By Steph Willcox, Head Actuary, Dynamic Planner

The FCA is concerned about how firms prepare and use cash flow modelling. It has reviewed firms’ usage and provided guidance on how to improve the quality of cash flow modelling for clients.

Dynamic Planner welcomes the review and is pleased to see the FCA-desired approach to cash flow modelling tightly mirrors our own. Dynamic Planner’s cash flow is a quick and efficient way to bring a client’s finances to life. It enables a client to connect with their future self and it helps advisers deliver suitable advice, to help their clients achieve their goals.

Dynamic Planner’s stochastic Monte Carlo forecaster projects thousands of runs monthly, to reflect the way your clients spend their money, and ensure that sequencing of returns risk is successfully captured for higher risk investments.

Following March’s publication of a FCA review, here we can share how Dynamic Planner’s cash flow solution provides your firm with a compliant and insightful cash flow plan for all your clients.

FCA finding 1: Firms relying on information without considering accuracy

The FCA recognises that a great cash flow plan cannot happen without great data, but it is concerned that advisers are using out-of-date information, or accepting client updates without questioning what has been provided.

Within Dynamic Planner’s ‘one system’ approach, we have a ‘Client Access’ module which enables you to invite your client to complete questionnaires, as well as collect important information from them. This includes incomes, expenditures, details of pensions, savings and investments, and their future goals.

Using ‘Client Access’, your clients can review their finances as often as required, to ensure that a client’s current cash flow model is relevant and accurate. You can investigate any changes in information provided by a client before updating the client’s record. As a result, you are not forced to simply accept changes provided by clients. You’re free to challenge anything which seems unusual or incorrect.

Model changing income and expenditure

You can have good conversations with your clients about their goals, and place monetary values and timeframes on them to help illustrate what the future life looks like for a client.

Clients may have no idea what their retirement spending could look like, so the use of ‘life phases’ within Dynamic Planner Cash flow enables you to have structured conversations about changes in income and expenditure at different stages in life.

Linking start and end dates to life phases allows you to have a seamless conversation about the timing of these events, by intuitively dragging them up and down a timeline of your client’s life. You can also make use of Dynamic Planner’s valuation integrations with different platforms and providers to ensure you hold accurate figures for all pensions, savings and investments.

FCA finding 2: Using justifiable rates of return

The FCA has specified that ‘the returns used within cash flow modelling are one of the most important parts of the model’, and that ‘firms [should] have a reasonable and justifiable basis for all assumptions they use’. It adds that simply repeating specific patterns of past returns is not appropriate.

At Dynamic Planner, our asset risk model is entirely forward-looking, providing expectations of real return and volatility for 72 underlying asset classes. These are combined to create expectations of real return and volatility for our 10 risk profiles. As our returns are real in nature, this allows for variable rates of inflation over time and powerfully reflects reality.

Our asset risk model and its assumptions are independently reviewed each quarter by Dynamic Planner’s Investment Committee, which includes external and internal experts, covering fields of academia, research and regulation, as well as the investment industry both inside and outside the UK.

Assumptions reviewed every quarter

The Investment Committee updates and approves all assumptions used within Dynamic Planner. The underlying returns and volatilities are then updated each quarter in Dynamic Planner. New assumptions take effect immediately, so you can be confident subsequent cash flow forecasts are using the latest assumptions. This documented process ensures all assumptions have been rigorously tested before being applied to any client forecasts.

All forecasting within Dynamic Planner uses our stochastic Monte Carlo forecaster, which uses monthly projections across thousands of runs to generate a range of results for a client. We then present this range of results from the 5th percentile to the 95th, to ensure that clients are aware of the results they might achieve.

By forecasting assets by their risk level, we naturally allow similar assets to be projected in a similar way, regardless of the wrapper they sit within, and can allow for all applicable charges to be included in projections too. We also include calculations on income tax and national insurance, where applicable.

FCA finding 3: Planning for uncertainty

The FCA has found that cash flow planning can be misleading for clients where it is poorly explained to clients. Examples of this include mixing real and nominal terms or planning for average life expectancy.

Throughout Dynamic Planner, we only use real figures. Every forecasted number is shown in real terms so that clients can understand the purchasing power of their investments at every point in time. Cash flow also uses real returns, allowing for variable rates of inflation within the projections.

A projection that performs well may reflect a high level of return and a low level of inflation. Similarly, a poorly performing projection may reflect a good level of return, but a high level of inflation.

