the 30-year average of the Retail Prices Index (RPI) which, at the time, was 2.83%.  Through simple maths, we explored for how long inflation would need to remain at 2022 levels (or higher) to cause a significant impact on this long-term measure.

Based on OBR and ONS estimates at the time, we speculated that it would take over a year of double-digit inflation to cause a  significant shift in long-term rates:

Our conclusion?

we do need to keep a close eye on things.  If inflation creeps even higher, there’s a very real chance that by next year your 3% inflation assumption could be a little on the low side.  If things stay that way… then maybe it would be prudent to increase your inflation assumption.  But only by 1%, not 5%!

The response to this blog was incredible.  Not only did we have emails from our customers thanking us for the explanation, we even had messages from competitors telling us the article helped them navigate “difficult conversations with advisers”.

The (un)importance of being right

The maths we used in our original article was based on the Monetary Policy Committe’s aim of bringing inflation back under control within 12 months.  As we now know: this didn’t QUITE happen.  The government had also hoped that inflation would peak around 10%.  This didn’t QUITE happen, either – we saw a peak of 14.2% in October 2022.  As a result, our maths was a little bit off.  But does this matter?

We estimated that it would take 11 months for the 30-year RPI average to reach 3%, but this actually happened in just 8 months!  But, as inflation starts to come back down to “normal” levels (latest RPI at time of writing is 4.3% and CPIH 3.8%), I’m sure you’re wondering what two years of high inflation has done to those long-term averages.  Well, worry not – I have that answer for you!

In the chart below, we can see the craziness of the last 2 years.  In case you can’t, I’ve drawn a big red circle around it!

Compared to the previous 18 years, it’s clear that these were pretty exceptional times.

Let’s try a little experiment.  Remember our long-term average, in March 2022, was 2.83%.  What do you think it might be, today?  Here are a few pointers to think about:

• inflation continued to grow for the next 9 months
• on reaching double-figures, it stayed there for 15 months
• It wasn’t until October 2023 that we dipped back below 8%

I won’t keep you in suspense – the current 30-year average of the RPI is 3.35%.  The impact of all of the above: an increase of just 0.53%!  And, if that sounds like a lot to you, it’s worth bearing in mind that the long-term average of the RPI had only dipped below 3% in July 2020.  The last time it sat at 3.3% was in December 2018, just six years ago.  In other words: we aren’t seeing historic highs.  The impact of all that craziness is this little blip at the end of the chart below:

But we can’t rest on our laurels – the Cost of Living crisis is far from over.  Even with inflation dropping, the disparity between wage growth and prices over the past couple of years is still being felt and the need for ongoing financial planning has never been more apparent.  Recognising the importance of long-term assumptions and communicating them to clients helps us meet our Consumer Duty obligations and ensures our advice is received in a way clients understand and can relate to.

Understand your tools

The moral of the story is that being right or wrong isn’t important.  What’s important is understanding the tools you use and the assumptions that you (or your tools) make, so that you can justify them to clients when challenged.

While the messages of thanks we received in the aftermath of our original blog made us feel pretty good, that’s far less valuable than the knowledge that we helped fill a knowledge gap.  It’s my hope that somewhere out there there’s just one client who, as a result of the information we shared, realised that inflation WASN’T going to stay at 8%.  They accepted their adviser’s reasoned, reasonable assumptions and, rather than postpone retirement, they just tightened their belts for a couple of years.

I like to think that they’re currently on a cruise around the Carribean, laughing about how dismal things looked way back in 2022 and how grateful they are that they listened to their financial planner!

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Yes… but also no!

Stick with me, it’ll all make sense…

In the Spring budget, the Chancellor announced that the Lifetime Allowance (previously set to be frozen until 2028) would be removed and Lifetime Allowance ended on the 6^th of April.  This is both true and slightly misleading, for reasons that will become clear, shortly.

On first hearing this announcement, I immediately started crunching the numbers to see how much difference it might make for clients.  There are many demographics that will benefit, but a few who need to be a bit careful.  There are a host of potential pitfalls and challenges, as well as some great planning opportunities for advisers.

