Etheridge: There is one alternative to cash 
flow modelling? Guessing

Paul Etheridge, founder and chairman of The Prestwood Group, states the case for what he believes is the defining trait of a financial planner...

Cash flow modelling – from back-of-an-envelope calculations to detailed assumptions-based software – is a tool to explore how financial planners can help clients long term.

Just as the choice of platform or back office system should be irrelevant to your process, it is the fact that you do cash flow modelling to support financial planning that distinguishes your service – not the system you use.

The only alternative to cash flow modelling is guessing and it is absurd to develop financial plans without any real understanding of clients’ long term aspirations, or even that unknowingly they may go bust in 20 years.

The implications of introducing a financial planning service are far reaching. Comprehensive financial planning is not appropriate for everyone. Those thousands of policyholders’ files in your drawer are not necessarily going to become financial planning clients (but they may be a time bomb). Many believe that each planner can manage only 75-125 comprehensive financial planning clients.

Financial planning should drive a new style of working that goes right back to first principles.

It is not enough to bolt on a cash flow modelling system and label yourself a “planner”. Almost everything may need enhancing – your client criteria, your service proposition, your terms of business and your ongoing service.

Cash flow modelling tools give greater structure. Almost every piece of information disclosed by a client has a cost implication – from education plans to career ambitions, to holidays, to cars to grandchildren’s wedding presents or the weekly shopping bill.

Whatever system you prefer, it is essential to factor in information to provide as complete a picture as you can of the financial implications.

In my experience, the words used to glean personal information are crucial. I preface my comments to clients with “just as a planning assumption”; it is a license to say whatever I want next, developing empathy along the way.

There has never been a shortage of people who can benefit from a comprehensive financial planning service and can afford to pay for it. However, prospecting is less about recruiting; more about eliminating.

By demonstrating what we do and how we do it we can test whether they are likely to be suitable clients – that is, that they will get significant added value from our proposition and will be able and willing to pay for the service.

There is a tacit understanding that if we – planner and client – work together, it will greatly increase the likelihood of achieving their desired lifestyle.

I’ve heard people challenge the sense of incorporating lots of detailed assumptions – arguing that time will surely show the assumptions were not accurate. Of course they are right – which is why we have annual planning meetings with clients to continually adjust them as circumstances change. The alternative to making assumptions is not making assumptions!

Software should assist you in doing the best job for the right clients. That means having the right prompts to ensure you capture the appropriate data and agree credible assumptions about future inflation and investment performance.

The data needs to be presented professionally and should be easily understood by clients. It also means having the right back up and support with training, mentoring and innovation.

The proof of the pudding is in the eating – Prestwood clients stay with us for decades and continue to be profitable.

As RDR shifts the emphasis from transaction-based product distribution, advisers adopting a financial planning model are ahead of the game.

Take a look at Etheridge’s Truth financial planning software at: www.prestwood-group.co.uk/truth.htm