Demonstrating the true monetary impact of sound advice, by Jon Rolfe, Head of Product Advisory Board at i4C

, 31 July 2018

Although many financial planners know of cashflow modelling and the positive impact it can have on a client’s decision-making ability, this is only one of the reasons why I believe using such a tool can be transformational to a progressive IFA business. I believe there are three central benefits – or pillars – to using a cashflow modelling:

• Pillar 1. Health Check: Empowering clients to make decisions with confidence, having seen and understood the potential impact of action;

• Pillar 2. Stress Test Advice: Allowing an adviser to stress-test their advice to ensure it is robust. It is particularly useful in complex scenarios and in many cases, can challenge the adviser’s preconceptions;

• Pillar 3. Demonstrate Impact: Demonstrating the once intangible value of good advice.

Perhaps this is best illustrated with a case study. Tim and Rebecca recently sold their business and whereas previously they had not considered that IHT planning was important to them, they now felt a desire to maximise their estate for their children, James and Emma.

Prior to our meeting with them, the extent that cashflow modelling had been used on their behalf was to assess what their “magic number” was – how much they needed to realise from the business sale in order never to have to work again.

In our initial ‘Baseline’ assessment, we therefore took their current cash and asset rich situation and projected it into the future. This is shown in the left-hand graph in Figure 1. As can be seen, their assets should easily outlast them as they spend less than they are assumed to make in investment returns.

As well as using the software to carry out capacity for loss analysis, I created a second scenario ‘May 2017 IHT Planning’. In this scenario (shown on the right in Figure 1), I introduced IHT-efficient measures such as turning off drawing income from the pension, making a number of gifts into trusts, and including a Whole of Life insurance policy. Crucially, we also included planning fees in this scenario. This lets the adviser see whether such planning is cost-effective, whilst leaving the client with sufficient liquid assets to provide security for life.

Figure 1: i4C Liquid Assets Chart: (Baseline) v (May 2017 IHT Planning) scenario.

While clients usually understand the benefit of IHT planning, they often lack the confidence to implement it as they are unsure about what the future might hold. To eradicate this fear (for myself and the client), I created a third scenario – ‘May 2017 IHT Planning with Headwinds’. In this scenario, I created a perfect storm of “headwinds” with a view to assessing how much headroom we had left the client before their primary objective of financial security might be jeopardised. These headwinds included poor investments returns (matching inflation for life), increased expenditure (by 10% a year for life) and a provision for long term care fees (£30K p.a. for 4 years).
Figure 2 illustrates that even with these changes, the client still maintains a safety net of liquid assets until death (assumed to be at age 100). Given they also own several properties which they could be disposed of , our advice stood up to the challenge.

Figure 2: i4C Liquid Assets chart: (May IHT Planning with headwind) scenario

This process not only removed any inertia the client may have otherwise had, it also evidenced that the advice is highly unlikely to jeopardise the primary objective of achieving lifetime security. The client can now confidently act on my recommendation and we can both sleep well at night. It should be noted, that in order to maintain positive liquid assets, we needed to re-commence pension withdrawal to the original level stipulated in the baseline.

Figure 3 looks to demonstrate the value of this advice to the client and shows how the overall benefits dwarf the planning fees payable. Looking at the Estate on Death graphs within the cashflow software, we can see that the total assets after IHT (on death at 2040) have increased from £4M to £5.4M and the IHT liability has reduced from 32.1% to 12.6% of the estate. This is after accounting for all financial planning fees which are factored into the second scenario.

Figure 3: i4C Estate on Death graph and pie chart for ‘Baseline’ v ‘May 2017 IHT Planning’

Using cashflow modelling to demonstrate the impact of your advice, after fees, not only removes client inertia, it helps to drive home and quantify the value you are adding as a financial planner. Gone are the days that I am judged only on investment performance – a position that will increasingly be under threat from robo-advice. The cashflow modelling process helps move the focus of the conversation away from fee justification and investment performance onto the issues that make a difference to the client – their life plans.

I honestly don’t know how I used to provide advice on these critical, and often irrevocable, planning areas without the use of modelling tools.

This article was published in New Model Adviser in 2017