Advisers are free to set the end date of their cash flow plan, and this does not need to be based on life expectancy. As life expectancy is so varied, we do not show this within cash flow. This encourages advisers to consider what length of cash flow plan is appropriate for each client individually. The FCA also stressed that highlighting the lower percentile outcomes in stochastic modelling is important.

At all times, Dynamic Planner presents three forecasted outcomes:

  1. ‘Be prepared for this’ – the 5th percentile result
  2. ‘Plan for this’ – the 50th percentile (median) result
  3. ‘Be pleasantly surprised by this’ – the 95th percentile result

As well as having the option of displaying each of these three outcomes on charts, our 5th percentile returns can clearly be seen in analysis and a wealth chart Dynamic Planner produces for you to share with your client in report, as well as under a simple headline, ‘When will my money run out?’ This gives a client a clear indication of the asset values they should be prepared for, in case of poor future returns.

In Dynamic Planner, you can also ‘show paths’ to illustrate for a client how their investment journey may fluctuate over time. Twenty Monte Carlo projections will be displayed, to highlight the monthly gains and losses that may be experienced. This can support a capacity for loss conversation.

You can quickly increase expenditure in retirement and ask Dynamic Planner to disinvest from assets to meet this spending requirement. This gives you the ability to show a client how higher spending will deplete assets sooner. This can be even more effective if you make use of the three different expenditure levels available, ‘Must do’, ‘Like to’ and ‘Dream of’, to quickly show the effects.

FCA finding 4: Consumer understanding

A clear part of Consumer Duty is ensuring that your clients understand what they are looking at, particularly if they have reports that they are taking away, outside of a meeting with their adviser. The FCA is keen to ensure that all communications received from an adviser are consistent, or explainable if they are not.

Dynamic Planner uses consistent projections throughout, and one definition of risk, ensuring that all communications produced can be read in conjunction with one another without causing confusion.

Dynamic Planner’s cash flow report has also been researched and tested with advisers and members of the general public who have received advice. It is intended to contain all information discussed with their adviser and can be read independently of the meeting. It also includes: assumptions used in the modelling; a complete description of uncertainty and Dynamic Planner’s modelling; and all information provided by the client.

It can be presented in different colours and text sizes, and is entirely customisable by the adviser, to tailor to the individual client.

FCA finding 5: Consider the output

Rather than send cash flow modelling outputs directly to clients, the FCA wants to ensure that advisers are reviewing information they are about to provide, to check it’s appropriate, and it is based on suitable assumptions.

The FCA particularly highlights that cash flow models could include withdrawing from assets before they are available [like a pension before the minimum pension age, or from illiquid assets that a client has no desire to sell] or that expenditure items might not be detailed enough to cover specific life events.

The FCA also encourages advisers to check how long funds will last under the ‘base’ and additional cash flow modelling scenarios.

Dynamic Planner’s cash flow report clearly shows all outputs from the ‘base’ scenario, including a focussed section on how long the client’s portfolio will last. This is compared to how long the portfolio will last under all alternative scenarios included in the report.

All scenarios created can be clearly included in the report, as well as on screen. The report includes a clear display of the differences between the ‘base’ scenario and the additional scenario, in terms of inputs as well as outputs.

The system’s flexible expenditure input enables expenditures to be entered in any format: one-off; recurring; or with a wide range of frequencies. They can also be entered as a ‘Planned goal / event’, enabling it to be assigned an intuitive icon and be flagged on all charting to help bring the client’s financial picture to life.


Dynamic Planner Cash flow can be used with your clients to help bring their finances to life, and to ensure that they understand the risks they are taking, throughout their lifetime and beyond. At Dynamic Planner, we believe in our cash flow module, and in light of the 20 March 2024 publication of the FCA review, we are proud to continue to help advisers meet their requirements of quality cash flow modelling.

Not a Dynamic Planner user? Schedule a free no-obligation demo with a business consultant and experience the full functionality of Dynamic Planner.

It’s been a busy few months here as the team have been working hard to complete a number of exciting updates and enhancements.

Firstly, we’ve added a number of features to our Cash flow tool. Building on the goals feature we released in May, we’ve added a number of new visualisation options to help you present the most engaging and insightful plans to your clients.

Segmented view of income and expenditure

You’ll now see two new charts within the Analysis section, giving you a breakdown of income and expenditure in the plan. These are brilliant at supporting conversations with the client and make it clear where changes occur in the future cash flows. Hovering over any year gives you a quick snapshot of it, as below. We’ve also added this breakdown into the data view.

