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From Adviser Guide: Cash Flow Modelling

Q: What are the downsides of cash flow modelling?

What you get out most definitely depends on what you put in, let alone what software you use.

By Oliver Haill | Published Sep 20, 2012 | comments

While cash flow modelling is regarded by a large proportion of the advisory industry as a crucial tool, it has been criticised for being inflexible, excessively dogmatic, and making too many assumptions to be accurate.

But also, that the process has come under criticism both for over-complicating matters and being overly simplistic, indicates that what might at first seem an uncomplicated tool can actually vary vastly depending on the software, the adviser using it, the client’s needs and both parties’ perceptions.

Richard Allum, managing director of Paraplan Plus, asserts: “The output from a cash flow is only as good as the questions the adviser asks and the information they gather in order to carry out the forecast. A tool may help provide some structure to the questioning but it needs to be used sensitively and intelligently by an adviser. Finally, the assumptions that the model is built on are the foundation and these need to be thoroughly understood by the adviser using them.

“The adviser needs to understand how to interpret and the act upon the results of the model. If an adviser relies too heavily on cash flow planning then it will fail as part of the advice process.”

He cautions that over-reliance on the process would be dangerous for the adviser and the client. “But as part of a financial process with checks and balances, the correct questioning, ongoing monitoring and review and an understanding of the assumptions, then cash flow modelling is not a danger to the adviser or the client. It’s like anything. If used properly, it will help; if abused it will backfire.”

Michael Hunt, partner at Greycoat Financial Services, adds that the cash flow modelling process is not the be-all-and-end-all.

He says: “If the output from cash flow modelling is seen as the solution without looking at it in context it can be dangerous. What it produces should be a working document, something that is discussed with clients so that they are aware of its limitations.”

He stresses that cash flow modelling is, like any tool, only as reliable as the person using it. “[It] can be used to sell product – correctly or incorrectly – depending on the input. Over-stating or underestimating information can lead to inappropriate results with the potential that clients are mis-sold or mis-advised but this is no different to any other tool that’s out there. In the end it comes down to the integrity of the person using it.”

Sandy Robertson, managing director of Acumen Financial Planning, agrees: “Results and therefore conclusions are held hostage by the quality of data entered into the model. Advisor firms need to have at least one specialist who knows exactly what they are doing.”

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