Advisers have branded providers’ cashflow model projections a “non-standard mess” amid warnings they could be “systematically over-estimating” their clients' retirement income.
Data from EValue showed the vast majority (84 per cent) of advisers believed it was important that cashflow model projections for drawdown clients were realistic and considered ongoing variables that would affect the plan over time.
EValue polled 130 advisers in June and found while 88 per cent believed it was the adviser’s responsibility to model stress events and downturns, more than half (57 per cent) thought providers needed to improve their models.
It was “impossible to compare like-for-like” due to “differing assumptions”, according to one adviser, while another described provider projections as a “non-standard mess”.
This was more “even more important” given that clients recently “really experienced the dangers” of sequencing risk and volatility, the respondents said.
Gemma Brazier, chartered financial planner and propositions director at EValue, warned advisers could end up “systematically over-estimating” the retirement income that could be supported by a drawdown plan if cashflow models did not allow for real-world economic scenarios and realistic levels of investment volatility.
She said: “Cashflow modelling is an extremely important part of the financial planning process, with three quarters (77 per cent) of advisers in our survey stating that projections via cashflow modelling have become the number one mechanism to bring a financial plan to life.
“However, to develop reliable plans for clients, advice professionals and product providers need access to reliable modelling tools.”
Financial advisers choose between deterministic models, which use specific estimates of future investment returns to produce future projections, and stochastic models, which use up to 10,000 different estimates of economic conditions.
EValue said while deterministic models could make a more basic comparison between different providers, they did not allow for market complexity and irregularity, so could be easily affected by the implications of sequencing risk, potentially adversely impacting a retiree’s income and lifestyle in retirement.
A poll of advisers by consultancy the Lang Cat, carried out for FTAdviser in 2018, found the majority (58 per cent) of respondents thought stochastic tools were a better option for adviser cashflow modelling than their deterministic counterparts (42 per cent).
imogen.tew@ft.com
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