Viewing possible investment paths

Dynamic Planner’s Cash flow module is driven by a powerful, Monte Carlo stochastic forecast. The stochastic returns are driven by the same assumptions used in our risk profiling process. Using a single definition of risk in your cash flow plan is vital to avoid the danger of miscalibration and to ensure nothing is lost in translation, as a result, in the planning process.


We’ve added a new feature to help you and your clients visualise the underlying volatility in the thousands of simulations modelled to provide the overall forecast outcomes. This allows you to see the peaks and troughs of the simulated investment path.

The Wealth graph, pictured above, has been further updated. Responding to user feedback, we have introduced the shaded area in the centre of the forecast for how a client’s portfolio is likely to perform in future.

The shaded area encompasses the 25th to the 75th percentile of projected outcomes. In short, there is a 50% chance a client’s portfolio will perform within these parameters. Wealth graph analysis is available in Dynamic Planner Cash flow and appears in the opening section of a Client Review report, ‘Is your portfolio on track?’

Making charts more accessible

When it comes to data visualisation, or conveying any kind of complex information, we know that one-size doesn’t fit all. That’s why we’ve taken time to ensure that wherever possible we provide graphics, words and data to help the client understand their plan.


As we introduced the new segmented income and expenditure charts, we wanted to take the opportunity to introduce a complementary feature to address the accessibility of the colour palettes we use. You can now select from a range which have been created to help clients more easily distinguish each segment, taking into account different types of colour blindness.

Target Market definition tool

Elsewhere in Dynamic Planner, you will now see our new Target Market definition tool. Having a clear and concise definition of your firm’s target markets is a pivotal step in building and maintaining your investment proposition. But all too often we’ve heard from users that they are unsure how to go about this and lack the tools to consistently do this.

The target market definition tool is our first step in helping you on this journey. We’ve given you a simple structure within which you can define your target market, looking at a range of attributes and facets of a particular cohort of your clients such as their risk and sustainability profiles.

We have more features planned here, so watch this space! The target market tool is available now to fully licenced Dynamic Planner users. Click here to build your first target market

As always, if you need any help or just want to chat about the new features, please do reach out to our Client Success team, who are always available to support you. Thank you.

Join us each month for a new, 30min webinar covering latest enhancements in Dynamic Planner. The handy, bitesized sessions are on the second Wednesday of each month, at 10am. A senior member of our Client Success team will be on hand to host and time permitting, will also answer commonly asked questions from users about Dynamic Planner. Account Manager Lorna Brown will take August’s new ‘Monthly Update’. Register your place.

By Joshua Knight, Head of Product

It’s been a busy few months! And now, in our May release, we’re excited to release a number of exciting changes.

Firstly, our new Sustainability questionnaire is now available for all users. You’ll notice the ‘Risk profiling’ process has been reborn as the ‘Client profiling’ process, with its broader remit of helping you explore other relevant facets of a client’s personality.

Along with the new questionnaire (which has previously been covered here), we’ve introduced a new way for you to select which questionnaires you want to complete with your client. We know it’s not one size fits all.



The new questionnaire responses and results are included in the final report. We’re working on incorporating the questionnaire into a revised client invite process. More on this to follow in the coming weeks.

We’ve also taken the opportunity for a small cosmetic enhancement. The client landing page (pictured below, where you select the planning process you’d like to complete) has been redesigned to make the recent activity more prominent and making it easier to return to your last activity for the client.



We’ve also been busy in our Cash flow process. To help make plans more personalised and engaging, we’ve introduced a visual tweak for client goals and financial objectives.

Where the client has some aspirational future expenditure, be it a round-the-world cruise (once possible!), education costs or just a big party, you can now give the expenditure an icon which will appear in the timeline under the cash flow charts, as you can see below.


The forecast shows the key life phases for the clients and the important financial goals along the way.

On more technical matters, we’ve enhanced the way in which you describe pensions withdrawals, giving you more flexibility with regard to crystallisation, PCLS and drawdown income. We know this can be a complex area, so we’ve added supporting videos in Dynamic Planner you can watch to help show how you model common scenarios.

This is a significant update to our latest Cash flow since it was launched in November last year. Of course, if you do get stuck, we’re always here to help. Please reach out to our Client Success team, in the usual way and they will be happy to assist.

Alternatively, you may wish to pop along to the final two weeks of our Spring 2021 events, where we will be helping you maximise your usage and efficiency with Dynamic Planner. From 8-10 June, our events will focus on sustainable investing; and finally, from 15-17 June, on client target markets, including ‘at retirement’.

Register here.

