FCA approach to cash flow mirrors our own, says Dynamic Planner

by | Mar 26, 2024

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Dynamic Planner, the UK’s leading risk based financial planning system, has welcomed the work undertaken by the FCA: Undertaking cash flow modelling to demonstrate suitability of retirement-related advice, with the approach set out by the FCA mirroring Dynamic Planner’s own.

Steph Willcox, Head Actuary at Dynamic Planner said: “The FCA is concerned about how firms prepare and use cash flow modelling and has offered a review of usage, and guidance into how to improve quality. Dynamic Planner welcomes this review and is encouraged to see that the FCA’s desired approach to cash flow modelling tightly mirrors our own.”

Advice firms using Dynamic Planner can be confident that their cash flow option meets all the five findings for quality cash flow modelling as set out by the 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FCA recognises that a great cash flow plan cannot happen without great data, but is concerned that advisers are using out-of-date information. 

  • Dynamic Planner has a one-system approach with “Client Access” – questionnaires can be completed and key information shared – advisers are not forced to accept changes, and are free to challenge anything that seems unusual or incorrect. This enables adequate conversations on life phases, monetary values, goals and time frames. Integrations and valuations are linked to ensure accurate figures for all pensions, savings and investments. 

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 “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.

  • Dynamic Planner uses an entirely forward-looking asset risk model providing expectations of real return and volatility for 72 underlying asset classes. These create expectations of real return and volatility for our 10 risk profiles and allow for variable rates of inflation over time; reflecting reality.  All forecasting uses Dynamic Planner’s stochastic Monte Carlo forecaster which uses monthly projections over thousands of runs to generate a wide range of results and presented from the 5thpercentile to the 95th to ensure clients are aware of the results they might achieve. 

Finding 3: Planning for uncertainty

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

 
 
  • Dynamic Planner only uses 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. Advisers are free to set the end date of cash flow plans, and this does not need to be based on life expectancy. This encourages advisers to consider what length of cash flow plan is appropriate for each client individually. 

Finding 4: Consumer understanding

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

  • Consistent projections are used throughout Dynamic Planner with “one definition of risk”, ensuring that all communications produced can be read in conjunction with one another without causing confusion. The cash flow report has been fully researched and tested with both advisers and investors who have received financial advice at one time in their lives. It includes all assumptions used, a complete description of uncertainty and modelling, as well as all the information provided by the client to the adviser.

Finding 5: Consider the output

The FCA wants to ensure that advisers are reviewing the information they are about to provide, to check it’s appropriate and based on suitable assumptions. They particularly highlight that cash flow models could include withdrawing from assets before they are available 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 is also encouraging advisers to check how long funds will last under the base and additional 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 that have been included in the report.  All scenarios created can also be clearly displayed in the report as well as on screen. 

Steph Willcox continued: “Dynamic Planner Cash Flow is a quick and efficient way to bring a client’s finances to life.  Our stochastic Monte Carlo forecaster projects thousands of runs monthly, to reflect the way that clients spend their money and to ensure that sequencing of returns risk is adequately captured for higher risk investments. 

“Advisers who use Dynamic Planner can feel confident they have a solution for their clients which meets the FCA’s requirements of quality cash flow modelling.”

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