Financial Planning

Updated 20/8/2019.  A well-constructed financial plan takes a holistic view of your situation, your objectives, your resources, your income, your responsibilities, and key life milestones for yourself and your family.

A plan also helps you prioritise between the three tiers: (i) needs - the essentials, the “must-haves”; (ii) goals – the objectives you are working towards, and; (iii) dreams – your aspirations, lifestyle wishes, the “wouldn’t it be nice if”s. Having a clear perspective and solid grasp on tangible priorities is essential to your future financial success.

What Is Financial Planning? 

Financial Planning is an ongoing process to help you make sensible decisions about money that can help you achieve your goals in life; it's not just about buying products like a pension or a savings plan.
It might involve putting appropriate wills in place to protect your family, thinking about how your family will manage without your income should you fall ill or die prematurely, spending money differently, or setting up regular savings for specific goals. In fact, it involves thinking about all of these things together i.e. your 'plan'.

There are six steps to a sound financial plan:

1. Establish your goals in life – short, medium and long term
2. Work out what assets and liabilities you have – write them down
3. Evaluate your current financial position – how close are you to achieving your goals?
4. Develop your plan – create a “route map” for achieving your different goals
5. Implement your plan – make the changes and make it happen
6. Monitor and review your plan at least yearly and make adjustments when needed

Start by working out your goals in life, in the short, medium and long term. Prioritise them, and think about the likely cost of those goals and when you will need the money, so you can start to plan your finances to work out how to achieve them. Don’t forget you also have to plan for some of the hurdles you may have to overcome too. It’s about getting organised; being in control of your finances rather than letting your finances control you.

By planning your finances to meet your goals you will:

• Have a much greater confidence of where you are going in life
• Reduce your stress levels and start to enjoy life more
• Gain control and peace of mind through knowing whether you’re on track for the future you want for you and your family

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Do I Need a Financial Advisor?

You can build a plan on your own, or if your needs are more complex you might want the help of a Financial Advisor.   Think of your financial plan like a ‘project’ for your personal finances, and a Financial Advisor is your project manager.  Your Financial Advisor brings experience, investment knowledge, a rational unbiased view, and an empathy for your own individual circumstances.

Here are some questions to consider when deciding to work with a Financial Advisor:

• Do I have the time to develop a well thought-out strategy and invest my own assets?
• Is investing my own assets the highest and best use of my own time?
• Do I understand the constantly changing complexities of the financial markets?
• Do I have the knowledge to research alternative investments, track their performance, and make changes as necessary?
• Can I stay objective and not make emotional financial decisions?
• Does it make sense to manage my own financial assets as I get older?
• Who will step in and manage my assets if I suffer a debilitating illness?

When surveyed,  most people who use Financial Advisors do so because:

• They use the services of Advisors for the same reason they use the services of other professionals such as lawyers, accountants, etc.
• They don’t have the time or expertise to do the work themselves.
• They know high quality professionals produce better results than they can achieve on their own.

When surveyed, most people who don’t use Financial Advisors do so because:

• They don’t think they have enough money to afford advisors
• They had bad experiences with previous advisors so they don’t trust them.  (This is a direct outcome of selecting a low quality advisor.)
• They don’t like to pay for bad advice.
• They have the time and knowledge to do the investment work themselves.
• They believe they can produce better results than the professionals.

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How to choose a Financial Advisor

It’s no secret that just as in any profession, in the financial industry there are good practitioners, not so good practitioners, and excellent practitioners.

Here are some of the reasons why investors sometimes choose bad Advisors:

• Investors don’t know the right questions to ask to determine the quality of advisors.
• They can’t believe people they like will take advantage of them for money.
• They trust people they like, but likeability has nothing to do with competence and ethics.
• They use the same selection processes for new advisors that they used to pick the ones they just fired.
• Their selection criteria are subjective.
• They place too much emphasis on advisor personalities.
• They hire advisors who say the right things (high return with low risk is a sales pitch).

Investors are more likely to use a Financial Advisor as their asset amounts grow.

• This is because mistakes have a greater financial impact.  A 10% loss on $100,000 is $10,000, but a 10% loss on $1m is $100,000.
• Some people enjoy the investment process, so they manage some of their assets on their own, as a hobby.
• However, they can’t afford to make mistakes with larger sums of money, for example the assets they are accumulating for retirement, so they use the services of financial professionals.

Who makes the financial decisions if I use the services of a Financial Advisor?

• You can delegate the work to professionals, but retain control over financial decisions.  This is called a non-discretionary relationship.  Advisors cannot buy or sell investments without your approval in advance.
• Or you can delegate the work and the decision-making to professionals.  This is called a discretionary relationship.  Advisors have limited authority to buy or sell investments without your approval in advance.

Generally, I work with clients on a non-discretionary basis.  If discretionary fund management (DFM) is appropriate for a particular client, I help select and recommend the right DFM provider, and provide supervision and overwatch of the DFM on the client’s behalf.