Cash Flow Modelling

Question 1

Factors and assumptions when using cash flow model (9)

Answer 1

• future expenditure patterns
• pattern of gifting
• longevity
• future need for long term care
• ATR
• CFL
  — growth rates of investments
• fees
• Inflation rates
• use of tax efficient wrappers

Question 2

Benefits of cash flow modelling (7)

Answer 2

• allows advisor to compare N and J’s expected income with their expenditure pattern
• advisor can stress test different scenarios
• to understand the impact of future events on their ability to cover outgoings
• advisor can identify possible shortfalls
• and put in place plans to avoid these occurring
• allows various assumptions to be made
• can be adjusted as circumstances change
• can be used to determine a suitable asset allocation for Client

Question 3

Drawbacks of using cash flow modelling (7)

Answer 3

• assumptions can be incorrect
• requires regular reviews
• objectives/circumstances can change
• cash flow returns are linear
• tax rules are likely to change
• does allow for market risk
• does not take account of liquidity risk

Question 4

Scenarios to stress test with cash low modelling (6)

Answer 4

• permanent loss of income/capital/market crash
• lower returns
• higher income requirements
• large unplanned capital spend
• higher inflation
• bigger longevity
• adverse change of circumstances

Question 5

Reasons to use CF modelling (5)

Answer 5

• when income being drawn from non guaranteed sources
• cash flow will allow assessment of how different assets will provide an income
• will show likelihood of funds being exhausted before death
• forecast can take account of expected longevity, market downturns and systematic risk
• regular reviews will allow underlying assumptions to be adjusted