Many people like me who have made over 50 trips around the sun can recall a time when most households were able to survive with one earner. Since Charlie McCreevy introduced tax individualisation in his December 1999 budget, the country has morphed into two-income, two-car households. Both parents having to work outside the home means that most people are time poor. Even though we spend a very significant proportion of our lives working to accumulate wealth, many households spend relatively little time managing that wealth.
And managing your finances has become far more complicated than once was the case. 40 years ago, many people stayed in the one job for life. Some people had a defined benefit pension which meant they didn’t have to concern themselves with the vagaries of investment markets. The average worker leaving college today will have up to 12 different employers during their life so seven pensions isn’t at all unusual. A great many people never gain much insight into what those seven pensions are going to deliver for them in retirement.
Since around 2008, an alternative to product-driven advice has emerged – the Certified Financial Planner or CFP. CFPs offer holistic financial planning services to the public and often products too, but they come at the process with a planning mindset, taking all aspects of your finances into account. The critical difference is that as you pay a fee for financial planning, the adviser doesn’t have to sell you a product to get paid. A good indicator that what you’re getting is real financial planning is that much of the advice won’t result in a product sale at all.
If you approach us for a financial plan, we’ll ask you to complete a questionnaire where you can tell us about your personal and financial circumstances, and your life objectives. We ask questions that help us understand what really matters to you, because having a better understanding of your motivations can result in a better process and more appropriate solutions.
We model your finances using cashflow modelling software. We first model a base plan. This shows you your future finances in graphical format based on what you are doing now. We give you a step plan of recommendations to help you to achieve your objectives and we then model a number of ‘what if’ scenarios to show you how the graph changes if you implement the recommendations. This can be a great motivator of action towards your financial goals.
When we meet to go through the cashflow model and our recommendations you’ll see your financial future laid out in front of you for the first time. You can request an additional scenario like a model of your finances if you retire early, take time off to re-train, switch to a 3-day week etc. Scenario modelling is really useful and can be used to assist you with a range of decisions you may face related to career and housing as well as other issues like redundancy, re-location or retirement planning. It’s a big statement, I know, but I firmly believe that an adviser can only validly recommend an investment after going through a full financial planning process. The plan determines the rate of investment return required to achieve your financial objectives. Without a plan, any investment recommendation is essentially a guess.
The benefits of financial planning are that it shows you if the actions you are taking, which are often pointing generally in the right direction, are the most efficient way to get you to where you need to go. It can also act as a sanity check on issues like your investment strategy, which is probably one of the main areas where the industry falls down, as evidenced by the destruction of wealth caused by excessive reliance on no-interest or low-interest bank deposits.
A telling feature of the process is that we often receive approaches from clients who want us to help them pass on wealth to their children, even though they haven’t yet accumulated enough for their own needs, demonstrating that people need this guidance to know whether they are going to have enough. If the model shows that they have more than enough the task becomes one of managing that wealth and passing it on to the next generation as tax effectively as possible.
We often find that people really enjoy the process, especially engineers because, I suppose, financial planning is financial engineering. It’s also a great way for couples to start a discussion about what they want to achieve in life as very often it forces you to make decisions around what is important to you and what you value. Lastly, having a CFP at your side is a bit like having a financial concierge service. The service doesn’t end after your plan is implemented. Your CFP can be an ongoing resource as you work towards your goals. The investment company Vanguard estimates that having an adviser can add up to 3% in net returns for clients through better financial planning, portfolio construction and behavioural coaching.
If any of this sounds like a good solution to a familiar problem, we’d be glad to have a conversation. You can contact the author via our contact form.
