Early on in my career, I would sketch graphs on the back of an envelope to show folk what they needed to save in order to meet future needs.
At that time, simple graphs and drawings were part of an adviser’s toolkit to get people to save more. Eventually I stumbled across the then Institute of Financial Planning (IFP) and discovered what I’d been doing was called cashflow modelling.
Compared with the financial plans created by certified financial planners my graphs were simplistic and one-dimensional. But the aims were the same; using models to simplify things and thus helping people make better financial decisions. I joined the IFP and swapped the scientific calculator in my toolkit for a computer loaded with financial planning software.
For me, cashflow modelling has always been a means to an end rather than the end itself. Yet somewhere along the line attitudes have changed. Today I hear of advisers talking about cashflow modelling as a standalone product. Why is that?
To use a well-worn analogy, it’s like focusing all your attention on the drill because the client says they need a hole for a picture hook. But it’s not even about the hole, what clients really want is to see their picture hanging on the wall. The drill and the hole are just a bit players – ‘scuse the pun.
Consequently, when I first meet a client I don’t talk about cashflow modelling and I don’t refer to financial products. Do any of us have clients who get excited by the words ‘cashflow modelling’ and ‘pensions’? Even the term ‘financial planning’ can leave people cold.
Instead, I get people to talk about what’s important to them, their vision and their challenges. Essentially it’s the first three stages of the EVOKE framework (Explore, Vision, Obstacles, Knowledge, Execution] from George Kinder.
I capture the conversation as a timeline and sketching it is easier for me than tapping a keyboard. Also, paper and pen capture random information quickly, unlike software which can be very prescriptive.
Building a rudimentary timeline with a money plot shows why planning works and how it adds value before we ever talk about products or investment.
Once someone has bought into the process I’ll revert to a computer-based cashflow modelling tool. Rudimentary sketches might show what cashflow modelling can do, but they don’t replace the number crunching of a computer-based system.
Clients tell me the financial planning process gives them greater clarity than they’ve previously had, and they feel confident and in greater control of their financial decisions. When people truly understand what their money needs to do, how hard it must work and over what timeframe, they cannot help but make better choices.
But to go back to my earlier point, I would argue selling cashflow modelling as a standalone product is the wrong way to go because it then becomes a commodity to be purchased online.
It becomes a sophisticated product in untrained hands, with poor assumptions and biases which in turn are likely to lead to poorer outcomes. By all means sell your advice and sell better outcomes, but don’t sell cashflow modelling.