Is cashflow modelling a necessity for adviser firms?

clock • 5 min read
"Not only does it take a large amount of the stress out of planning for you and for your clients, but it also gives you more availability to advise clients." - Kat Wellum-Kent

"Not only does it take a large amount of the stress out of planning for you and for your clients, but it also gives you more availability to advise clients." - Kat Wellum-Kent

Cashflow modelling has become a crucial financial planning tool for many firms, but with every convert, there is a critic. Georgie Lee asks: what are the actual benefits of a cashflow planning strategy to an adviser?

The financial advice sector is full of cashflow modelling converts. The ability to project a client's financial future has proven to be invaluable, and as new technology advances and hybrid-advice models come to the fore, reshaping the traditional role of the adviser, the use of cashflow tools is expected to accelerate substantially over the next few years.

A 2020 survey by consultancy the lang cat that examined the responses of 565 advice professionals, revealed cashflow software has become immensely popular in the sector, particularly when it comes to constructing retirement plans. In total, 90% of advisers confirmed they use cashflow modelling in some form or other. One adviser went so far as to liken the absence of its usage by the modern professional, to a doctor refraining from using a stethoscope.

This was not a fluke. In January 2021, digital advice solutions provider intelliflo revealed that in a recent poll of advisers, 88% of respondents agreed cashflow modelling engaged clients in the financial planning process. In this research, multiple features of cashflow modelling, such as inbuilt tax calculations, graphs and reports, as well as ease of use, were all hailed as key benefits.

Cashflow tools, however, are not without their limitations. In fact, 8% of respondents from Intelliflo's survey confirmed they don't offer cashflow modelling to their clients at all, while 39% admitted they are only using it at milestone occasions with clients, such as at retirement. As few as 36% are utilising it when a client's lifestyle changes.

Despite the latter statistics, cashflow modelling still remains invaluable to many in the sector. When asked what the alternatives to cashflow modelling were, Lindy Kroese, financial planner at Balance Wealth Planning, explains: "The alternative is quite simply the risk that your client's plan falls short of their goals and objectives."

"Risk comes with not knowing what you're doing," she adds, quoting Warren Buffett.

Models are predominately used in the five to 10 years leading up to a client's retirement, but they are also used during initial meetings.

Cashflow modelling allows advisers to forecast their clients' finances. It is about matching expected income during a client's lifetime with expected expenses. But no tool today can accurately predict the future financial landscape: tax rates change, as does inflation, employment status, pay and health, financial markets, sometimes in sudden and unpredictable lurches.

Advisers need to be aware, therefore, of variables that limit the effectiveness of cashflow tools, as Jamie Smith, partner at Foster Denovo says: "I use this modelling as more of a strategic or planning tool, and not for complex tax planning advice. Whilst it is great to create alternate ‘what if' scenarios to help clients understand how different options compare, I would not depend on it to calculate future potential tax liabilities."

Given the uncertainty over fiscal policy and periodic changes, cashflow predictions become a series of assumptions, according to some advisers. Yet they can still be used to wade through complicated financial matters in which hard tax calculations - and their repercussions - are embedded.

"You can create hugely complex financial plans with modelling, but actually that isn't in the best interest of the client," says Dennis Hall, founder and Chartered financial planner at Yellowtail Financial Planning. "Your job as a financial adviser is to boil down data and reporting into one or two visualisations to help your client make decisions with your guidance."

Technological impact

While cashflow planning tools have gained popularity within the financial advice community in the past few years, cashflow modelling as a premise has been around for decades.

Technology has transformed this once basic visualisation tool, but before Voyant, CashCalc, and Truth, advisers used Excel spreadsheets to demonstrate their clients' projected financial outlook, creating their own stress tests to demonstrate the extent of income resilience.

Today, cashflow models have a greater effect. Recently, intelliflo reported that advisers are using modelling tools to increase appetite for protection products, an area of the market that has been historically underused by clients, but has experienced a surge in interest since pandemic-induced financial hardship took hold last year.

Indeed, during the pandemic advisers used modelling as a way to try and minimise panic by offering some indication to clients that their situation may not be as adversely affected as initially thought.

But compliance director at Lowes Financial Management, Barry Strathearn, says proper training is required before advisers begin to implement them in their advice strategies and argues caution should be taken.

"We have seen examples where they are extremely misleading due to the underlying input of data, consumers may then make decisions based on these models, which should include reasonable assumptions," he says.

"It is very important that this is done appropriately and in line with the regulator's guidance. While the regulator has stopped short of mandating the use of cashflows on complex advice such as final salary transfers, they did publish guidance in CP19/25 that needs to be taken into account."

Strathearn refers to the FCA consultation paper in which the regulator warns advice firms to prepare cashflows in "real terms, i.e. today's money terms," to factor in tax bands, and carry out stress testing scenarios, among other things.

Stress testing is a way to ensure clients fully understand the impact of, for example, market downturns. Advisers can simulate ‘stress periods' to test and exhibit the impact on their clients' income and financial security.


We can only expect cashflow modelling to advance, particularly as hybrid advice starts to become commonplace. As advisers provide client services in-person and online, firms will require tools that complement their journey.

As client and adviser collaboration strengthens, and clients start to co-develop their financial plans, firms are likely to partner with API-powered software providers to optimise this process.

Aside from the visualisation benefit to the client, advisers may capitalise on their time efficiency. The onus is taken off the adviser to plan out every stage of a client's financial journey. Modelling tools provide a data destination for this, leaving more time for better client interaction.

And, as Kat Wellum-Kent, director of business services at MHA Monahans, points out that can result in a more profitable business model.

"Not only does it take a large amount of the stress out of planning for you and for your clients, but it also gives you more availability to advise clients and therefore charge for your time more often, making the business far more profitable," she says.

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