A Light Bulb Moment With Cash Flow Modelling

On paper a cash-flow forecast seems quite simple really, it’s a summary of your expenditure, both now and forecast into the future, along with an idea of the income and capital that can be used to meet that expenditure. The net result of the exercise is a good idea of how long your money will last. This is something that clients ask us about all the time.

The data that drives this plan, however, is very complex and requires a significant investment of time and effort on our part to get right. We will need to establish suitable assumptions for inflation, asset class performance and earnings growth as well as considering the impact of unexpected market events on the plan.

The foundation for any good cash-flow model is the “base plan”. This is what your financial future could look like based on todays position and known future income and outgoings.

Following the completion of this base plan, we can then consider various “what if” scenarios. These allow us to model the impact that different courses of action will have on a clients’ overall financial plan.

For example, if the initial (base plan) cash-flow model had identified that a clients assets would only last until the age of 76, we could consider the impact that downsizing their home would have on the picture. This might generate sufficient funds to last until the age of 80. Following this, we could then calculate the investment return that a client would require to ensure that their funds would last until the age of 90, and then make an appropriate investment recommendation to make this a reality.

A client had a real light-bulb moment when we were completing his cash-flow model a few months back. The gentlemen in question was desperate to retire in 6 years time at the age of 68, but was unsure as to whether this was realistic based on his current level of investments and pension provision.

We put together a detailed cash-flow projection for him which not only showed that he had sufficient funds to support his desired retirement lifestyle right now, but also that he would be able to sustain that level of expenditure until the age of 107!

Based on the outcome of our cash-flow modelling the client felt secure enough to take an early retirement, a whole 6 years before he had planned. He is very much looking forward to spending this time with his grandchildren. He has also now gained the confidence to start to pass down some of his wealth to help fund their education.

The output of cash-flow modelling may just look like a fancy graph, but it is fantastic lifestyle outcomes like this that make it so much more than that! Cash-flow modelling is, in fact, a powerful, enlightening, life changing tool.

How Clean Is Your Fund?

You may have seen the term “clean” or “super clean” funds in the news recently. What this refers to is the “unbundling” of fund manager charges and the shift on to a new charging structure.

To “clear things up” (no pun intended), it may help to first explain what a “dirty” share class is.

Historically a fund manager has made an annual management charge which included the cost for actually managing the fund as well as an additional provision to pay some money to a broker for introducing the client to the fund. For clients who use online platforms, the fund manager will often rebate some of the total charge to the platform as an incentive to introduce more clients to the fund manager.

This old system was rather “muddy” (I’m really on a roll now) to say the least so the FCA has seen fit to introduce a new charging structure. So called “clean share classes”.

Under a clean share class you pay predominantly for the costs of fund management and as such there is little or no rebate paid to the platform. Consequently, most platforms will now charge an explicit fee for their services.

The idea is that charges should be clearer and more transparent, however due to the number of deals being done between fund managers and platforms, that ambition has only been partially realised.

Investors should review their investment holdings without delay in light of these new charging rules, in some cases a switch into the new “clean” share classes will be beneficial. For those investors in tax wrappers (ISA’s and pensions for example) it may be better to remain in the old “dirty” funds.

If you would like tailored advice on your investment holdings, please get in touch to arrange your discovery meeting, provided at our expense.

We Are No Fee Dodgers

A recent report by Which? Highlighted the fact that many financial advisers were slightly coy about their fees. The report highlighted that during a phone call to 30 financial planning firms enquiring about the fee for a typical £60,000 investment, only 14 gave a “clear indication” of what their fees would be. In addition only 9 firms published details of their fees on their website.

I do sympathise to a certain extent with the above mentioned firms. Pricing for a financial planning job is certainly not simple, as each set of client circumstances is different and upon further inspection, even 2 seemingly similar jobs can turn out to vary significantly both in their scope and complexity.

I do feel however, that financial planning advice should be clear and transparent and to that end we publish a detailed list of our service packages and indicative prices on our website. Each client who engages our services, does so following the receipt of a personalised “scope of work” letter, setting out the range of work that we have agreed to complete on their behalf, as well as a full breakdown of the initial planning and implementation fee, and the ongoing advice fees required.

We are not coy about our fees, because we feel that they offer exceptional value for money. The value we add often covers our fee several times over.

For some reason the report is also quite critical of “free but lengthy face to face sessions”. Now personally, when I appoint a professional to deal with an element of my personal or business life, I like to meet that person beforehand. A face to face meeting gives both parties the opportunity to get to know each other and to decide if they are a good “fit”. In most cases financial planners offer at least an hour of their time to new clients and will often meet them at home for their convenience. I would suggest that this is far more generous than some other professionals would be before any money has changed hands.

If Which? would rather we charge them for an initial discovery meeting then we would be glad to, but from experience most clients really appreciate the chance to get to know us, and find out about our services, without pressure or obligation.

Price Is What You Pay – Value Is What You Get

With pension charges back in the news again last week following the governments decision to delay the cap on charges for auto enrolment schemes, perhaps now is a good time to consider value, rather than price. In the famous words of Warren Buffet “price is what you pay, value is what you get”.

Please don’t get me wrong; I am not excusing, nor defending, overly high or punitive pension scheme charges. In fact, I am one of the strongest proponents of better value pension savings vehicles. It does seem however, that in our never-ending quest to make all financial products cheaper, that we have forgotten all about value for money. Surely this should be the deciding factor.