Let’s ask AI…

Following the meteoric rise of the omnipresent ChatGPT, over the last few weeks, I thought I’d ask everyone’s favourite AI what it thought about the Government’s announcement.  Like all content creators, I’ve been a little concerned that my “skills” will soon be made redundant… turns out there was little to worry about!

I very quickly got into an argument with ChatGPT, who insisted that the LTA hadn’t been removed.  Then promptly apologised!

“I apologise for my earlier response, you are correct…”

You have to phrase your question very carefully, if you want an accurate response.  “Tell me what’s changed with the Lifetime Allowance” tends to get inaccurate answers.  You have to ask very leading questions, telling the AI exactly what you’re after.  In the end, I plumbed for “Write a 3000-word informal blog about the implications and opportunities of the Government’s recent changes and the abolition of the Lifetime Allowance for UK financial advisers”.  Which led to some pretty funny, misleading, and laughable content!

Rather than bore you with the details, the fact that ChatGPT sees the key challenge for advisers as being the loss of revenue from Lifetime Allowance charges should say all that needs to be said!

What has ACTUALLY changed?

I think we can all sleep a bit better at night, knowing that even AI doesn’t understand pension legislation!

The actual changes made in April 2023 can be boiled down into three concrete points:

• The 25% LTA charge (Retained Amount Charge) has been scrapped
• The Tax-Free Cash limit has been frozen at 25% of a client’s current LTA, forever
• Any excess is charged at the client’s marginal tax rate, rather than 55%

So, what are the planning opportunities presented by these changes and what are the potential pitfalls we should look out for?  To explain, let’s look at a couple of simple case studies.  To keep things simple, for each case study, I’m going to assume each client is 60 and has a £2m pension fund.

1 – The Estate Planner

This type of client has no need for pension income.  They want to ensure their beneficiaries inherit as much as possible from their pension pot.

Advice pre-April 2023

For clients in this situation, the only alternative to a hefty LTA charge is to de-risk up to age 75, minimising the growth on their fund and preserving its capital value.  On their 75^th birthday, after paying the “Retained Amount” LTA charge at 25%.  They can then invest for growth.

Let’s assume a modest 5% return, net of charges, and inflation at 3%.

By age 75, their £2m pot increases to £4.1m.  Assuming (current legislation) the LTA is frozen until 2028, when it increases annually with inflation, the LTA has risen to around £1.4m and they pay LTA charges of £680k.  This leaves them with a fund of around £3.4m.  Adjusted for inflation, this is roughly £2.2m in today’s money.

By age 100, their fund is worth £3.6m in today’s money.

Advice post-April 2023

These are the clients who benefit most.

The removal of the Retained Amount charge means that this client will never incur ANY Lifetime Allowance charges.  Not only do they save nearly £700k in LTA charges at 75, but they can invest for growth from the outset with no concerns about handing more of their pot to HMRC.

Their £2m pension fund, invested at 5% for 40 years (age 60 to 100) is worth £4.4m.  Not only have they saved £680k in LTA charges, but the investment growth on this money equates to an extra £120,000 in their pot.  Overall, this is a 22% increase in the value of the fund they might potentially be leaving behind for their beneficiaries.

Planning Opportunities

Clients who were previously forced to look elsewhere for their investments can now potentially simplify their affairs significantly.  Clients who had stopped contributing to their pensions might consider doing so as an alternative (or in addition) to trust planning, Family Investment Companies, etc.

While this may seem like a lost new business opportunity, proactively contacting clients who are in this situation to advise them of the fantastic implications the new legislation might have for their financial affairs is a golden opportunity to solidify and strengthen client relationships.

2 – The Active Retiree

Approaching retirement, this client is going to rely heavily on their pension fund.  Other than State Pension (a few years away, yet), they have no other source of income.  They require an income of £40,000 per annum.

Advice pre-April 2023

Phasing tax-free cash is the most tax-efficient way of extracting income from this client’s pension.  Each year, a combination of tax-free cash and taxable income can be taken.

By crystallising precisely £109,720, they can achieve their target income of £40,000 net in the 2023/24 tax year without paying a penny in tax!  They can take 25% of this (£27,430) as tax-free cash.  The remaining £82,290 goes into a Flexi-Access Drawdown (FAD) pot, providing “taxable” income of £12,570 to make up their £40,000 income requirement.  As this is within the Personal Allowance, there is no income tax to pay.

