Why suitable advice requires cashflow modelling: practical tips from Defaqto’s Richard Hulbert

by | Mar 26, 2024

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Following last week’s ‘Dear CEO’ letter from the FCA on income in retirement, Richard Hulbert, Insight Consultant, at Defaqto, reminds us of the benefits of cashflow modelling as he also points out certain issues that advisers should bear in mind when it comes to delivering financial planning solutions using cashflow planning.

Last week the FCA issued guidance to firms that advise on income in retirement. The regulator’s guidance suggested they should:

  1. review their processes
  2. use the FCA’s Retirement Income Advice Assessment Tool (RIAAT)
  3. use cashflow modelling

The RIAAT is a list of requirements to give suitable advice. Completing it allows cashflow modelling to be undertaken, and together they can evidence suitability.

The FCA states that cashflow modelling “can be a key step in providing suitable advice. It is used to project the income flows that different assets could generate and compare these with the client’s estimated retirement needs.”


It is great to see the FCA finally embracing cashflow modelling as it creates benefits for both the advice firm and its clients.

It is worth noting that not all modelling tools are the same. A true cashflow modeller considers many factors including growth, risk, taxation, and inflation, and produces a comprehensive and accurate illustration that can be fine-tuned and altered in real time.

The underlying calculations can be based on two approaches, stochastic or deterministic. They each have their merits, and the best tools tend to use deterministic as a structure with stochastic powering their accumulation and decumulation illustrations.


That said, cashflow modellers are not a panacea and the FCA warns of poor practices that it has observed.

Finding 1: Firms relying on information without considering accuracy

If the client information input is not accurate, complete, and up to date then the output could be inaccurate leading to unsuitable advice. This has always been the case with the advice process.


Including the RIAAT within your factfind and using probing questions will mitigate this problem.

Finding 2: Using justifiable rates of return

Modelling tools require rates to be assumed for items like costs, growth, and inflation.

Where rates are known facts, such as costs and reduction in yield, it is always best to use them.

Professional cashflow modelling software tends to have assumed rates pre-populated with evidence-based ones. If you overwrite them be sure to evidence base your numbers and record your rationale.

Different solutions create different outcomes, and so it is not appropriate to use the same assumed rates for all. Growth rates for different risk levels being a prime example.

That said, where economic rates are used, such as for inflation, it is good practice to use the same rate for all similar clients.

Do not blindly accept defaulted rates or set and forget your own rates. It is good practice to periodically review them for ongoing suitability.

Finding 3: Planning for uncertainty

You will never be able to model every eventuality, and therefore the FCA suggests advisers illustrate four unexpected events to demonstrate how stresses impact on the advice. They are:

  1. a rare but feasible fall in asset values when income withdrawals start
  2. reduce net of inflation rates of return to show the impact on how long funds will last
  3. highlight the lower percentile outcomes in stochastic modelling outputs
  4. show how higher withdrawals will deplete the fund sooner

Finding 4: Consumer understanding

Six out of ten of the UK population are visual learners and therefore the majority will gain a better understanding through cashflow modelling.

This requires clients to have a firm understanding of what they are looking at and so an explanation and run through of the pros and cons is advisable. Interestingly, when this is done clients tend to be more open to ongoing reviews and to be more realistic in their expectations, such as withdrawal rates.

Cashflow modelling works best when the illustration is shown on screen and changes as the conversation between the client and their adviser evolves. This improves both the client’s experience and their understanding, especially when this is part of the ongoing review process.

Finding 5: Consider the output

The FCA states, “Firms need to review the cashflow modelling outputs to draw conclusions about the client’s potential financial position before and during retirement. These outputs are key factors to consider in the firm’s suitability assessment.”

Failing to review outputs can create incorrect or misleading outcomes, resulting in inappropriate risk and actions being taken, including unsuitable advice.

For many firms, the scenarios illustrated form part of the advice process and so should be kept on the compliance file. Some modelling tools make this much easier than others and importantly do not detract from the client experience.

Circumstances and goals evolve and therefore it is important to revisit the outputs periodically, (at least annually), to help evidence ongoing suitability. More importantly to help clients understand how their financial future is evolving.


The FCA expects to see advice firms using cashflow modelling as part of their income in retirement advice proposition. This is because they improve the client’s experience and understanding, while helping to evidence the suitability of the advice.

When looking to meet the FCA’s expectations, we suggest six steps for advice firms to follow:

  1. Make cashflow modelling part of your advice process, including demonstrating the outcomes of the four unexpected events listed in ‘findings 3’.
  2. Train advisers on cashflow modelling and require CPD on it.
  3. Choose a modeller carefully as it will be a long-term partner.
  4. Centrally control the assumed rates in use and periodically review them for ongoing suitability.
  5. Review outputs for accuracy and suitability.
  6. Review advice provided to existing income in retirement clients using cashflow modelling to help check for suitability.

When selecting a cashflow modelling tool it is worth highlighting that the bulk of the cost is not in licensing the software, but in the time it takes to execute tasks. For example, some take a few hours to load clients on, while others can take an age to save each scenario considered.

Advice firms should shop around to avoid these issues and others. I suggest starting with the Defaqto Engage cashflow modelling module.

You can read the full FCA guidance at:


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