“Do what you feel in your heart to be right – for you’ll be criticised anyway.”
— Eleanor Roosevelt, “Paraplanning for Fun and Profit”
Damned if you do
“Most Australians do not engage fully with their superannuation. They may have little idea of how much income they will have in retirement and how this compares to the amount they will need.”
— ASIC RG276 Superannuation forecasts: Calculators and retirement estimates
The value and merits of cash flow projections in Statements of Advice (SoAs) have long been debated; do the benefits outweigh the risks?
Can clients rely upon projections for too long and mistakenly assume they are on-track to meet their retirement goals in an ever-changing landscape?
Charles Dickens, in his seminal nineteenth century “Introduction to Financial Planning” (French Edition) described projections as “the best of tools, the worst of tools”. It’s difficult to argue with equivocation but, I’d like to suggest that as counter-productive as they often are, when cashflow modelling and projections are purposefully crafted and done well, they demonstrate:
● The value of advice being provided now;
● The value of ongoing service to maintain this advice; and
● Free, prior and informed consent as they relate to the client’s personal circumstances.
What does the legislation require?
There is no statutory requirement to provide projections in a Statement of Advice (“SoA”).
However, ASIC states in RG175.213 that “Clear, concise and effective presentation of SOAs promotes understanding of advice by retail investors.”, and in RG175.215 it also suggests that “Useful presentations includ[ing] … tables and graphs that are clearly explained” improve both comprehension and engagement (and reduce regulatory and legal risks).
In fact, ASIC’s long-standing, and commonly frustrated, ambition is for Statements of Advice to evolve beyond disclaimers and disclosures to improve a client’s understanding of the advice being provided to them.
If you recall it’s position being more prescriptive, we’d refer you to RG276.57 in which ASIC stated that “If a provider already holds an AFS licence with an authorisation to give personal advice, the provider is free to give personal advice in any way it chooses, including by giving forecasts, as long as the personal advice requirements in the Corporations Act are complied with.”
We see this in practice in the sample SoA provided by ASIC with Information Sheet 267; you’ll note its example included a cash flow estimate of the impact of insurance premiums on page 14. It was an example, not a mandate, and crucially ASIC reiterated that this approach “is one way that an adviser can demonstrate their compliance with the best interests duty and related obligations.”
One way. Not, the only way.
So, to be clear, ASIC suggests that tools such as projections can help advisers fulfil their obligations and help their clients understand their advice.
You will note that ASIC also uses its own retirement estimate calculators on the MoneySmart Retirement Planner website to help consumers get some idea of what their retirement savings might look like. Their projections, and the tools that generate them, are buttressed by the inclusion of appropriate disclaimers and assumptions below the data inputs.
See ASIC’s example and take it’s lead.
The choice is yours but remember that ASIC is supportive of tools that can help enrich clients’ understanding of their retirement outcomes, presuming they are tailored, concise and appropriately illustrative of the client’s needs and objectives.
What do our reviewers require?
After reviewing several thousand client files, our Reviewers have seen it all; from misleading (and deceptive) projections supporting conflicted recommendations to highly-detailed analyses underpinning exceptional advice [well done 😊] and everything in between.
Unsurprisingly, they’re often agnostic in respect of projections. They tend to focus on the context and use of models and projections which is why, when asked about the use of cash flow modelling and projections in SoAs, they avoid definitive answers in favour of observing that:
- “Not including projections is incongruent with setting a savings target, or a retirement sufficiency target, or a retirement income target.”
- “Projections can be important when trying to illustrate the impact of insurance premiums on superannuation balances.”
- “Projected scenarios assist with justifying the provision of ongoing service to ensure that the projections remain relevant over time and help the client keep on-track towards their goals, because clients cannot live in a one year vacuum.”
- “Without projections, how is the basis of alternative strategies or scenarios justified e.g. debt reduction vs superannuation contributions?”
- “Without projections, how does one show the benefits of the current vs proposed scenarios?”
- “The use of projections is a lot about how the projections are couched: if using traditional software-generated, straight-line returns, then these could indeed be considered to be unhelpful and inaccurate, so these need to be appropriately disclaimed.”
So is a projection/model useful, desirable or effective?
Like most things in life, it depends on how it’s used.
How can advisers use projections effectively?
1. Understand your clients’ needs
It’s important to get to the heart of what your client really wants to achieve, what kind of risk they are truly comfortable tolerating, and what their “end game” is for seeking advice.
Is it a shorter term goal of paying off a mortgage in 5-10 years’ time, or is it the long game to meet their income needs in retirement?
Understanding your clients’ needs will help you determine what kind of cashflow modelling and projections may assist your clients understanding of your recommendations and tying your projections to their needs is where the value is realised.
2. Be clear about your assumptions
It’s important not to rely on the default projections produced by the software you use, it’s assumptions are likely to be generic, unrealistic and not relevant for your client.
Review assumptions according to your clients’ needs and determine what assumptions are genuinely realistic and relevant for their situation e.g. their risk profile, their time horizon for investment and any other factors that impact the advice you are providing.
This is critically important for insurance projections for sums insured and premium costs; understand the period of time for which the client might need their policies, what mitigating factors could change the cost over time and how these should be reviewed on a periodic basis to ensure that they remain relevant for their personal circumstances.
3. Tailor your projections to highlight client needs
There may not be much point in projections where your client is in a position that they will clearly meet their retirement goals.
However, if a client is concerned about retirement income, stress-testing different scenarios can help a client decide what to do and what levers to pull over the years, in order to help achieve their retirement goals. Alternatively, this stress-testing may help you to re-adjust their expectations to set goals that are more realistic.
For example, where we have seen this done really well is when an adviser can demonstrate “What your retirement would look like if you had your income protected with insurance” vs “What your retirement will look like if you do not take out insurance”.
It is hard to refute the damage that under-insurance can have on retirement savings when they disappear because the client didn’t want to take out insurance.
4. Disclaim appropriately
It is important to support your projections with appropriate disclaimers, again ensuring that they are relevant for the clients specific needs.
For example, when providing assumptions for CPI and growth, clearly explain that these can vary over time given changing market conditions, monetary policy and government legislation. This further highlights the importance of ongoing service to keep on-track and modify expectations over time.
Bringing it all together
Great advice is the outcome of good process. By carefully determining their clients’ needs and objectives, skilfully working through trade-offs and competing priorities with their clients, using relevant assumptions and appropriate disclaimers, keeping high-quality file notes, and retaining well-documented research and strategies, an adviser moves beyond “compliant” to become “effective and professional”.
Make no mistake, great advice is based on careful consideration and demonstrated value – and projections and models can elevate ordinary recommendations to extraordinary solutions.
But, like many situations in life, it’s not just what you say, but how you say it.
Projections, when they are correctly framed, can both support the basis of the advice you are providing and facilitate free, prior, and informed consent for your clients. When they’re not correct, or correctly framed, they’re disastrous.
If you would like help on how to recognise the difference, and operationalise better advice processes, reach out to us at Assured Support.