Assuming 5% investment growth and a 3% increase in retirement spending, after around 8 years they would have depleted their tax-free cash entitlement.  From this point on, they would need to restructure their income to avoid a 55% LTA tax charge.   With a significant amount already in their FAD pot, they could take some income from this.  Any further crystallisations from the uncrystallised pot…

Advice post-April 2023

Rather than having to worry about which pots might or might not be subject to LTA tests at 75 and stripping out the growth on funds to avoid tax charges, things are much simpler now.  Regardless of whether the pension is crystallised or uncrystallised, any income drawn will be taxable at the client’s marginal tax rate.

In other words, once tax-free cash is exhausted, it makes sense for this client to crystallise the remainder of their pension into flexi-access drawdown.  As well as avoiding potentially paying fees and charges on two separate products, should future governments choose to reinstate the Lifetime Allowance, ensuring all funds are crystallised protects against future charges.

Planning Opportunities

For this client, their objective is to enjoy their retirement.  Now, they can afford to do a great deal more of that!  On crystallising the remaining pot, in eight years’ time, they save around £420,000 in Lifetime Allowance charges.  Seven years later, when they turn 75, they save a further £120,000.

Just from the Lifetime Allowance savings (and growth thereon), they could afford to spend an additional £30,000 a year during the heyday of their retirement (from now until age 85).  That’s a lot of holidays, gifts to the grandkids, or sailing lessons!

3 – The Overfunded Pre-Retiree

This client had already built up their pension fund prior to the arrival of the LTA back in 2012 and applied for Fixed Protection at £1.8M.  Fixed Protection, as the name indicates, protected the client against the reduction in the Lifetime Allowance, in exchange for ceasing all contributions.  They’ve been unable to add to their pension for the past eleven years, despite not yet having retired.

Advice pre-April 2023

This client would have had to look elsewhere for investments to fund their retirement, as no further pension contributions could be made.

Advice post-April 2023

Any clients with Enhanced or Fixed Protection can now contribute to new or existing pension schemes without losing their LTA protection!

But what does this mean?  Well, it opens up the possibility of putting money into a pension for those who couldn’t previously… but does that mean they should?  Without a Lifetime Allowance to worry about, are clients any better off investing in a pension where income is likely to be taxed at their marginal rate than putting the same money in their GIA where income will be tax free? This all depends on the differential between their marginal tax rate pre and post-retirement.

It’s pretty safe to assume most clients with pension funds threatening the LTA are likely either to be Higher or Additional Rate taxpayers.  An Additional Rate taxpayer benefits from up to 45% tax relief on pension contributions (£0.20 via HMRC and a further £0.25 claimed back via Self-Assessment).  In other words, each £1 contributed results in £1.45 being added to their pension pot.  If the same client had no other taxable retirement income, the whole £1.45 could be withdrawn tax-free.  If withdrawals were taxed at ??

This table shows the gain a Higher or Additional Rate taxpayer could make per £1000 net pension contribution, depending on their marginal rate in retirement:

Planning Opportunities

This might only relate to a relatively niche group of clients: those who had pretty substantial pension funds a decade ago but are still in employment.  But, for clients who are lucky enough to fall into this group, there are some pretty significant potential gains to be found.  Many of these clients will have been investing in more complex vehicles over the past few years, as pensions were off the table for them.

Even where clients with Enhanced or Fixed Protection are likely to be higher or additional rate taxpayers in retirement, the potential to grow an asset which is immediately outside their taxable estate may also be a very attractive option.

But Labour will bring back the Lifetime Allowance in 2025!

Sir Keir has not been shy in voicing his approbation of the recent changes.  So, what happens if Labour wins the next general election and reinstates the Lifetime Allowance?

PR, darling!

There are a number of considerations, here.  Firstly, the PR angle.  One of the current Government’s primary excuses for the removal of the LTA has been keeping senior NHS and public sector staff in their roles rather than pushing them towards early retirement.  If a future government were to reinstate the lifetime allowance, imagine the PR storm the opposition could kick up!

