Cashflow Assumptions

Morning everyone. I wondered whether any of you who use Prestwood Truth (or any other cashflow tool for that matter) have a set of standardised assumptions for things such as inflation, earnings, interest on cash deposits, etc. which you use for all clients (presumably based on historical data) or do you agree each of these items individually with the clients? We have until now been doing the latter, but are looking to standardise these in order to save time at meetings and in meeting preparation...

Comments

  • We have standardised assumptions (for everything that Voyant requires) which we use for all clients. 

    If they want to change any of them for any particular reason, we will accomodate that although I can't think of a case where it has actually happened.

    Andy
  • Thanks Andy. From what data source(s) do you base those assumptions? (Or does Voyant pre-load them..)
  • Source data comes from FE Analytics and they are all agreed by our investment committee.
  • benjaminfabibenjaminfabi Moderator
    edited August 2016
    I would use common assumptions for it all, be it via cash flow or other software, or in a spreadsheet/on a calculator. Of course these need explaining to the client and they are in no way set in stone, indeed a number of different scenarios can be produced if required. Voyant will give you a preloaded set of assumptions if you don't want to create your own, plus there are a number of ways of modelling investment returns in the system.

    Andy, you had a thread with a request for how investment return assumptions were arrived at. What was your resolution? Would you update that old thread with your solution? Thanks smile 
  • @benjaminfabi I did indeed comment on the Voyant Assumptions discussion. As yet there has been no change to what we do.
  • The CFP standard requires all assumptions to be reasoned and reasonable. Many of these are standard for all clients. For example general inflation and cash deposits are economic assumptions applicable to all clients. However, personal expenditure inflation (which may be very different from general inflation) can be more client specific depending upon their spending habits.

    Over time you can establish a more precise average expenditure inflation figure for each client based on heir year on year expenditure data.

    Other things such as care home fees; school fees etc can be sourced on an 'average' basis either on a UK wides approach or a care home / school specific approach.

    We would start with our 'standard' assumptions, adjust where clearly they differ and agree them all with each client. I think asking the client what assumptions they would want to use is extremely dangerous; after all, you are the experienced professional and surely it is you who should be guiding the client as to what is (or is not) reasonable.

    Projected investment returns are linked specifically to the client's agreed attitude to risk.

    We would then 'risk test' any cash flow, most typically through the raising of the expenditure inflation but also on occasion altering the rate of investment return.
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