Possibilities or Goals

When financial advisers are working with clients, is cashflow planning a complete waste of time? It’s the sort of question that could provoke a physical reaction among some of the cashflow modelling advocates. I’m not that brave, so it’s the sort of question I leave out of most of my conversations with advisers. With around 90% of financial advisers using cashflow planning as part of the decumulation advice process[1], cashflow tools have become a core part of the profession’s re-orientation away from (simplifying/generalising) “selling product” to “lifestyle planning”.

It is – from behind the safety of a screen – worth asking the question; are they fundamentally flawed?

In 2017 7IM published a whitepaper called “glide path to poverty” looking at lifestyle funds as a default retirement option. We highlighted that if the objective was to maximise a percentage chance of reaching a retiree’s goal, automatically de-risking through time (lifestyling) didn’t make any sense – something the world is increasingly coming to realise.

While the paper was focused on lifestyle funds, another key part was discussing a “goals-based” approach to delivering a client’s objectives. Because when we take this approach, we frame risk profiling in more dimensions than just investment risk.

This is crucial when we think about constructing processes for running retirement income portfolios. Centralised investment propositions (CIPs) tend to slice investment portfolios by a client’s risk profile plus cost-sensitivity – read active vs. passive. Once an adviser has established these two bits of information, there is a small and obvious choice of building blocks to fulfil the job of “balanced passive” or “adventurous active”.

Now I am deliberately simplifying but I think it summarises CIPs quite succinctly. The bit that centralises and scales advice processes is that the adviser doesn’t have to “bespoke” the portfolio for each and every client, where historically that might have been the case. In a time gone by, pre-RDR (retail distribution review), many advisers played the role of portfolio manager, at the same time as tax planner/tax adviser/lifestyle coach/etc etc.

And when we think about how a centralised retirement proposition (CRP) could be defined, it starts with a similar philosophy to a CIP. There should be a number of inputs to define the portfolio. However, in the case of retirement, these stretch well beyond the simple categorisation of a risk profile and set of cost preferences.

The income requirement is the obvious key addition, but it goes further than that to include how long those cashflows need to last and any adjustments to those through time, for instance due to inflation. Once those goals are set it makes complete sense that, assuming a client’s goals are identical to another’s, they would get the same portfolio and process to deliver on those goals.

That assumption is a HUGE one though. With accumulation, it’s easy. The goal is to grow the pot as much as possible. But with retirement goals?!

Clients may come to a first meeting with no goals at all, with unrealistic goals, or those that are too conservative. In fact, the extraction of specific goals from a client conversation is a huge part of what advisers do for clients. Letting them know early retirement is possible, that they can give their children a helping hand, that they do have financial freedom.

Goals-based planning sounds great, but it’s actually step two of the process. Step one starts with the possibilities, needs and wants of a client that are then articulated through a process and conversation into goals. There’s so much good stuff that can come after those goals are defined, from portfolio construction to tax optimisation, but really it’s secondary to the possibilities-based planning exercises that defines the goals. It’s also a step that is the least likely to be subject to the “rise of the robot”. It’s why I think talking about “goals-based financial planning” cuts short the real value provided by an adviser.

[1] From the FCA “Retirement income advice thematic review” in the CRP processes reviewed 88% of firms used some type of cashflow modelling tool.