By Chris Jones, Proposition Director, Dynamic Planner

We are increasingly accustomed today to carefully managing our own retirement date. However, wider events, as we have witnessed in 2020, can quickly overtake the best laid plans, thus reminding us of the importance of cash flow planning.

It has been widely reported this year that the Covid-19 crisis has impacted younger workers hardest. But it is also hurting people reaching the end of working life, whether through necessary or opportunistic cost saving by employers, or through a perceived lack of new digital skills demanded today. While that more mature cohort may no longer have youth on their side, hopefully, they do have pensions, investments and professional financial advice.

What if a client is suddenly in retirement?

If a client is ‘forced’ early into retirement, the solution isn’t as perhaps simple as finding a sustainable income for the rest of their natural life. It could be simpler and transitional. For example, an income until new employment is secured, or while new expenditure habits are formed. Whatever the answer, you need to plan quickly and plan dynamically.

Accurate cash flow planning, in this context, of course is essential. If the client already has one, then it will need radically readjusting. Equally, it may be the first time there has been a pressing need for one. Whichever is the case, the final plan produced needs to be quick, easy to understand and above all accurate.

This is no longer a theoretical plan for the future, it is the client’s new reality. There is less room or time for error.

When a client plans to retire at a set point, years in advance, you can of course plan ahead. However, when circumstances suddenly change, as they have for many of us in 2020, there has been precious little opportunity to readjust expenditure – and how long will it be before new employment and regular income through that is secured? Such a backdrop demands an always-on cash flow modelling tool – one you can view and quickly update in minutes, not hours.

Things to consider

Decisions like paying for something annually or monthly, taking a lump sum from pensions or investments, or withdrawing a monthly income can all have a significant impact and should be included. Those decisions also importantly determine whether and how you need change the investment to accommodate the switch from accumulation to decumulation.

Which product is the most efficient to withdraw from? What are the tax implications? What happens if the client re-enters employment? Did the client receive a redundancy package from their last position?

All these considerations and potential complications demand a skilled adviser, who can quickly analyse and recommend the best solution for their client. Needless to say, choosing the correct fund and tax wrapper can make a notable difference to how long the portfolio will last and go some way to alleviating the impact of having to access it earlier than first anticipated.


The value of professional financial advice in this situation is irrefutable. Also, the added emotional value of having a person you trust, to shoulder the burden cannot be underestimated either.

Whenever short-term circumstances collide with long-term financial planning, there is always a danger that the former will win. It is of course the client’s money and this could be the rainy day you have both long referred to.

However, all clients deserve to know the pros and cons of choices they can still make. The best way to explore them is with a disciplined, accurate cash flow plan, which uses reasonable assumptions founded on objective data.

“Dynamic Planner Cash flow has helped me enhance my service for clients.” Hear from one adviser in a 5min clip

An independent review of Dynamic Planner’s new Cash flow planning service has been published. The Paraplanners Paraplanner Perspective: Dynamic Planner Cash Flow, is available now to download here.

Colin Stewart, in-house at retirement planning expert at The Paraplanners, conducted the review independently with no input from Dynamic Planner other than an initial overview. Colin has hands on experience of working with many of the UK’s cash flow and retirement planning tools on a daily basis. The review explains the experience from a user perspective and draws on comparisons with other tools The Paraplanners team is familiar with.

Richard Allum, Managing Director, The Paraplanners said:

“If you like numbers and forecasting, it’s an exciting time. There is an increasing need for stochastic cash flow modelling in financial planning, and it’s become a vital part of decumulation planning. Of the tools we have seen, Dynamic Planner Cash flow is the easiest to navigate and use. It is highly customisable, but remains simple at the same time. The report is excellent.

“Dynamic Planner Cash flow stands out from some other cash flow systems. There is enough detail in there to get the message across without overwhelming the client. It will help conversations rather than hinder. In short, we would like to pat Dynamic Planner on the back for creating this tool and we’re looking forward to using it.”

Ben Goss, CEO, Dynamic Planner said:

“Paraplanners are an indispensable, critical part of advice firms, and cash flow planning is a crucial tool that paraplanners call on every day to carry out financial planning duties for their clients. We know that paraplanners will want to ensure that their cash flow service of choice is powerful and accurate whilst ensuring suitability – having this independent review from The Paraplanners team gives them objective insight and understanding about what Dynamic Planner can offer them.”

The Paraplanners Paraplanner Perspective: Dynamic Planner Cash flow can be downloaded here.

