In his latest blog, Andrew Storey, Propositions Director at EV, discusses the challenge of getting the right level of detail when building a cash flow planning solution without compromising on the best outcomes for clients.
You may have noticed that most of life forces us to make trade-off decisions. Whether that’s getting up in the morning too early or too late or your porridge being too hot or too cold, we’re all looking for that perfect “just right”.
This is also true of cash flow planning. If you include too much detail, it takes longer to create, can give a false impression of accuracy, is harder to use and has too many assumptions for it to be useful.
But if you have too little detail, it can’t sufficiently reflect the reality for the client, which means it doesn’t show the impact of decisions effectively, even though it may be easier to use.
So the challenge when refreshing cash flow and making it customer-focused is to get the balance of detail to ease of use “just right”.
When designing the EVPro Goal cash flow planner, I used a number of key features to help us do just that. Here are a few.
Tax calculations
Expenses are always considered net of tax. Income could be entered either gross or net, but these have their issues.
If you enter net income, it takes no account of other sources of income and the tax that would be payable. If you enter gross income, you have to make assumptions about future tax rates.
Unfortunately, there are other likely sources of income in a full cash flow plan at various points, such as withdrawing from a pension pot or state pension, which will also need to have tax applied at the correct level.
Therefore, from the very first release of EVPro, we have included the key tax rules to ensure the future realism of the plan for clients.
Appropriate assumptions are included for the increases in the various thresholds, including ensuring that the freeze of personal allowance is taken into account.
So we have aimed at the “just right” by taking into account the significant tax implications for plans, but not going into too much detail so that it is simple enough but not so detailed that it gives a false sense of accuracy.
Input simplicity
Too much detail for the current finances and position, and it’s time-consuming to enter, hard to collect, and keep up to date, gives a false sense of security of the accuracy of a long-term projection.
Too little detail and the outcomes are not going to be representative of the potential outcomes for the client. For example, not taking into account the risk level of the investment can make huge differences to the plans in the longer term when you project into the future.
Here the just right is to have enough detail to give reasonable projections without going too far.
For example, an asset level forecast would give the client a good indication of how their risk profile affects their cash flow plan. Going to the next level of detail and considering individual holdings, say the difference between a BP share and an Esso share, would only have a second-order impact on the overall cash flow plan and not change any decisions.
Result simplicity
Too much detail confuses the adviser and customer with numerous complex graphs or tables of figures.
Too little detail, and it’s not clear what’s going on in the plan or why or give much idea of what can be done to improve the plan.
Our approach to the output is a little different, as we start by providing high-level metrics to simplify the output for both customers and advisers and then give a drill down into more detail for the plan, showing how it has been created.
The results focus on the range of possible outcomes given the client’s risk suitability to ensure that the plan and suitability are considered together.
Drill down from little to more is the principle, allowing a high-level metric to give you a way to compare over time or between plans, then allowing more detail if required.
Control over expenses to meet withdrawals
Too much control, and you’re likely to need to spend a long time making the plan work - setting the right level of sustainable income from a drawdown when the amount required each year can vary depending on what else has been included.
Too little control, and you can’t show the tax efficiency of solutions or the impact of decisions.
We’ve implemented an order of withdrawal at a product level that calculates the amount needed each year to ensure expenses are met. This gives you control and can show the benefit of different orders of withdrawal.
However, the heavy lifting of working out how much is needed to be taken from each pot is done by our calculation engine, which considers the tax being paid, particularly from a pension withdrawal.
For example, a level sustainable gross withdrawal rate does not necessarily give a level net income stream for expenses. That also depends on what other taxable income is taken each year.
In summary
It’s been a challenge getting the right level of input and result detail for cash flow planning and including the right level of tax calculations, but it’s a challenge I’ve been proud to be part of.
For almost 20 years, I’ve been helping create goal planning software for both advisers and end customers, so it’s been great to have been allowed to use that experience to create a solution built from the ground up to be “just right”.
Further reading
In his first blog series, Andrew discussed the development of our new financial planning software for advisers, EVPro, his approach to innovation, and his personal quest to find a “one-click” problem-solving solution that improves your clients’ financial planning outcomes.
Click here to read; My quest for the ultimate automated advice
So what next?
Our EVPro software is designed to deliver consistency to your advice journey from start to finish, negating the need to integrate multiple third-party tools. So, why not book your one-to-one demo of EVPro by clicking the image below.