To avoid public outroar, there would need to be, at the very least, some special measures introduced for those in the NHS and other public services who might otherwise have retired between April 2023 and whenever a subsequent government issues its first budget.

New Protection?

When the Lifetime Allowance was introduced, and each time it has subsequently been reduced, the serving government has given clients the option of protecting their pension funds against legislative changes.

Theoretically, it’s possible for clients to amass an almost unlimited pension fund!  Those clients who had FP12 with funds of £2.5m and were expecting hefty LTA charges could throw money at their pension for the next 18 months.  Assuming they haven’t contributed in 11 years and no tapering applies, they could contribute £180,000 this year alone (three years of £40,000 carry-forward, plus the new Annual Allowance of £60,000 for 2023/4).

It would be unprecedented for the government NOT to introduce some new form of protection for those whose funds exceed the new Lifetime Allowance, should it be re-introduced in 2025.  What form this might take, and what allowances might be made for fund values on 5^th April 2023 (for clients with pre-existing protection) is anybody’s guess.  While I can’t envisage any solutions that aren’t horrifically complicated, some new form of protection is almost guaranteed.

A week is a long time in politics…

Labour wouldn’t be the first political party to renege on a pre-election promise.  And, at this stage, it’s not even a pre-election promise.  Just because Sir Keir Starmer has made a speech, that doesn’t mean it will even form part of the Labour manifesto for the next General Election (or, indeed, that Sir Keir will be the Labour candidate).

And, of course, there’s the possibility that Labour might not win the next General Election!  Latest opinion polls put Labour a staggering 23% ahead, but the gap is narrowing.

Not only can a lot change politically, but also legislatively.  While we’re focussing on the Lifetime Allowance, changes to personal tax allowances, tax rates, and other available reliefs over the next 18 months could alter the advice we give to clients in the interim.  We can’t expect the Lifetime Allowance simply to be reintroduced as it stood on the 5^th of April 2023 as if all other legislation had been frozen in time around it.

The Ghost of LTA Past

In the style of a low-budget Christmas film, rather than the one Lifetime Allowance we had prior to the 6^th of April, we now potentially have three: the current Lifetime Allowance (yes, it’s still there, just charged at 0%), plus the ghosts of LTA yet to come (see above) and LTA Past!

In years to come, historians (and new entrants into the advice sector) will scratch their heads and wonder where on earth the obscure figure for maximum permissible tax-free cash from a pension came from.  We, the survivors, will be able to knowledgeably inform them that, when the Lifetime Allowance was reduced from £1,250,000 back in 2016 we were promised that the LTA would increase by the September increase in CPI (https://www.legislation.gov.uk/ukpga/2016/24/section/19).  This only happened three times – in 2017/18 (3%), 2018/19(2.4%), and then 2019/20(1.7%).

As there are currently no plans to index this number, moving forward, we end up with the obscure figure of £1,037,100 as the Lifetime Allowance as it stood when it was repealed, with our tax-free cash limit forever locked at 25% of this.

Gone, but not forgotten…

So, don’t forget about the Lifetime Allowance.  It’s gone (for now), but never to be forgotten.  It might be back.  It might not.  There might be further interim legislative changes.  There might not.  There may be more forms of Protection introduced.  There might not!

If a week is a long time in politics, 18 months is an even longer time in Financial Services.  Who knows what might change in the meantime.  And if the Lifetime Allowance ISN’T reintroduced by a future government, knowing why clients’ tax-free entitlement is limited to £268,275 will make for good Financial Services pub quiz knowledge, if nothing else!

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With implementation plans now well in place and the new rules coming fully into force on 31^st July 2023, we wanted to a look at where cashflow modelling fits into the Consumer Duty puzzle.  So, let’s run down three of the key ways in which cashflow modelling can help you exceed your regulatory requirements and get yourself ready for Duty.

Product or service?

The “products and services outcome” element of “the Duty” focusses on ensuring that the products and services you supply to consumers meet their needs and are fit for purpose.  One of the most important aspects of this outcome and area of oversight is ensuring that the products and services you offer meet the “needs, characteristics, and objectives” of your clients.

