Financial Planning – changing the way we think

I like to read, observe and listen. Whether tongue in check or not I have seen some scathing comments about the way advisers charge for their services and personally I think we need to be careful that this doesn’t stick in people’s minds as the norm. The purpose of these blogs is to accept what has happened in the past and move on.

The challenge for all of us is to change not only the way we think but also the way others think – to highlight this I read an excellent piece (which I tweeted) from Forbes which highlights the fact that Personal Finance is more about the personal than the finance and this is I think is a crucial ingredient. In this series of blogs I want to dispel the myth that financial advice is purely a product sale but more centred around financial planning.

To do this we need to to reverse the triangle so goals are at the top and product is the solution at the bottom:

 

As I pointed out in the last blog there is still a majority who remain focused on the solution and whilst you focus on this then you cannot see value in the proposition. As an example, a pension may be the best solution to provide income in retirement but equally an ISA (etc) may provide a better solution or provide a blended approach. You cannot make the decision on the solution until you know what the goals are.

The concept of financial planning

I struggle with terminology and sometimes the wrong words can portray the wrong message, financial adviser is a prime example of this. I think this is as outdated as a sales consultant for an insurance company, it effectively pushes the idea of a sales person just peddling the latest fashion. Financial advisers are now financial planners. 

Once we accept this then we can ask what does it mean and how it applies to everyday life. For me financial planning covers five areas:

1. It provides direction and meaning to financial decisions 
2. It considers the whole picture, so one decision impacts on another
3.  It enables consideration of both short and long-term goals as part of the overall life goals 
4. It provides the ability to adapt more easily to life changes
5.  It makes us feel more secure that goals are on track

Financial advice the myth

 

As we can start to see financial advice is actually more about financial planning, it is not about selling a product but about sitting down and developing, delivering and continually monitoring a long-term financial plan.

Financial advice – why bother?

I loved reading comments that paying for advice is a con, whether you do it yourself or pay someone you will still pay and actually in many cases the cost between the two is not that great but the burden of responsibility is. I will cover this in more detail in future blogs when I consider the concept of doing it yourself against paying someone to do it for you. 

There are five reasons I suggest why someone should consider a financial planner:

1. Individuals may need expertise in certain areas of their financial planning which they don’t possess. For example, a financial planner can evaluate the level of risk someone is comfortable with and adjust the plan to reflect this
2. However easy it is to do it yourself many people simple don’t have the time to spare to do their own financial planning
3. There is an immediate need or unexpected life event such as a birth, inheritance or major illness
4. An individual may feel a professional financial planner could help improve how they are currently managing their finances
5. An individual knows they need to improve their current financial situation but does not know where to start

What to expect from a financial planner

 

A financial adviser will work to develop a game plan that fits the individual’s financial circumstances and tailors it to accomplish their goals by:

1. Looking at the whole financial picture including the goals
2. Understanding the client’s tolerance for risk and what the expected returns are
3. Providing an unemotional assessment of what needs to be done
4. Delivering a comprehensive annual review
5. Keeping the client informed

Conclusion

Financial Planning is an important concept and whether we decide to do it ourselves or seek professional help we have to understand the concepts around this. I can only provide an overview, there will be other views but they all come down to the same point and that is understanding goals and delivering them.

In my next blog I want to look at the process and setting of expectations. I will then explore the concept of doing it yourself, the costs of all the options and finally some ideas for choosing an adviser.

Follow me on Twitter so please spread the word and lets change the world.