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The need for a financial ‘MOT’

The need for a financial ‘MOT’

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Background

Against the backdrop of COVID-19, the global economic position is now a concern for many people. A number of trends that the majority of people were previously unaware of are now at the forefront of their minds: the slowing of global growth, increased levels of debt, ageing populations, to name but a few.

The key point around these global concerns is the impact they will have on our clients and their families. As professionals, whether it be as accountant, financial adviser, solicitor, etc., we all have a duty to make our clients aware of these concerns. We believe a ‘financial MOT’ is a sensible route to achieving this.

Financial ‘MOT’

Never has there been a more relevant time to revisit our clients’ financial planning. Much like an MOT, this doesn’t necessarily mean drastic change is required, or that the existing plan is broken. But it does mean carrying out a high-level assessment to ensure that every part of a client’s financial planning is appropriate and working as it should be. As I am sure you will be aware, clients need reassurance on several levels from time to time, but specifically with regard to their finances in times like these. When has this peace of mind ever been more relevant?

A ‘financial MOT’ would consider the holistic financial position; however, at the moment, particular attention needs to be paid to the following points:

  • Protection and estate planning
  • Attitude to risk
  • Cash flow modelling

Protection and estate planning

First up, do your clients have a valid Will and lasting Powers of Attorney (LPA) in place? Dying without a Will (intestate) leads to complex situations for the beneficiaries and may mean that wealth isn’t distributed in line with the client’s wishes. Not to mention the additional stress this places on beneficiaries through this process at what is already a difficult time.

Hand in hand with the Will, ensuring LPAs are in place to provide peace of mind is so important. Having a trusted individual to make decisions on your behalf through an LPA can provide comfort that this is being taken care of.

It is necessary to review life cover plans to ensure these are still appropriate to cover liabilities in the event of death, but also to make sure these are written in trust for ease of access when the time comes. If a life cover shortfall is recognised, making sure this is dealt with to ensure the family is protected in the event of a death is also necessary.

Attitude to risk

At current times, investment performance is the first thing that clients want to talk about. Although this is important, considering the risk position and the client’s attitude to this is a bigger priority in my opinion.

Risk needs to be assessed to understand the potential downsides that could be seen. Although the client’s risk profile is extremely important, understanding why that level of risk is being taken helps to evaluate if that is appropriate to their circumstances.

If risk is excessive, you should consider discussing with your client whether the level of risk should be reduced.

Cash flow modelling

Cash flow modelling is regularly used with retirees to build a plan to replace ‘earned income’ upon retirement. However, cash flow modelling is so important in prioritising expenditure, budgeting and managing income flows.

For those who have seen income reductions, whether it be as a result of redundancy, owner managers taking dividend cuts or employees being placed on furlough, reviewing cash flow is a priority. This will help to efficiently prioritise income and identify any cost savings that may need to be made.

Advice around accessing savings tax efficiently will help to replace income, but it will also help clients to understand the long-term impacts of this. You should also consider discussing with your client whether any cost savings and debt restructuring can be made.

One step further

As part of the review, protecting the current position will be top of the agenda. However, we cannot take our eye off the future. We are now in a new tax year, with a new set of pension scheme contribution rules to adhere to, and we must not overlook this.