6min read

Abhimanyu Chatterjee, Dynamic Planner’s Chief Investment Strategist, discusses the hot topic of inflation amid increasing concerns it could soon rapidly rise. How has it been viewed over time? What are arguments both for and against?

Abhimanyu then analyses what could happen next before outlining four extreme inflation scenarios Dynamic Planner has run to robustly stress test its Asset Risk Model. Finally, he considers cash flow planning and inflation’s potentially acute impact here now for financial planners

Everyone worries about rising prices, especially savers. This general increase (or decrease) in prices of goods and services in an economy is referred to as inflation (or deflation). Margaret Thatcher referred to it as ‘the robber of those who have saved’, while the high priest of the ‘Free Market Economy’, Milton Freidman, called it ‘taxation without legislation’.

The general rise in the price level in an economy results in a sustained drop in the purchasing power of money, as each unit of currency buys fewer goods and services. It reflects a loss in the real value of the medium of exchange.

The opposite scenario, deflation, is characterized by a sustained decrease in prices in the economy.

Market participants are firmly of the opinion that low, positive and stable inflation is generally good for the economy as inflation causes reconfiguration of labour markets through increasing wages and lower unemployment. Excessive inflation or deflation is generally the cause for concern, often caused by step changes in monetary policy.

Inflation: Arguments for and against

It is said that if there are 10 economists in a room, there are 11 opinions. A debate on the causes of inflation results in 20 opinions in the same room.

One often cited reason for inflation is an increase in money supply – both steady or sudden as we have observed during the continuing Covid crisis or during the financial crisis of 2008.

Central banks in the developed world this year have expanded their balance sheets to previously unseen levels to stimulate their economies. Governments have moved beyond monetary policy to fiscal measures, given diminishing marginal returns of monetary policies. In addition, central banks are prepared to move away from their mandates of inflation stability for a period of time to jump-start economies.

As can be seen in Figure 1 above, while CPI inflation has dropped significantly due to the slowdown in demand, the expectations of inflation has picked up from previous levels. On the other hand, the case for disinflation is gaining traction.

At Dynamic Planner, we feel that, rather than being a financial crisis, as seen in the past, this is a social crisis – a crisis in which consumers are voluntarily choosing to socially distance themselves and postpone consumption, due to uncertainties surrounding health and employment. In addition, there is a sizeable output gap across the global economy, indicating spare capacity.

In China, the current output gap is around 7.5%, an historical high, as it is in the US (8%), which stands at the same levels of the Great Depression. In addition, there is a school of thought that the link between money supply and inflation has broken down – a case in point being the large stimulus measures implemented during the Financial Crisis 2008 did not result in runaway inflation as was expected then.

Further, given the nature of the current pandemic, it is obvious there will be sectors which will be worse off than others and hamstrung in their efforts to grow. Previous bouts of quantitative easing and other fiscal measures failed to increase inflation materially, with divergence being even more stark and asset prices rising and the bulk of the economy facing disinflationary forces.

Inflation scenarios: Stress testing the Dynamic Planner asset allocations

In stress testing our allocations, we consider four specific scenarios:

  1. Reflation: In this first scenario, monetary and fiscal policy proves to be successful and stimulus brings the economy closer to its pre-Covid long-term trend growth. Nominal rates remain relatively stable, inflation picks up to levels slightly above 2% and the US dollar strengthens. This is good news for equity markets in general. With real rates and risk premia decreasing further, they could gain around 16%.
  2. Deflation: A grimmer scenario where dis-inflationary trends get the upper hand despite central banks across developed markets keeping yields of all maturities close to zero. With economic growth impaired and increased uncertainty, this is bad news for equity markets, which could lose around 23% in this scenario, with growth stocks underperforming the market.
  3. Inflation overheating: In this scenario, inflation picks up slightly more than planned, which leads to disrupted economic growth and increases in nominal rates as the US Fed reacts to rising inflation. Equities benefit moderately from decreasing real rates with growth stocks benefiting more from declining real rates.
  4. Stagflation: This final test is a more extreme version of the previous one, with inflation going up even more. However, this scenario assumes developed market economies are impacted more severely than other regions, as a result of more aggressive fiscal and monetary stimulus. Although real rates decline, growth disruption and uncertainty take the upper hand, pushing equities into slightly negative territory and resulting in a positive bond-equity correlation.

In assessing these scenarios, we have set out the major risk factors to perform in Figure 2 below:

Based on the above scenarios above, we calculate the performance of the allocations for the different Dynamic Planner Risk Profiles.

As can be seen from the graphs in Figure 3 below, the deflationary scenario is the worst one for our allocations, which is understandable, as in this scenario all growth assets underperform immensely.

