Although ‘Cashflow Modelling’ has been around for 30 years or more it only now appears to becoming popular. I’ve been using it successfully with clients for most of those 30 years, and speaking from experience, if used properly, it is the most powerful resource available to any financial planner.
How else can you show clients where they are heading financially? How else can you make sense of the long term effect of financial decisions made today? How else can you demonstrate the effect of your recommendations?
More importantly, clients love it!
It adds incredible value, which, in a fee only world, is the reason I believe it should become the focus of EVERY Advisers ongoing service. It should become central to their proposition in order to not only deliver more appropriate advice, but because it also provides an opportunity to dig deeper with clients, to re-engage with them year after year about what’s important (i.e. their life) all the time adding more and more value to the client experience. In a fee only world, this is crucial – if you want to keep earning your fees.
There’s no doubt, Cashflow Modelling is incredibly powerful… in the right hands.
The trouble is, Cashflow Modelling is extremely dangerous in the wrong hands!
I’ve just finished this ‘Special Report: 7 Biggest Sins of Cashflow Modelling – How To Avoid Leading Your Clients Astray’ and in it I highlight some of the mistakes unwary Advisers are making that could cause them or their clients some serious problems.
Perhaps I’m missing something. But what I can’t understand is this: with so many benefits to be gained through harnessing the power of cashflow modelling – why are so few Advisers paying the price and doing it properly?
It could be (for the reasons stated in my previous article) they only pay lip service to Financial Planning and are far too keen to get to the product / investment piece (because that’s where they think they earn their money). Or, it could simply be a complete lack of awareness of what good Financial Planning (incorporating meaningful cashflow modelling) looks like.
These are forgivable reasons. After all, the Industry has been doing its best to keep Advisers focused on the wrong things.
But, as my report identifies, there’s now a problem arising that is far more worrying….
There are now Advisers who are playing with Cashflow Modelling. These are the ones who claim they do cashflow modelling, but really, they don’t take it seriously – these are the ones who will lead clients astray.
Often they use cheap, basic tools, the outputs of which – based on such simplistic assumptions – are well, let’s just say… rowlocks.
By far the biggest sin committed is this: doing a Lifetime Cashflow for a client… as a ‘one-off’ service!
I believe any Adviser doing this should be shot!
It is better NOT to do a cashflow modelling exercise for a client at all if you are not prepared to do it properly AND make a long term commitment to revisit it every year. Clients could make serious decisions, take action – or worse, NOT take action – because of what they learn from a one-off exercise. Like retiring early, because a ‘one-off’ plan said it was OK to do so.
You wouldn’t go to the gym once and expect to be fit for life, would you? It’s the same with proper Financial Planning. You have to keep on doing it! And the reason is this: any initial Financial Plan, incorporating Cashflow Modelling, will be WRONG! Yes, that’s right. It will be WRONG! What makes cashflow modelling work is doing it EVERY year!
One of the best ways to explain this to clients is using the analogy of an aeroplane taking off from London Heathrow bound for New York. The fact is the aircraft will be off course 95% of the time – because of constantly changing air currents. The only reason it ends up in New York and not Zimbabwe is the autopilot! Constantly pulling the plane back on course so it makes its destination.
Same with my yacht. If I set off from the Azores, bound for Gibraltar, do you think I’m going to have someone on the helm, 24 hours a day? Of course not. Spellbound’s auto-helm (affectionately known as ‘Wilma’) takes over. We keep a good look out, we make allowance for wind and tide, and by constantly adjusting course, Wilma then gets us to our destination.
Same with the SatNav in your car. If you take a wrong turn, the SatNav will adjust the route constantly and inform you to make changes in order to get you to where you want to go.
Here’s my point: Imagine the above examples if you set the course just once and then never checked or adjusted it again!
That is exactly what’s happening when Advisers do this as a one-off exercize. And they’re gonna get sued.
With Cashflow Modelling, it must be based on prudent assumptions and it must be done EVERY year – year in, year out. Speaking from experience, it is the prudence and the repetition that makes it work! Amazingly so.
More importantly, this ongoing process is the very thing that helps you to demonstrate and deliver your ONGOING service in return for your ongoing fees. Each year re-engaging the client with the ONE THING that’s most important to them: i.e. their life and their lifestyle! Then, every year, you identify what needs to happen for clients to stay on course, constantly re-assuring them that they can continue to live a good life, enjoying their desired lifestyle without fear of running out of money, (or dying with too much) – that is IF they take your recommended action, which might include the recommendation of a financial product.
It could be that no financial products are necessary. But your service is still worth paying for. It could be you providing them with something really empowering – the confidence to SPEND MORE, to do more, to LIVE MORE! Life’s not a rehearsal!
Do this right, and the focus of your service becomes THEM not their money, and you providing them with the peace of mind, financial independence and financial security that only comes through proper Financial Planning (delivered by meaningful cashflow modelling). It’s no longer about boring products, or trying to outperform the market, or be top quartile – or be low cost and passive. That’s just plain boring – and not worthy of a 1% a year fee!
In return for their fees clients deserve fantastic outcomes. That’s why proper Financial Planning, utilising meaningful cashflow modelling, is so powerful. If done properly and made central to your proposition, it’s a recurring repeatable ‘sticky’ service which will guarantee that the money ‘sticks’. That way you easily justify and KEEP your 1%pa fees.
So, I’m intrigued, with all these incredible benefits, why do so few Advisers get the message and do it properly?
- Is it because Advisers are just not aware of the opportunity? (because of said ‘Industry’ distractions?)
- Is it because they’re lazy?
- Is it because they’re too busy?
- Is it because they think clients won’t pay? (See Sin No. 7!)
- Or, could it be because they don’t know where to look for help?
My gut feel? It’s because of the ‘Industry’s product & investment focus. Sadly, because of this most Advisers are still well and truly caught in the Transaction Trap and are paying lip service to proper Financial Planning. Which is all OK, so long as a) they don’t promote themselves as Financial Planners and b) they suffer in silence during their painful demise when clients no longer pay their fees for a meaningless product / investment based service.
You can download the ‘Special Report: 7 Biggest Sins of Cashflow Modelling – How To Avoid Leading Your Clients Astray’ by going here. It identifies the seven biggest mistakes advisers are making. It contains some useful advice together with some powerful tips and techniques which you might find helpful.
What do you think? How has proper Financial planning incorporating meaningful cashflow modelling helped you and your business? Or, do you think it’s a waste of time?