The FCA is talking here about the needs, characteristics, and objectives of a segment of your client bank, rather than individual clients.  But, regardless of whether we’re looking at a cross-section or an individual, what better way of evidencing the fact that you understand your client’s needs than a report which breaks these needs down?  What better way of detailing their objectives than a report which itemises and prioritises them?  And why not achieve all of this with a financial plan, framed around a cashflow model?

One of the questions we’ve been asked more times than we care to remember, over the years, is “should I only offer cashflow modelling to my top clients?”  And the answer is… er… maybe!  It depends on the characteristics of your… “not top” clients.  Perhaps you have a segment of your client bank that only want you to manage their investment portfolio.  Maybe you think their needs don’t require cashflow modelling.  In my experience, almost all clients can benefit from cashflow modelling.  Whether it’s a simple model that gives them visual confirmation that all is on-track or a complex model which indicates the level of pension input they need to achieve a certain outcome, the value of cashflow modelling (as we’ll cover later) is peace of mind.  How would each segment of your client bank answer the question “would you value increased peace of mind, when it comes to your finances”?

Even though all clients might benefit from cashflow modelling, as we’ve talked about previously we should take pains NOT to treat cashflow modelling as another product to sell to clients.  Lifelong cashflow planning should be seen as something that enhances your service, rather than a product to peddle.

By incorporating cashflow modelling into your client proposition, you are demonstrating an understanding of your client and how your service helps meet their needs and objectives. 

Quantifying value

The next outcome, under the Duty, is “price and value”.  Evidencing value added is one area in which, traditionally, many investment-focussed advice firms struggle, particularly during periods of rocky market performance.

As part of the Duty, the FCA is looking to adopt a more data-driven approach to oversight.  We’ve already established that cashflow modelling should be something that enhances the service you provide to clients, rather than a product you sell.  We’ve also seen, from a qualitative perspective, how it enhances that proposition and helps ensure that your advice is tailored to your clients’ specific needs and objectives.  But how do we quantify the value that this adds, for clients?  If cashflow modelling forms part of your service proposition, we need some way of putting a figure on its importance and recording MI ready to present to the FCA.

There have been seen some fantastic articles, over the past few months, suggesting client questionnaires as a fantastic way of capturing this data.  I won’t be the first, or the last, to echo this sentiment… but I might have a slightly different take on it.  Rather than simply asking a client, either before or after a review meeting, whether they are confident about their financial position, or whether they understand the advice you have given, how about something a bit more nuanced?

Imagine, for a moment, you have a meeting coming up with a client.  Prior to the meeting, you send the client a link to a questionnaire with just a couple of simple questions, for example:

On a scale of 1-10:

• How confident do you feel about your financial future?
• How well do you understand the products and investments you currently own?
• How clear are your financial plans for the next twelve months?
• How clear are your plans, beyond this period?

You record your clients’ responses to these questions then, the following week, you meet with them.  A few days after your meeting, you send them the same questions.  The pre-meeting results are your benchmark; any improvement is a quantitative indication of the value of the service you have provided during your meeting.

Perhaps you could add in some more leading questions, such as

During our recent meeting:

• What helped to improve your understanding of your financial situation?
• What helped to improve your confidence about your financial future?

Subjective responses are perhaps not as “valuable”, in pure MI terms, as seeing a client’s confidence rating go from a 6 pre-meeting to a 9 afterwards.  But not all data is numerical.  Having a statement on file saying how the cashflow model you presented to them, or your matter-of-fact explanation of their situation improved their confidence or understanding is just as valuable in illustrating how you are meeting your Consumer Duty requirements.

Of course, you can also quantify the Pound value of the tax you’re saving your client; the IHT they might save because of some trust work you’re doing for them; or how much more they have available to spend in retirement, following your pension advice.  But, for an oversight regime designed to focus on consumer understanding and positive outcomes, what could be better MI than your client’s direct feedback on the value that your advice has added to their situation?

A picture paints a thousand words…

I once had the misfortune of receiving a critical yield illustration for a DB pension transfer.  This document ran to over a dozen pages, with countless almost-identical tables illustrating the impact on the sustainability of the receiving fund of various different growth rates and withdrawal strategies.  As a consumer (albeit one with passable knowledge of financial services), it bored me almost to tears.  My willingness to understand it (and my desire to go on living!) waned as I read on.

