What do Financial Planners do and how do they add value to their clients?
Introduction
Consumers who have an advice relationship are better planned, are happier with their investments, have a financial coach to help with major life decisions, provide peace of mind, administer financial affairs and assist in facilitating a path to financial freedom.
The Three Reasons Why
1. Life without meaning and direction is fraught with anxiety.
- Planning provides meaning, direction and control.
2. A dream without measure and rock solid implementation is reverie.
- Planning focuses dreams into action for the achievement of ones hopes and aspirations.
3. Circumstance and Lifestyles change constantly and at an ever increasing pace.
- Planning enables adaptation, innovation and the alignment of strategies and actions with products and services for the achievement of short, medium and long term goals.
Why pay for Financial Advice?
Introduction
- Peace of mind vs Anxiety
- Relaxation vs Stress
- Wellness vs Worry
- Philanthropy vs Welfarism
- Self fulfillment vs Self consciousness
- Multi General Wealth vs Generational Dependency
Few people have the capacity for total self reliance, for the long term. Whether captains of industry, champions in sport or happily married couples
The ‘mentor’ the ‘coach’ the ‘minister’ the ‘teacher’ the ‘director’ the ‘manager’ the ‘conductor’ – sometimes the catalyst, sometimes the person capable of facilitating and reenergising. The person that clarifies vision and focus. Both caring and capable.
Planning is as much about having a template of what needs to get done as determining who you choose to help in achieving it. Planning requires constant review and ongoing compromise because that’s how life works. Your chosen adviser must remain relevant and up to date. Economics, finance, family, estate – they change. Planning is evolutionary.
Content
- Why Young Professionals
- Why Young Families
- Why Newly Retired
Why Would a Young Professional pay for the services of a financial planner?
In short – Why plan?
A: Behaviour
The reason so few people achieve even basic levels of wealth is due in the majority of cases to their own behaviour. Over a forty year time frame everyone has the capacity to accumulate wealth in our society. Few do.
It is not because financial planners charge fees
It is not because equity markets are volatile
It is not because banks charge high interest rates
Young people will take direction as long as it is delivered without a sermon and it provides a sensible balance between short term wants and long term needs.
The Y generation don’t seem to mind paying for advice. Communication however must match their preference.
B: Vision
Whilst our young people are open to positive direction they are also open to various other influencers. There is an appallingly high youth suicide rate in NZ. The ultimate outcome of depression. Unless there is clarity of vision we succumb to ‘the influence’. This phenomena is not new – one only needs to reflect upon history and the transition of ‘controls’ through various centuries. From tribal, to religious to political direction – vision was determined by the ruling structure.
Planning is about determining ones own direction and getting into the drivers seat to accomplish the journey – through personal control. Planning is the ‘vehicle’ to get there.
The secret is understanding where there is and what there is.
C: Financial Understanding
It doesn’t take Einstein to work out that a young professional saving 2% of their $50,000 income, with a 3% inflation rate and a 6% real return is going to have $240,484 in 40 years. It only takes a computer or calculator. But it does take an adviser to determine how to achieve a 6% real rate of return over a 40 year time frame and more importantly how to keep investment in that asset class when all around abounds in temptation or armageddon thinking.
It does take an adviser to point out that 2% removed from an income leaves 98% – to pay tax, pay expenses and get on with living.
“It does take an adviser to point out that if the 2% went into Kiwi Saver in 10 years this young professional would have about $46,000 accumulation of which over $34,000 was available for a house deposit. And if the young professional had a partner in a similar position they could have a deposit of close to $70,000 as well as around $11,400 each in retirement savings. This first home withdrawal applies to anyone on any income, buying a house at any price and contributing to Kiwi Saver at any level – as long as you have been in Kiwi Saver for at least three years” (Mary Holm. Dom Post July 10 2010)
The fundamentals for the Young Professional
1. Vision
Clearly we believe that having a vision for ones future is more than likely going to deliver an outcome and most often a journey that is superior to someone who ‘wings it’
There is sufficient empirical evidence from studies done in the US over 20 year time frames to support this claim.
There is sufficient evidence from many years experience in the financial services industry to conclude that a passionate focus to a goal orientated life over a protracted time frame, delivers abundance far beyond that accomplishment by the vast majority of people. The non planners
2. 10 Year Assumptions
Whilst a long term vision can have sceptics questioning validity due to change of circumstance, ten year assumptions are somewhat easier to relate to and therefore prepare for.
Without losing sight of most young peoples desire to travel, buy ‘stuff’ and have a good time – and we would support these actions whole heartedly, there comes a time when ‘partying’ and ‘extremism’ just doesn’t have the same appeal
What happens next is longer term relationships, family then the employment and security things. Most young people realise this, they just don’t prepare for them.
3. A Spreadsheet for Life
We know that what is easily measured is more easily managed.
