There are universal ways cashflow modelling is used by financial planning firms, observes Jon Dodson of Redmill Advance.
In a few short years, we’ve moved to a point where Cash Flow Modelling (CFM) is a staple in many financial planners’ toolkit.
It’s truly amazing how much colour, what is essentially a big calculator, can bring to the client experience and the service they are offered. Some firms have adopted a very clear approach to where CFM sits in their client journey, others have given their planners the flex to use the tool as they see fit with clients. Here, I thought I’d look at just a few of the ways I’ve seen CFM used with clients. Outside of the parameters defined by the regulator for DB transfer advice, I’m not sure there’s a right and a wrong way to use it. Though I would point out that two things seem to be universally true: 1. It seems to be far more compelling when it is used in a live environment rather than just sharing static content. 2. It only works if the conversation with the client is exceptional – this seems obvious but on the very odd occasion I have seen CFM positioned poorly or become a conversation replacement. After that, it seems that the use of CFM is down to the preference of the planner (within firm policy) and the effect they wish to have with a client. What follows is three of the more common uses that I have seen in the past few years. Indeed, many planners will use two or all three of these when working with a client…
- Fact find facilitator In this situation, the CFM tool is used early on with the client as a capture tool in the fact-finding meetings. This allows the planner to rapidly produce what we might call an initial report detailing the client’s current situation. This snapshot immediately gives value to the client and can be charged as a separate piece of work.
- Eye opener This can be combined with the above approach but doesn’t necessarily have to be. The fact find is completed and the planner will go away to model some scenarios to illustrate to the client in a separate meeting – sometimes referred to as a planning meeting. Sitting alongside the client, the planner will play through
- Confirmation of action Here the planner and their team have completed the analysis and are ready to present their recommendations to the client. The CFM outputs are used by the planner to confirm that the solutions that have been reached are the best course of action for the client. Other scenarios may have been modelled to show the impact of proceeding down an alternative route
If a planner has used CFM with a client at outset, the narrative from the outputs gives a dynamic to the planning story which helps clients visualise progress towards their planning objectives – this makes returning to CFM at reviews critical in order to continue that narrative. At its most effective then, we may choose to think of the role of CFM like this: A client’s goals, assets, objectives and aspirations etc are like the numbered points on a dot-to-dot picture. Great planning draws the line to join the dots and create the picture – it brings coherence. CFM is when we colour that picture in.
By Jon Dodson, Redmill Advance