Lets illustrate this with a simple example and assume for a second that both options are similar in terms of risk profile and financial strength. Fund A charges 1.5% per annum and generates a return of 8%, fund B charges 1% but only delivers a return of 4%. All other things being equal, I will choose fund A thank you very much.

Now clearly the above example is quite extreme, but the principle is sound. It should be the value for money of a particular scheme that we are questioning, not the fee itself.  Part of any good fund analysis should take into account the level of charges made by the fund manager, and the additional performance that the manager has generated (or, heaven forbid, subtracted) from the fund. Only then can we get a true idea of the value for money that the proposed investment represents.

While the government is right to look into the cost of pension plans for workers under the auto enrolment regime, surely it should be value for money, and not cost alone that is the primary focus of any review.

How To Become A Financial Expert

On Friday the Times ran a 4 page pull out which was entitled “how to become a financial expert”. Now this in itself doesn’t sound like a bad idea, after all, who wouldn’t want to be more informed about their money. What I would question, however, is just how much of an “expert” you are expected to become.

To put things into context, I am the proud holder of no less than 12 financial planning qualifications, which have a combined suggested study time of well over 1500 hours. I am also in the process of studying for two more! Combine this with many years of experience, countless hours of technical research and a rigorous continuing professional development programme and I don’t think I am blowing my trumpet too much if I refer to myself as someone who knows a thing or two about finance.

To expect others to possess this level of knowledge and experience is clearly un-realistic. For example, when researching an ISA recommendation (which is quite simple in the grand scheme of things) for a client, I was presented with no less than 240 options and variables. To arrive at a suitable recommendation took several hours of analysis. I would suggest that for someone who does not do this each and every day, the time required would be considerably more and the outcome probably not the very best solution available.

When I need advice on an employment contract, I seek assistance from a corporate lawyer. If I need to check if my proposed house purchase is a good investment, I ask a chartered surveyor to produce a report. I seek help from these professionals because I am well aware that I lack the knowledge, skills, qualifications and experience to do the work myself.

I think it is unlikely that next weekend the papers will run a pull out called “how to become your own legal expert” or “how to do your own structural survey”, so why should financial planning be any different. In the same way that I felt I had received extremely good value for money when a Chartered Surveyor told me that a house I was planning to purchase had subsidence, my clients feel that I have added significant value to their financial situation and are happy to pay for that service.

While I agree that we should all be a bit better informed when it comes to our finances, surely this would be best achieved by working in conjunction with an experienced professional, rather than going it alone!

We Could All Learn A Thing Or Two From Dave

As someone who takes a keen interest in all things financial, I always make a point of watching the programmes on channel 4 which follow the attempts of Dave Fishwick to make the financial world a more straightforward and friendly place. I find Dave highly amusing and uplifting with his seemingly never ending high sprits and a level of determination that would have Churchill quaking in his boots.

Those who saw his previous two shows would have seen how he took on the big high street banks and came up with his own local bank based on old fashioned values. The simplicity of the service he offers has to be seen to be believed. You can deposit money at 5% and borrow for slightly more, and that’s about it. No huge contracts, no industry jargon, just a simple, efficient service. The whole operation runs from a small shop front with a few hard working people crammed behind a single desk. There are no trading floors, no high-rise towers, just a man with a good set of ideals trying to help people in his community.

What really strikes me about the service that Dave offers is that it is highly personal. He gets to know his customers and makes decisions about lending based on relationships rather than computers and credit reference files. He also helps the businesses he lends money to develop, providing his expertise and time, all as part of the service.

I think a lot of businesses in the financial world could learn a thing or two from Dave, I know I certainly have, which is why we try to make things as straightforward as possible for our clients. I can’t promise a single interest rate or just one piece of paper, but what I will promise is a concise, efficient service without all of the complexity and jargon that normally surrounds the financial world.

Could Inflation Be Back In 2014?

For the first time in four years, inflation has now fallen to the governments 2% target. This was welcome news for the many people who have experienced low (if any) pay rises, coupled with the well publicised rising cost of living. Sadly, the current low rate of inflation has the potential to come to an end before it has even really started.

With the base rate currently set at an historic low and the price of property now rising again faster than people can keep up with, it only seems a matter of time before inflationary pressure returns to the market. Halifax today reported that average property prices rose 7.5% in the 12 months ending in December and that trend looks set to continue. Businesses are reporting record profits just days into the new years reporting season and already there is talk in the media of 3% average pay rises this year.

What this all adds up to is consumers feeling more confident, after all, their property value is now back on the stairway to heaven, they will finally be getting that pay-rise they have been waiting 5 years for and even the good old BBC seems to think the economy is ok. What could possibly go wrong? Well, more confident consumers will likely spend more which in turn will have the impact of increasing prices once again, just as they started to get back under control.

My fear is that perhaps we are a little too confident. Our economic recovery is still in it’s infancy and that base rate will have to increase one day. The risk is that inflation will spike “too soon” triggering a rise in interest rates that will bring the country back to earth with a bump when it realises that it does actually cost money to borrow money.

As always, a well-diversified portfolio of asset-backed investments stands the best chance of beating the rate of inflation over the long term. Clients may wish to consider a review of their investments now, before inflation starts to pick up again.

Please get in touch to book your discovery meeting, provided at our expense.