Building a Plan
Cashflow Planning is the very start, middle and end of the process at Altor. Our first engagement with a potential client starts the journey of gathering information to build a plan. The cashflow plan is a visual representation of what their financial future will look like. The inputs are income, expenditure, assets, liabilities, risk, and future plans. The output is a visual, showing the range of potential future outcomes. Most potential clients want to know whether they will run out of money and if not what they need to save, spend or gift to make the numbers work out. Often, we will present several options side by side to show the person the art of the possible.
Most advisers in the UK use cashflow software that has underlying assumptions about what future investment returns, costs and inflation will be. Hopefully you can immediately see the issue with this approach, what if the future doesn’t conform to the assumptions? The adviser might be too cautious in the assumptions, and as a result you live a poorer life of underspending. They might be too optimistic in the assumptions, and you run out of money having spent too much.
The software we use (Timeline Planning) is still in the minority, but it is growing. The power of this software tool is that it doesn’t use assumptions about the future at all. Instead of showing a single projected outcome it shows hundreds of projected outcomes, all on a single chart. It does this by taking every set of economic data since 1915 and showing what would happen in the future if the inputs were the same as the past. So, if you have a 40-year life expectancy, it will run your individual finances from 1915-1955, then 1916-1956 and so on up to this year.
The power of looking at the past is huge because it allows us to show you what your worst-case financial scenario would look like (probably covering either a World War or the hyper-inflation of the 1970s) and the average scenario. You can plan around the average scenario but knowing the economic conditions of the worst-case scenario is also helpful because it shows you what you will need to do if history repeats itself.
Well, what about the old saying, the past is no guide to the future? That is true but if the future is worse than the worst-case scenario in the last century, then we will be digging up our gardens to grow our own food and financial planning becomes irrelevant anyway. What the past does show us is a likely possible range of future outcomes as there is nothing new under the sun as Morgan Housel writes in his excellent book Same As Ever.
“History doesn’t repeat itself, but it often rhymes.” – Mark Twain
Once the cashflow scenario is agreed with the client we will then build the financial blocks of tax planning and investment management around it and implement any changes.
One the client’s finances are sorted we will then arrange for a data feed back into the plan. This means that the core cashflow plan updates itself constantly in the background.
Many advisers don’t use cashflow planning with clients at all and of those that do, often it is run as an initial report and rarely revisited. This is a waste of time as only 20% of the power of cashflow planning is in the initial plan, 80% is in the ongoing review. Regularly checking back in on the plan and its evolution allows us to show a client whether they are on target, to spot problems early and course correct.
Our cashflow software starts to build a ‘lived experience’ line of real data to replace the projected data. So, the longer you work with us the more your chart becomes real life and the less variable your projected future becomes. The system will automatically send prompts to your adviser if your wealth declines by more than a certain threshold or increases above the same threshold or if your success rate falls below a certain threshold. We are then able to contact you with a range of options to fix the issue before it develops.
Cashflow Planning is the core of what we do for Altor clients in our Bespoke, Main and Family Services.
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