On the other hand, modest inflation increases or a re-emergence of the economy from the stress and uncertainty of the pandemic would be extremely beneficial for the allocations. In the stagflationary scenario, allocations for the more conservative risk profiles would be safe while the more aggressive allocations with higher equity allocations would suffer mild negative performances.

As fiscal and monetary policies expand to allow governments to deal with the fall out of the pandemic, market participants have started engaging in conversations regarding the possibilities of inflation. This analysis is meant to add structure around conversations for our clients, who use our allocations as a guide to making allocation decisions.

Cash flow planning with confidence

To navigate scenarios as mentioned, our clients, at the coalface of financial planning, need to create a long-term cash flow plan for their clients.

If the plan uses inflation and growth assumptions which are reasonable and based on objective data, a financial planner can engage more effectively with their client and create a quality and understandable plan.

Dynamic Planner forecasts real returns – i.e. net of inflation – across its system, in the risk-reward trade-off shown for risk profiling, in investment portfolio reviews and in cash flow planning.

The forecast is generated by a Monte Carlo scenario engine that generates thousands of possible real returns. As the returns are real to begin with, the various possibilities for inflation at different times are already factored in. It is therefore inappropriate to guess and factor in other numbers for inflation and apply them to the forecast.

With current events set to make inflation more confusing and volatile, clients will need your advice and explanation even more. It is therefore even more important that growth assumptions used are risk-based, real, reasonable and based on objective data. We conduct extreme stress testing like this, so that you can have confidence in ours and plan confidently with your client.

Read about new Dynamic Planner Cash flow planning

Cash flow modelling has long been part of financial planning’s toolkit. For a wealth of reasons, it is today firmly on the rise. Here, Heather Richards – Head of Actuarial Insight at Dynamic Planner – looks closely at cash flow planning tools under a regulatory microscope.

She considers the strengths and weaknesses of different approaches, including stochastic and deterministic forecasting; fully testing a client’s capacity for risk; stress testing portfolios; miscalibration; and an answer to avoid these dangers

Cash flow planning can take many forms, from a simple spreadsheet showing annual income and expenditure, to a sophisticated, stochastic projection of the impact of contributions and withdrawals on a client’s capital.

There are multiple cash flow planning tools currently available and many more homemade spreadsheets. Of course, as with any financial advice, it is vital it is done well. However, some tools arguably would struggle to meet the regulatory demands of COBS, let alone the newer PROD rulebook, designed to help firms meet standards laid out in MiFID II.

COBS 4.5A 14 states any future projection must be based on appropriate assumptions, supported by objective data and not simulated past performance. If your current cash flow tool takes in a historical index of returns and creates a forecast by sampling returns from this index, without any model or assumptions for how this might change in the future, then the tool is using simulated past performance and cannot arguably be used for future performance.

Assuming your own growth rates – The dangers

A cash flow tool which asks you to input a percentage growth rate is making you answer a complex question – determining a future growth rate, including showing the impact of investment risk. A larger organisation, with expert internal resources, could potentially handle that demand, but it could be a challenge for smaller firms.

Entering a percentage growth rate may be fine when it matches what was intended by the risk profiling tool adopted by your firm. However, a deterministic cash flow is arguably unlikely to accurately reflect the level of risk within an investment.

In an ideal world, the tool you use for measuring clients’ attitude to risk also enables you to project cash flow plans, based on returns from a range of risk levels using the same model and assumptions. That can then be aligned to the risk level of recommended investments, again using the same assumptions.

Looking more closely at PROD, particularly within the context of cash flow planning, advisers are classed as ‘distributors’, recommending ‘investment services’ to their clients.

PROD 3.3.1 states that: “A distributor must: (1) understand the financial instruments it distributes to clients; (2) assess the compatibility of the financial instruments with the needs of the clients to whom it distributes investment services… and (3) ensure that financial instruments are distributed only when this is in the best interests of the client.”

A cash flow plan, done well, can show a client that a product is suitable in a range of circumstances, meets their needs and is in their best interests. PROD 3.3.11 further states distributers should consider how a recommendation fits with a client’s risk appetite. We can explore this now.

Cash flow planning and capacity for risk

Risk appetite – this is an area in which cash flow planning is arguably much underused. Measuring a client’s attitude to risk is often today done through a psychometric questionnaire. But there is an additional, vital element to someone’s suitable risk profile, their capacity for risk.

