Not all prospective clients suit our financial planning approach
Financial planning and financial planners come in for a fair amount of, often deserved, criticism. Hardly a week goes by without a story about how a “dodgy financial planner” took advantage of a trusting, but ignorant, client.
But turning that usual story around, since the beginning of this year we have noticed an increase in inquiry from what we have come to realise, through experience, is the “dodgy” or, more politely, unsuited client for our style of financial planning.
Within a couple of weeks of each other, I had meetings with two prospective clients that superficially appeared to fit our ideal client criteria. Both had net worth in excess of $5 million, no debt and significant investment wealth. But in response to the question, “Why have you come to see us?”, the similarity of their responses was uncanny and set off alarm bells.
Both were concerned that their “money wasn’t working hard enough”. They were hoping we could assist. What they really wanted was for us to give them increased investment returns without taking additional risk. Given our core belief that risk and return are related, it was immediately apparent that their expectations were unrealistic.
Further investigation revealed that the majority of their investment wealth was held in self managed super funds and comprised primarily term deposits and portfolios of self selected Australian shares. One had also recently purchased a residential investment property. Both were do-it-yourselfers, with an obvious aversion to paying fees.
Their motivation for seeing a financial planner was clearly the low interest rates they were now receiving on their term deposits (relative to recent bond returns) and the recent poor performance of Australian shares (relative to international shares). They were concerned that they were “missing out”, but lacked experience with investing in bonds or international shares.
Both were uncomfortable and not well prepared to talk about their current lifestyle and aspirations for their future lifestyles. Their primary intent was to maximise the return on their investments, taking as little risk as they perceived possible, rather than to understand whether their investments were consistent with the lives they wanted for their families.
Clients that value our service share many traits
The parallels of such prospective client meetings with what we experienced in 2007 are striking and cause us to tread carefully now. At that time, we had experienced three to four years of strong investment returns. In addition, there was a once off opportunity to put up to $1 million in after-tax contributions into superannuation before lower caps applied after 30 June 2007.
The fear of “missing out” saw many do-it-yourselfers seek out financial planners, including us, looking for higher investment returns and superannuation specific advice. Our subsequent experience with many of these people was sobering. Despite repeated warnings about risk and return and the need for a long term perspective and discipline, they became the most unhappy and unsettled clients when the global financial crisis hit.
Most of those that focused primarily on investment returns ultimately chose to ignore our advice and pursue alternative strategies, seduced by the apparent certainty of cash or hybrid securities or the familiarity of the then out-performing Australian share market. Still others were lured by commodities, particularly gold, with one timing his foray into gold at almost exactly that commodity’s peak.
The lesson for us is that there are ill-suited clients. They are best avoided altogether, rather than working with them in the hope that they will change their perspective from needing to always be investment winners to seeing investment as a process and a means to an end. Our experience is that the latter view generally results in both a better investment experience and more consistent investment returns.
So that begs the obvious question, “What is an ideal client?” for our lifestyle approach to financial planning. Who is likely to perceive the most value from what we do?
Characteristics of an “ideal client” include:
- an understanding that they are better off focusing on what they do well and/or enjoy, rather than becoming amateur financial planners. They recognise their time is better spent doing other things, even if they could do a perfectly good job managing their financial affairs;
- a focus on the progress towards securing their desired financial future rather than the short term gyrations of investment markets;
- an emphasis on what’s required to achieve their financial and lifestyle objectives, rather than comparing themselves with others’ apparent financial situation;
- an inclination to be patient and grasp that “success” is more likely to come from adhering to a disciplined, clear process with attention paid to the things they can directly influence than from spectacular investment wins;
- a desire to understand the rationale for advice and take responsibility for their decisions, but then delegate as much as possible to their trusted advisers; and
- a tendency to judge the worth of any service, including financial planning/wealth management, on its value to them, rather than only its cost.
“Return on life” or “return on investment”?
In summary, our ideal financial planning client is comfortable with the proposition that the most certain way of achieving their financial objectives is by taking many deliberate decisions over an extended period that are consistent with getting them to where they want to go.
They are willing to trust the advice of experts and seek help to ensure that they:
- remain focused on what is truly important to them; and
- are not distracted by the endless stream of irrelevant “noise” and temptations that will take them off course.
As financial coach, Mitch Anthony, describes it, they are primarily concerned with “return on life”, rather than “return on investment”.