They make used car salesmen look good …
The financial planning industry (and a number of accountants dubiously playing on the edge) has come under intense fire recently.
The downturn in investment markets has exposed a number of products that have not turned out to be in clients’ best interests. These include high yield mortgage funds, absolute returns funds, agribusiness and protected equity products and excessive margin lending.
Criticism of planners and offending accountants that promoted these products is well justified. In many instances, it is difficult to resist the conclusion that their sale was driven or too heavily influenced by what was best for the promoter.
But, judging from public responses to a number of recent newspaper articles adverse to financial planners many people also blame their financial adviser for recent poor investment performance and/or failing to get them out of share markets prior to the downturn.
This reaction suggests a failure of advisers to explain or admit that they cannot predict the future. Or, maybe, some claimed they could! And their clients irrationally chose to believe them!
What do professional financial planners do?
But if personal financial advice is not about picking winning investments and successfully timing entry to and exit from share markets, what is it about? What do professional financial planners offer that they can reliably deliver to enhance their clients’ lives?
Indirectly, our clients provide the answer. When they first appoint us, we ask them to nominate their “top 5” financial planning objectives. To assist their deliberations, we provide a list of typical objectives to choose from or add to.
The eight most frequently chosen objectives, with their accompanying description, are listed below:
1. To be financially well organised
To create a Financial Plan that will give you a clear grasp of your present financial situation and help you make the most effective use of your resources to achieve your goals and objectives.
2. General Lifestyle
To define you and your family’s version of a desirable lifestyle and achieve it as soon as possible.
3. Financial independence
To achieve Financial Independence no later than age …………….
4. Lifestyle Protection
To ensure that adequate provision is made for the financial consequences for the family of the death or disablement of you or your partner.
5. Income Tax Planning / Current Cashflow Management
To minimise your income tax liability, produce an analysis of your personal expenditure planning assumptions and to ensure that your cash inflows are sufficient to cover your desired cash outflows.
6. Investment Planning / Future Cashflow Management
To estimate future cash flow on realistic assumptions and to develop an investment strategy that will enable you to invest your capital and surplus income in accordance with risk/reward, flexibility and accessibility standards with which you are comfortable.
7. Estate Planning
To reduce the tax liability likely to arise on the death of yourself and your partner and to ensure that your estate is distributed to your beneficiaries as intended.
8. Wealth Management
To decide how to effectively use cash flow that will result in an accumulation of wealth that is considerably beyond any perceived lifetime financial requirements of your family.
Clients usually find it difficult to rank these objectives. They realise that most or all are important to them. And at the beginning of the relationship, they often are not achieving their most important objectives (and, sometimes, unknowingly).
The distinctive role of the professional planner is to help clients identify and close the gaps between where they are now, relative to their stated financial planning objectives, and where they would like to be. This service can be reliably delivered in a manner that is both expected and valued by clients.
The “profession” of financial planning
Too much of what comes under the umbrella of “financial planning” or “wealth management” is product, rather than advice, driven. And it’s this reality that gives the industry a bad name and justifies the view that it is some way off being considered a true profession.
But the need for comprehensive, well considered personal financial advice remains and grows. The level of knowledge, wisdom and trust required to competently deliver that advice warrants the status of a profession. The fact that the role also offers the opportunity to positively influence and transform people’s lives will, one day, make it one of the most intrinsically rewarding.
But until the nexus between advice and product sales is clearly broken, by legislation if necessary, the “professional” financial planners will have to live with the taint created by the “product floggers”.