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Silver linings and green shoots: a client lifecycle approach to financial planning

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OutRank Pension Planning

Historically, a generous defined benefit provision coupled with robust social welfare afforded a more passive approach to pension planning. Now, as average/final salary schemes continue to recede, there is a much greater personal imperative on accumulators to ensure that our lifestyles are protected in our golden years. In the UK financial advice...

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by Kidbrooke
| 01/06/2021 12:00:00

Changing patterns of living and working
Now that the world is emerging from the Covid 19 pandemic, people will be making decisions on their lifestyle choices, careers, housing, education and eventual retirement. A year of working from home, for those who are not key workers, has led some individuals to contemplate a new kind of life, with better work-life balance, among other objectives. Pundits have published articles about “the future of work” and related topics. Yet these decisions must be made in the context of holistic financial planning, so that the rewards, risks and tradeoffs can be fully understood. The ability to see complex financial scenarios including the “known unknowns” is usually the subject of actuaries and portfolio managers; ordinary people, and the financial professionals who advise them, need tools to understand their finances in a quick and simple way. What an actuary would call “the expectation of probabilistic outcomes” is what most people would say “what are the odds that my dream can become a reality”.

Let’s imagine our hypothetical person leaves a big job in the City, plans to sell up in the leafy London suburbs and downsize to a house in the country, from which she or he will run a small business.  The “known unknowns” can be plugged into a spreadsheet, including that he will experience a dramatic drop in income, but also a reduction in expenses, on the assumption that he will use the equity in his London home to live mortgage-free in the country. Once his business is profitable, he will be able to cover his monthly outgoings and continue to save and invest for the future. Let’s look at three variables.

Self employment
When executives become entrepreneurs, some have an easy transition to being their own boss. Others find they have underestimated the challenges of going it alone. Most businesses fail because they run out of money or because they have failed to understand what customers need. 

While many executives transitioning out of corporate jobs may carry over their life insurance policies, they need to consider a range of business insurance, offered in a package including many products. It may be overwhelming to consider all the products available, such as public and employers’ liability, indemnity, business interruption and contents insurance, to cover a multitude of risks faced by a company. Without business continuity insurance, “key person” risk is significant when business is interrupted for economic or personal reasons.

Having a tool that can forecast all the needs of business owners, including assets, liabilities and levels of insurance, would put the minds of budding entrepreneurs at ease. With Kidbrooke, OutRank can be tailored to help analyse a number of insurance products according to what kind of business is proposed.

Income replacement needs
Most people, whether employed by companies or by themselves, are underinsured with respect to losing the ability to work for a certain period of time or even permanently. Today’s 20-year-old has a one in four risk of being temporarily disabled at some point in their life. For adults over 35, the risk is 30% that a person will experience a disability for 90 days or more. It is difficult for healthy people to imagine losing their health and ability to generate income and even more challenging to calculate the mix of insurance, savings, asset drawdown and alternative earnings that could be required to replace their income.

Many people assume they can live off their savings if necessary, but the risk is that starting decumulation too soon will hollow out their capital, which could have been used for investment growth instead of living expenses. The ability to calculate different scenarios of insurance coverage, investment income, reduced earnings or a return to part-time employment is critical if middle-aged people of working age are able to make intelligent choices about their futures.  

Imagine a tool that enables a customer to forecast their expected lifetime income and expenses along with asset performance, using a scenario calculator. In the case of Kidbrooke, we offer a secure, stable and resilient way for insurance representatives or financial planners to present a variety of scenarios with decision support direct to customers. Consider Kidbrooke’s OutRank API, easy to use, transparent and highly customisable, used by Skandia Life, one of Sweden’s largest insurance companies. 

Identifying tradeoffs
The key to managing tradeoffs when making lifestyle changes is the awareness and avoidance of confirmation bias. People make assumptions on past experiences but this can impede good decision-making. A comprehensive tool should:

  • reflect all sources of capital/wealth and household liabilities
  • identify and deal with individual risk preferences
  • provide an appropriate basis for the comparison of financial products
  • acknowledge behavioural biases and educate investors of the potential ramifications
  • be accessible in a range of formats and varying levels of sophistication
  • be flexible and transparent.

People need to be confident of the accuracy, objectivity and usability of any financial planning tool. Capabilities should include an economic scenario generator, a balance sheet simulator, or a cash flow generator, along with financial decision support. Some planners use a methodology based on modern portfolio theory; however, that approach is flawed as it typically underestimates the risk of certain decisions. At Kidbrooke, we employ an approach based on a multi-period simulation model and utility theory. This allows for a more nuanced consideration of customers’ risk profiles, especially in conjunction with more realistic economic scenarios properly capturing the risk posed by economic crises.

If you’re advising clients who are making transformative decisions for themselves and their families, why not show them a comprehensive, realistic view of their aggregate financial position?

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A Holistic Framework for Lifecycle Financial Planning Should You Start a small  Business in your 50’s, Too much, or not enough: the risks of drawdown., From Tokyo to Bordeaux - the future of work takes shape.

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About Kidbrooke
We provide B2B automated financial analytics via our backend APIs designed to lower the cost of providing financial services or running internal financial functions without compromising on performance. We differentiate ourselves from our competitors by providing a very flexible (full balance sheet), granular (transaction-level) and fast financial calculation engine which enable users to create their own high performing solutions in a fraction of the time it would take to develop them from scratch.