Human beings are, by our nature, visual creatures.  Even those of us who are capable of digesting and understanding a dozen pages of critical yield tables take no pleasure from doing so.  But provide the same information in a graphical form and you increase your client’s ability to understand the information and retain its meaning significantly.

This table shows the value of a client’s £240k pension fund over a 20-year period with drawdown of £18k/annum at 4%, 4.5%, and 5% return:

Pretty dry stuff, right?

This cashflow chart shows the same data over the same period with the same outcomes:

Which do you think provides a clearer message?

Clients don’t (and shouldn’t) care whether their pension fund might hypothetically be worth £23,878 or £61,701 in 18 years’ time, they just want to know how much is enough.  By all means, supplement the picture with the thousand words, or include it as an appendix to tick off a compliance requirement, but don’t forget that all the client cares about is quite literally the big picture!

Nothing in life is to be feared…

Having provided comprehensive lifelong cashflow modelling software for financial planners, advisers, coaches, and wealth managers for nearly forty years, there is one recurring phrase that we consistently hear from our customers: “peace of mind”.

Clients come to you with problems, questions, or concerns.  “Can I afford to retire?”, “What will happen to my family if I die?”, “What happens if my portfolio tanks?”.  Of course, we can answer these questions with numbers.  We can tell clients that they can afford to retire at 62, rather than 65; or that they require an additional £432,000 worth of life assurance.  But why tell them when we can show them?  And, by showing clients a visual representation of their financial future, we’re not only solving their problems, answering their questions, and addressing their concerns.  We’re helping them to truly understand their life choices.

“Nothing in life is to be feared, it is only to be understood. Now is the time to understand more, so that we may fear less”
Marie Curie

Someone once told me that every assumption in a cashflow model is a stress test.  Assuming a client might live to age 95 when statistically it’s unlikely they’ll do so – stress test.  Assuming inflation will be slightly higher than economists’ projections – stress test.  Assuming conservative growth rates on clients’ portfolios – stress test.  We don’t baffle them with figures or overload them with pages of data, we show them a simple picture and the high-level assumptions that feed into it.  And, by showing clients that, even with all of these stress tests, everything is going to be OK, we deliver a service with tangible value that can be easily understood.  In other words: peace of mind.

The post Defining “Good outcomes”: Cashflow and Consumer Duty appeared first on Prestwood Software.

Consumer Duty is designed to ensure that firms provide:

• helpful customer support
• timely and clear information that people can understand
• products and services that are right for their customers

Reading between the lines, this suggests the FCA has identified firms who are providing UNhelpful support, UNclear information that clients CAN’T understand, and products and services that AREN’T right for their customers.

What does it say about our profession that we require regulatory intervention to ensure clients are getting what should be seen as basic acceptable standards of service? Surely, these aren’t things that we should need legislation to enforce.

Making the invisible transparent

Predictions from the FCA that the new rules will lead to a “major shift” in financial services indicate just how varied the standards of transparency and customer focus are across Financial Services, and how far we must go to improve the reputation of financial advice in the eyes of the general public.

Remember that financial services are just that: services. Unlike the primary and secondary sectors of the economy, the service sector provides intangible “goods” to consumers in the form of advice. While financial planning firms also serve as product vendors, the non-regulated business of “Financial Planning” itself is something clients can’t see. Perhaps this is why some firms struggle to communicate the value of their client proposition?

Clients can see their pension application. They can see their life assurance documentation. They have paperwork (or pdfs) and that paperwork has standards and requirements. They have acronyms to protect them, from KFDs to TCF. But when it comes to “advice”, they have something intangible and invisible. They can’t hold it or see it or take it home with them, so how are they meant to understand what they’re paying for? How do we increase the standards of transparency for something that’s already invisible?

An unsustainable “product”

When it comes to justifying client fees, many firms fall back on investment returns. By delivering something tangible, quantifiable, and measurable to clients, we effectively make returns our product. In some ways, this is easier than trying to explain the value of our service. But it’s also lazy and unsustainable.

In “selling” clients market-beating performance as a product, we’re deflecting from the question of “what value are you delivering for my fees” and instead relying on something which is unpredictable and beyond our control.

