AbstractThe use of assumptions is an essential element of financial planning, given that planners are faced with constructing and managing a framework aimed at the achievement of a client’s goals over a prolonged period in an inevitably uncertain future. The standards set by the international CFPTM certification require that assumptions be reasoned, reasonable and adequate for the scope of the plan being constructed and this paper suggests some of the variables that planners should consider and some ways in which they might derive robust values to assist in the construction of a plan, particularly where this involves the use of lifetime cashflow calculations.
The author wishes to acknowledge the significant contributions made by Nick Edwards CFPTM Chartered FCSI; Carolyn Gowen CFPTM Chartered FCSI; Michael Hague CFPTM Chartered FCSI; Jacqueline Lockie CFPTM Chartered FCSI, and others from among the IFP Fellowship [who are now Fellows of the CISI] in improving the original draft of this paper. Any errors remain those of the author.
However diligently and effectively the financial planner has gathered the necessary data about their client’s circumstances, attitudes, expectations and objectives, it is inevitable that some things will be unknown. Some of these will be, as Donald Rumsfeld memorably put it, ‘unknown unknowns’ while others will be ‘known unknowns’. While it is possible to model the former armed only with enough imagination, the latter comprises those items that may be highly influential on the success or otherwise of the plan but which are nevertheless difficult to predict accurately.
“It is exceedingly difficult to make predictions, particularly about the future.”
Neils Bohr, Quantum physicist
Read the full paper – IFP Fellows' briefing paper: Assumptions
An edited version of this research is published in the September print edition of The Review. Two of the images in the print edition are incorrectly attributed. The chart showing 'Annual rates of inflation' should have been attributed to the ONS instead of the Bank of England; and the chart showing 'Investment return assumptions' should have been attributed to Bloomsbury Wealth Management instead of the ONS. The CISI apologises for the error.