The FCA defines capacity for risk as an individual’s ‘ability to absorb falls in the value of their investment. If any loss would have a materially detrimental effect on their standard of living, this should be considered in assessing the risk they are able to take’.

The FCA has said capacity for risk should be considered mathematically and not be founded on a client’s feelings and what they think they can afford to lose. This could be interpreted as asking a client what they could afford to lose in terms of a percentage. But that raises issues.

First, most people simply wouldn’t accurately know in those terms. Second, such an unequivocal answer leaves little room for future manoeuvre. A client who states they can afford only to lose 5%, in terms of their overall portfolio value, might be unimpressed come their next annual review to learn of a 6% loss, even if materially it had no material impact ultimately on their standard of living.

How can cash flow planning help?

Accurate, risk-based cash flow planning can powerfully demonstrate the amount of loss a client can afford and therefore the level of risk they can take with their investments.

Take one example – a client entering drawdown must decide on the level of risk they should take with their portfolio. A cash flow plan, showing their future expenditure (likely to be higher in early and late retirement, and lower in mid-retirement) can be created, with income coming from drawdown of their investments.

Stochastically forecasting the impact of that will highlight when the client is likely to run out of money, particularly if investments returns are low – a worst-case scenario in crude or layman terms. However, using the right tool, the level of risk within their portfolio can quickly be dialled up or down until that worst-case scenario provides them with enough money to comfortably last them right through retirement. If no level of risk is tolerable, it might be appropriate to look at annuities, or even to delay retirement.

Stress testing. And miscalibration – The dangers

Highlighting risk within cash flow planning is new for some. Some tools forecast worst-case performance simply by removing a fixed percentage of a client’s portfolio at a fixed time – stress testing, as it has been termed.

Using deterministic forecasting, that is all that is possible, which of course may be fine, provided you are aware of the limitations of your projection. However, a more sophisticated tools can produce a more sophisticated answer.

For example, the timing of the drop in the value of a portfolio is important and has different implications in different scenarios. For someone beginning retirement, the initial months and years are crucial and the time when investment losses will cause the biggest damage. For a client still accumulating, it is the end of that phase which is most sensitive to market performance and sequencing risk.

Good, risk-based cash flow planning software will consider all investment scenarios and be able to demonstrate poor performance, regardless of when it occurs.

When it comes to the model and assumptions used by tools, a final important pitfall in the process must be negotiated. Miscalibration. If a firm uses tool A to measure attitude to risk, adopts tool B for cash flow planning and then turns to tool C to find a ‘suitable’ investment solution, the chain of assumptions you are adopting has been broken and the firm is at risk, ultimately, of giving clients bad advice.

How can you fix that? Adopt a single financial planning tool, which uses the same assumptions consistently throughout – allowing you and your client to plan accurately for the future, whatever it holds.

Dynamic Planner has launched its new Cash flow. How can it help you?

Dynamic Planner CEO Ben Goss explores the complexity of effectively planning for retirement in 2020. How has today’s landscape changed in only the last 10 years? What key ‘unknowns’ should you consider today for a client entering retirement? How does cash flow planning software help?

How has ‘stress testing’ a client’s investment portfolio helped? What are the dangers of relying upon that? And, finally, what is the solution?

Covid-19 has this year spotlighted many areas of our lives. A commonality which has impacted everyone is the complexity faced when our expected norms are disrupted.

The simplest of everyday tasks – going food shopping; going for a drink with friends; going to school or work – have been made much more complex and stressful in 2020.

In the world of pensions and investments, we can have some sympathy for the approximately 2.5million people expected to reach retirement in the next five years. Not only must they plan through the current crisis, they must also consider their financial needs long-term and how their portfolio will support them in retirement.

How has the world of cash flow modelling and drawdown calculation changed?

Rewind a decade, before pension freedoms in 2015 and the problem was never simple, but it was simpler. Upon retirement, you purchased an annuity at a price fixed and lived off a fixed income in absolute or in relative terms. Your retirement date was known and perceived wisdom was that increasingly in the build-up, your portfolio would be strategically rebalanced to take less risk and manage volatility. Today, there are more unknowns.

  1. When will you retire?
  2. What about crystalising different pensions, or portions of pensions, at different times?
  3. What about changes to lifestyle in retirement; longevity; health; and care costs?

As a result, a client’s needs are more likely to vary over time and therefore, so are the demands placed on their pensions and investments, which all the while remain vulnerable to market volatility and risk. How do you financially plan long-term, given such variables?