A recent Which article gives the average cost of ongoing financial advice as 1.9% p.a. (after factoring in product and portfolio charges). What happens when markets inevitably tumble and your client’s portfolio grows by less than the cost of your fees? They’re still paying you, but not receiving the “product” they paid for. Until they STOP paying you!

The symptom and the disease

If reliance on investment returns as evidence of value is the disease, AUM (or AUI, or AUA) figures cited as a measure of business success is the symptom. Clambering after clients who have large portfolios will inevitably leave you chasing your own tail in trying to evidence the value of your proposition.

Imagine, for a moment, you have a client with £10m to invest. You intend to charge 1%. Where can you add £100,000 worth of value for this client? If YOU can’t see it, odds are that the client won’t be able to, either!

What if the same £10m were split across 20 clients, each with £500k investible assets? You still charge 1%. To achieve the same £100k revenue, you have to do 20x the work (or more). While you might have an easier job proving to your client that your time and efforts and those of your staff and colleagues are worth £5,000 to them, are you charging enough for that time?

Without getting too deeply into a debate about charging structures, it’s clear that there is a problem. Of course, the solution is fewer, more profitable clients! But, while we can all strive toward the perfect business model, a good place to start would be an alternative and more sustainable metric by which to measure success.

What do clients REALLY value?

So, what if we could find a reliable way to substantiate the value of financial advice without reliance on investment returns? What if we could provide clients with a transparent indication of the value of the service they’re paying us for, rather than trying to pass that service off as a product?

The starting point for this process needs to be a fundamental shift in focus. Rather than looking at things from the adviser or advice firm’s perspective, we need to look at it from the point of view of the client. What is the client looking for from the adviser relationship? Where might the client perceive value in that relationship? What aspects of that relationship couldn’t be replicated by the clients themselves, another adviser, or a robo-adviser?

If you sat down in a room with a thousand happy clients and asked them “what do you value most about your financial adviser?”, how many of them do you think would give an answer that mentions investment returns?

What clients value, and I’m telling you this from our experience of nearly forty years speaking with tens of thousands of advisers who have serviced millions of happy clients, is comfort, reassurance, and clarity. They come to you with a problem or fear, they come away with a solution and with confidence. Sure, some of this confidence has resulted from pound signs and zeroes being added to their portfolios, but that’s not what they remember.

When clients judge your performance in terms of the investment returns you are able to deliver for them, there is a perpetual need to continue delivering these returns. When the focus shifts instead to helping them realise and achieve lifestyle goals, the tail chasing can finally end.

Quantifying “confidence”

The “problem” with this client-centric approach is that the value of a client’s portfolio is much easier to quantify than understanding and happiness! When we move away from a tangible product toward a service, how do we collate data on this non-product?

One approach we’ve seen applied with incredible success is customer satisfaction surveys. Quite simply, you ask a client how happy they are with various aspects of their financial situation before your meeting, using measurable indicators. After your meeting, you ask the same questions again. Any improvement in these measures shows improvement in confidence.

There are many ways of achieving this. Whether you give clients a physical questionnaire, a digital form, or use an app (like ScoreMy). By keeping track of these scores over the course of a series of meetings, you have a means of putting a number to an otherwise abstract service and demonstrating clear added value. All without ever selling a product or looking at a fund performance chart.

Don’t be lazy (focus on the results)

For firms who have long embraced lifelong cashflow modelling, Consumer Duty will not result in the “fundamental shift” in processes that the FCA predicts. When clients can already understand the advice they receive and clearly see its value, no change is necessary.

But before you say “Adam, of course you would say cashflow modelling is the solution, you sell cashflow modelling software!”, cashflow modelling is NOT the solution. Don’t fall back into the trap of deflecting and “selling” cashflow modelling as just another product. It’s not the tool itself, but rather the shift in mindset that cashflow modelling helps deliver that’s the answer. Try not to focus on the service you’re providing, but instead on the results that it facilitates for your clients. Take the blinkers off and try to see things from the client’s perspective.

We’ve done a little research into what clients value from the advice process. In a recent survey (you can still contribute your thoughts here), we asked advisers what their clients value about cashflow modelling. 21% talk about clients becoming better informed and more engaged with the planning process; 36% of responses mention increased confidence or reassurance; 33% mention clients find cashflow modelling gives them clarity or an improved understanding of their financial situation. And remember, consumer understanding is one of the key areas of focus under the new Consumer Duty regime.

