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Financial forecasting software – is it as good as it says?

What are the key benefits of using financial forecasting software and if it’s so great, why aren’t more advisers using it? ABR talked to Andy Hart, founder of theVoyantist.com

ABR: What do you see as the key benefits of using financial forecasting software?

Andy Hart: As a financial planner I’ve been using Voyant with clients for over five years now, both in and out of client meetings. For me, I suppose, the benefits are two-fold. The first benefit of using comprehensive financial planning software is that it demonstrates to you as the adviser and to the adviser firm, exactly what you’re recommending to the client. And if you work in a team situation, where you have an administrator, paraplanner and an adviser working on a client’s case, then it is so easy to see visually and for everyone to quickly understand the advice that is being proposed. So first of all it clarifies the advice you are giving.

The second benefit is the interaction it facilitates with the client. Financial forecasting is a collaborative tool and it works so well in client meetings. When you go from not using the software, to using the software in your next meeting, you can see that the whole financial plan becomes more tangible for the client because it’s there, visually in front of them, particularly when you use the software’s capability to demonstrate ‘What if’ scenarios.

What this means is that, for the first time, clients can clearly see what it is that we do, and how we are adding value, whereas before we just gave advice and recommended a course of action without the benefit of being able to comprehensively demonstrate that advice to the client.

The software works brilliantly where there are complicated numbers involved, which is perfect for when we’re dealing with the wealthy market and complex financial planning.

ABR: Financial forecasting software (or cashflow modelling as it’s also known) has been around in the UK for a number of years, so why hasn’t it made huge inroads into the adviser market as yet?

AH: You may or may not be right about its penetration of the market. It’s difficult to get hard and fast data on the number of users. People are still arguing over how many financial advisers there are in the market. There is a general consensus that there are around 21,000 investment advisers and my guess, and it is only a guess, is that around 4,000 of those have financial forecasting software in their firms. However, the number of advisers making full use of the software on a day-to-day basis is debatable as I think that, as with most software, lots of people may have it but not everybody has taken the time to get to grips with it and to be able to fully use it to their advantage within their firm.

But the more people do use the software, the more they come to realise that there is no other way of doing truly comprehensive, detailed financial planning and to make it so accessible to the client.

My prediction is that as more and more of the market focuses on how it’s delivering service to the client, then the use of this type of software is going to grow exponentially.

ABR: How intuitive are financial forecasting tools and how easy are they for people to get to grips with?

AH: I think that comes down to how intuitive is the financial planning industry. We work in a very complicated environment, dictated by the layers of tax and financial planning rules. Voyant and other financial forecasting tools are just trying to mirror the market they are in. We are in a very complicated market so by default any tool in this market is going to be complicated to use.

But, like any software, you have to immerse yourself within it to get the best from it. Once you pick up a few key ways in which the software works than it does become more intuitive and it becomes easier to do other things within the software. It’s a matter of getting the building blocks in place first and then taking the time to learn and to progress through the various parts of the software, depending on the type of business that you do and whether you deal with pensions and investments. No one becomes a Grade 8 pianist overnight, and likewise, it takes time to become fully conversant with all aspects of financial forecasting tools. When I’m training on Voyant, for example, I use a belt system like in martial arts, from white to black belt. It takes time to get to black belt.

So you start with the fundamentals, assets, liabilities, income and expenditure and build a simple plan. You can then get more detailed with specific withdrawal strategies from ISAs, general investments and pensions, and then you move on to gifting strategies, inheritance tax and other similar areas.

I think it is important to point out that it is difficult to use financial forecasting software in isolation, so for example, you wouldn’t want to use the advanced forecasting tool just to model pensions. Because if you haven’t got everything else in place then the plan is not tight anyway, and it’s going to be quite hard to isolate that type of advice.

ABR: With the implementation of more flexible pensions rules do you see financial forecasting being used to a greater extent to help clients understand their future prospects?

AH: Technically, the planning strategies for wealthy clients shouldn’t change that much, just in terms of the pure withdrawal. No one is going to intentionally hammer their pension if they need it for their future, so there has always been the question of what is the safe withdrawal rate, how much can the client take out each year assuming investments increase by at x%. That scenario shouldn’t really change.

For really wealthy clients, the new rules open up something of a minefield in respect of which assets they dispose of first and which they maintain in place, as it affects their income ability and potential IHT liability. There will no doubt be things coming out of the woodwork over the next few months but, as it stands, it looks like the pension will now be the last asset to be touched, whereas when the 55% death tax was in place, it was the first asset to be realised.

Where financial forecasting software is useful here is in the withdrawal strategy, in respect of calculating and showing the client visually, how much it is safe to take out on a regular basis, and the inheritance tax strategies.

For clients holding sub £100,000 in their pensions, this is where there is a bit of a grey area in terms of how much advice they’re going to get and how much advice they will be willing to pay for, as well as which companies are going to be servicing them in respect of going into drawdown on a self-funded basis.

There is going to be a big requirement for advice. That requirement has always been there, but the rule changes and the greater freedoms they bring mean that people are now more aware of the need to make a decision that isn’t just an annuity, in particular now they are unhindered by the amount they are able to take out from their pension.

Image: Cashflow drawdown (in Voyant)

 

cashflow drawdown

 

 

 

 

ABR: How easy can the software’s visuals make it for clients to see the benefits of having an annuity and having money in drawdown, for example?

AH: Using a comprehensive financial forecasting tool you can quickly show the affect of the changes to both pension rules and tax. When factoring in the new pension and tax rules for decumulation clients, between one review and another we’re already completely changing the way that they are sustaining their income and spending their assets. Certainly, I wouldn’t dream of giving advice to clients in the decumulation stage without using a comprehensive forecasting tool that allows the client to quickly visualise and understand what the changes mean to them. In fact, I’d say good luck trying to do it in an Excel spreadsheet.

Image: Drawdown v annuity cashflow (in Voyant)

drawdown v annuity cashflow

 

 

 

 

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