Financial Advice - Cash flow modelling

Question 1

Explain the use of lifetime cashflow modelling within the financial advice process

4

Answer 1

• Used to forecast client income and expenditure profiles over the long term
• They provide a year by year summary of cash paid to and paid out by client
• Will show years where there is surplus or deficit
• **Main variables **- level of income/capital, level of expenditure, assumptions about increase in income, capital values, spending and inflation. Projections can then be amended to incldue the effect of recommendations.

Question 2

Describe how cashflow modelling could be used to help plan future income needs

10

Answer 2

• Identifies objectives/targets
• Quantifies capital/income required to meet objectives
• Downsize/future inheritance and capital costs
• Assesses shortfall
• Identifies expected rate of return
• Inflation assumptions
• How much risk do they need to take
• Stress test/market conditions
• Identifies when client will run out of money
• Structures finances

Question 3

Explain how lifetime cashflow projections/modelling is used

4

Answer 3

• Used to forecast clients income and expenditure profiles over the long term
• They provide a year by year summary of cash paid to and paid out by the client
• Will show the years where there will be a surplus or a deficit
• The main variables are - level of income and capital inputs, the level of expenditure, assumptions about increases in income, capital values, spending and inflation.

Question 4

Explain the limitation of cashflow modelling and why clients should not rely on this at the sole method of planning future income needs

9

Answer 4

• Provides estimates only/snapshot of current situation
• Inflation assumptions can be incorrect
• Growth assumptions may not be achieved/investment returns not guaranteed
• Personal circumstances can change/ill health/ loss of income/ objectives can change
• Tax rules may change
• ATR/CFL may change
• Charges/fees can change
• Regular reviews required
• Input errors/ misunderstanding of information by client or adviser

Question 5

Outline the process you would follow to enable you to review the performance of an existing investment

11

Answer 5

• Letters of authority/obtain plan details
• Confirm date of purchase
• Base cost/ any further investment/withdrawls/fund switches
• identify reinvested income
• Calculate gain/performance history
• Assess asset allocation
• Identify suitable benchmark
• Review charges
• Comparison with risk-free return/risk adjusted return
• Review volatility/risk rating of fund
• Assess fund against ATR/CFL