There is no panacea or magic pill which will improve your profitability overnight. There is no switch you can flip which will improve client retention. But adopting a truly client-centric approach to financial planning (maybe even facilitated by cashflow modelling software?) and seeing things from a client’s perspective will help you understand the value that your service actually delivers to your clients. Would you pay for what you’re offering? Would you understand it? Would you judge it to be good value for money? If you can honestly answer “yes” to these questions, then so will your clients.

The post Why it’s depressing that we even need Consumer Duty rules (but they’re long overdue)!  appeared first on Prestwood Software.

From time to time, we hear from planners who are stumped about how to fully integrate cashflow modelling into their businesses.  Maybe there is a lack of confidence when presenting in front of clients in case they ask a question not prepared for.  Maybe they think clients are simply not engaged.

Here, Terry Hopkinson tells us about his journey with Truth^® and how it gave him back his self-esteem as an adviser.

Over to Terry:

Testimonial by Terry Hopkinson, IFA

I had known of and respected Truth’s founder Paul Etheridge for a long time and been to more than one of his seminars but had never felt persuaded to take it on for some reason. Until I read a testimonial from a recent customer which said something like, “At last, my self-esteem as an adviser has returned”.

As an adviser in my late 50’s, this comment really struck me. Most of my days at that time, as with the previous 20 odd years, had been spent traipsing out to clients’ offices or homes hoping to sell them some product or twist their arm to increase their pension or ISA contributions in order for me to make a living.

Naturally, I convinced myself that I was doing an important job for them, but there was definitely something missing not just in the client-adviser relationship but also in my desire to convince clients that I was providing a service they would perceive as compelling and good value.

So, I decided to attend a Truth seminar after which I took the plunge and took it on. I firmly believe that that action was the most important one of my advisory career since I turned independent 25 years earlier.

Within a year of using Truth the following happened: –

1. Client meetings changed virtually 100%, from travelling to their premises to them coming into my office. I simply explained that I had some new software which would give greater clarity in helping them achieve their financial planning goals and that I needed to show them on the large screen in my office. I said it with genuine conviction and managed to convey that it would be worth the trouble for them to travel to me. Surprisingly even those I thought might baulk at this were willing to travel over at least once to see what I had to offer (and they came in for every annual review thereafter).
2. Having client reviews in my office immediately changed the dynamic of the meetings – and therefore the relationship. Clients were now doing what they did with other professional advisers: they took time out of their day to visit my office. They had no distractions and seemed happier too. More than a few said how much they now looked forward to their reviews.
3. My working day changed dramatically. Because clients were travelling to me I had so much more time to prepare for meetings and write follow up notes afterwards. My car mileage was reduced by 90%. No more getting stuck in rush hour traffic!
4. All of the above though were really just by-products, albeit very valuable ones, of the main value of using Truth. Being able to do a full, precise, and meaningful cash flow plan for the client and demonstrating it to them in real-time was the best prize. Clients now became fully engaged with the concept of having an annual meeting at my office to go through the annually updated cash flow financial plan, with a follow-up report, making their retirement goals look real and tangible.
5. Client relationships improved markedly. I was able to demonstrate real value that clients were happy to pay for. The main topic of conversation had moved on from investment performance to financial planning goals. This was especially useful during market downturns such as 2008. Once clients realised that despite the short term market falls that their plans would still be followed through, it provided them with great relief and therefore improved quality of life through peace of mind.
6. Now, we are experiencing a cost-of-living crisis and the threat of another recession. Planners using Truth with their clients should have full confidence that they have the tools to deal with all client concerns.  Truth helps you demonstrate that it is not what is happening now that will help your clients reach their goals, it is long-term financial planning.

I have sold my business now. I can confidently say the Truth software paid for itself many, many times over. I would wholeheartedly recommend it to any adviser who is serious about Financial Planning and wants to improve client relationships, give themself more time and, of course, more profit.

The post Terry Hopkinson – Relationships, Results, and Reaping the Rewards! appeared first on Prestwood Software.