For a long time, the skill of cash flow planning has been pivotal in helping clients devise a suitable investment strategy and access their portfolio for income in retirement. Most tools to date have adopted ‘straight line’ or deterministic assumptions around how portfolios will behave.

Some work backwards from expenditure required to calculate net return needed and then build a portfolio designed to deliver that return. While simple and helpful in respect of a client’s understanding, the problem of course is that this approach does not consider the risk of investments experiencing returns which are not fixed over time. To overcome that, different cash flow modelling tools have introduced stress testing portfolios. ‘What if?’ markets crashed here, similar to 1987 or 2008. Stress testing, granted, is good, but there are issues with doing it:

  1. First, it doesn’t reflect the risk level of the client’s portfolio. Is it a risk profile 2 or a risk profile 9 on a 1-10 scale, a system like Dynamic Planner, can adopt, for example? As a result, potential losses modelled may significantly under or overstate real risk to the client.
  2. Second, stress testing only simulates a repeat of a given event or time and not the numerous and more complex range of factors, each different, which can impact a portfolio over time.
  3. Finally, if, while markets are falling, a client is withdrawing money from their investments each month, to provide an income, sequencing risk, or the acceleration in portfolio losses, may be significantly underplayed.

That said, how then do you plan effectively and accurately with your client, given that complexity and uncertainty?

How does cash flow planning software help?

The answer lies in highlighting to a client a range of reasonable outcomes they can expect, given their risk profile and the timeframe. A Monte Carlo model – like Dynamic Planner’s – can help here by taking thousands of random potential outcomes for a period being modelled aligned to risk within their portfolio. How does that help?

  1. First, it links back to their portfolio, its asset allocation and its value at risk, all previously agreed with the client. Its risk profile drives the expected average return and volatility, including the likelihood of bigger losses being suffered than have been experienced historically.
  2. Second, it can model thousands [a statistically large and robust enough number] of the almost infinite number of performance paths the portfolio might take each month over the course of a cash flow plan.
    Some might look similar to previous market downturns, but the majority will not. The client can therefore plan for an expected average result, while also being aware of and prepared for a series of poor returns from their investments – the average of the worst 5% or be pleasantly surprised by higher than average returns.
  3. Third, monthly Monte Carlo cash flow modelling can consider the reality of the impact of monthly cash flows, whether this is income drawn down from investments or charges or tax being applied, resulting in a much more accurate assessment of the probable range of outcomes and assets ultimately left available to meet future expenditure.

Considering and then being able to clearly visualise different scenarios in a cash flow plan provides a powerful platform for advisers to engage with clients around a realistic assessment of returns likely from their portfolio. Forewarned is forearmed. As a result, advisers and clients will be better equipped to navigate the choppy waters we all now face.

Find out more about new Dynamic Planner Cash flow

3 November 2020: Dynamic Planner is set to shake up the status quo of cash flow planning in the UK, with the launch of its brand-new Cash flow planning service.

Launching on 3 November, Dynamic Planner Cash flow will make simple and powerful cash flow planning possible for all clients; will assist advice firms in demonstrating investment suitability; helps advisers demonstrate the value they add through the entire planning process; and crucially, gives advisers the ability to use one system and take miscalibration risk out of the equation.

Dynamic Planner’s new Cash flow is powerful, yet quick and easy to use. It combines intuitive technology with a trusted, independent asset risk model – with a real-time Monte Carlo modelling risk-based cash flows calculated on a monthly not an annual basis – critical for clients who are in decumulation.

It enables advice firms to seamlessly link a client and their portfolio’s risk profile, to their cash flow plan – avoiding having to decide upon and manually enter growth assumptions. The final cash flow, as a result, more accurately projects what a client’s future looks like and more robustly tests their capacity for risk.

Ben Goss, CEO, Dynamic Planner, said: “The impact of Covid, Brexit and everything in between has catapulted the ability to provide solid, robust, and risk-based cash flow planning for all clients to the top of advice firms’ wish lists. We spent many months consulting with advisers to identify exactly what they needed but didn’t yet have – something that was powerful, yet easy to use and so cost effective it could be used for every client no matter what their portfolio was worth.

“At the heart of what advisers told us they needed, was to clearly show that they were working hand in glove with the FCA’s stance on demonstrating suitability. Using our Cash flow enables them to do this through our asset risk model, in combination with real-time, risk-based cash flows.

“Advisers and their clients will now have access to ‘one system’ financial planning which addresses the risk of miscalibration – something that can occur if you use different definitions of risk and return in the planning and advice process. We believe using one system, providing a single definition of risk is the only way to ensure miscalibration is mitigated against.”

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