We also believe that better management decisions are made when the facts are available from which to deduce or deliberate
We also know, that is how the great sports people of the world operate and that’s how the great companies of the world operate
Why not individuals – the results can be impressive
We link our young professionals goals (Short, Medium and Long term) on a spreadsheet with:
Personal details (including assumptions and expectations)
Tax calculations
Budgets (one actual – one variable) – graphs
Debt calculations
Mortgage calculators
Balance sheet (over 7 years)
Retirement/Investment calculator
Education funding
Saving and Investing/and drawdown
A barometer of key ratios (good debt vs bad debt, % of income to various expenditure
A dashboard of insurances
The soft copy is interactive – the key is review, implementation and accountability
The process transcends cities and countries – our young clients are all around the world.
The fundamentals for a young family
Why would a young family pay for the services of a financial planner – When
- Two incomes may have reduced to one
- Expenses have increased – due to family responsibilities or interest rate change
- The cost of insurances and superannuation already seem to be depriving the family of lifestyle enjoyment
- The cost of living seems to be escalating faster than the CPI index
- Employers don’t seem enthused by the employees desire for a greater share of the profit
- The car tyres need replacing and the computer just spat the hard drive
- Creche and childcare fees seem exorbitant whilst working income for families government subsidies are appreciated but never seem enough
A: Behaviour
The young family decision makers want answers to the dilemma they are in. Their greatest issue is the rapid transition from independence and freedom, to a feeling of hopelessness or overwhelm. They revert to type and take advantage of access to retail therapy. Either individually or as a family unit
There in lies the dichotomy. Compromise now for a ‘potentially’ improved future lifestyle versus – lifestyle now and compromised future. A no brainer, most couples decide on compromising the future.
Planning can help them have both. Not easy but some simple actions can make a huge difference, however without a trusted adviser we would say the outcome is inevitable failure.
B: Vision
We call this the dichotomy of life. The speed of the treadmill as one is influenced by external factors and the inertia created by indecisiveness and fear.
Influencing factors for our young families of today are many and varied. Formerly ones family and institutions were our teachers and mentors. Today we are bombarded with global and local information good and bad due to our access via internet and communication mediums. Social media as well as main stream media. We are tempted with an array of consumer options and financial lending capabilities. Resistance would be almost inhuman and certainly exclusive. Ones relevance in this world is perception. How we look as matched against our peers.
There is hope. Whilst life is certainly about enjoying the moment planning is about preparing for an even better ‘moment’
Some families act on this by taking action on an idea or taking action on an idea or taking action to remove themselves from something they don’t want. Emigrating from one country to another is a typical example.
Whatever the plan of action is it is having that ‘dream’ that is critical – a focus to what you want. Living in the now, or worst still the past, is inevitably going to see life pass you by.
Planning and the use of a trusted adviser is the answer – the vehicle and the fuel. But you must become the driver. You must insert the data into the GPS.
C: Financial Understanding
The three key long term planning fundamentals most young families focus to are: paying off the mortgage, educating the children and accumulating for retirement. Yet they are hopelessly inept at understanding how, where and when.
Most young couples have been taught some basic mathematics at school but cannot tell you the difference between a stock and a bond.
Young couples love the options that revolving credit mortgages provide yet don’t understand why their mortgage is not decreasing.
Young couples understand the interest rates on credit cards yet continue to use this type of access to instant gratification. Young couples buy consumables through borrowing yet have minimal understanding of the taxation benefits in borrowing to buy assets which produce and income and paying cash for non income producing consumables.
It takes a third party to point these things out, but more importantly help change the habits.
A recommended procedure for young families:
- Choose a trusted adviser(caring and competent)
- Determine a position from which to manage. Data analysis
- Take the time to dream
- Write down some individual and collective outcomes
- Co-ordinate the expected outcomes with the necessary products and services (investment, tax, insurance, budget, mortgages, retirement, savings, lifestyle)
- Prioritise – cost analyse – compromise
- Implement – measure, monitor
- Review and Learn
Why planning is necessary for the Newly Retired
(Those with the requirement for a replacement income – generated via investment)
- Trust
- Financial Literacy
- Historical events
Trust
New Zealanders are incredibly independent and resourceful. We are a nation of do it yourselfers. Small business owners, house builders, gardeners, fitness fanatics, technology users. A small nation with an abundance of achievers. Probably a throw back from our recent colonisation and capabilities of our own people to survive many miles from external civilisation. The immigrants with a desire to ‘do better’ and the natives with a desire to learn and progress. A combination which has worked better than most when compared internationally. However this has been and remains one of our weaknesses. When we don’t necessarily know about something it is not often appropriate to simply circle the wagons or tread water until another option comes along.
Inevitably lack of knowledge wll impair judgement and flawed judgement can have disastrous consequences. We need to learn from and trust experts. People with a history of providing long term advice with positive outcomes. These people exist but are abundant.
However you must shake a few trees to find the right one for you and you should not accept the first one you come across as being your individual panacea. Advisers will wish to make money. Don’t confuse self interest with greed. People don’t get ahead in a democratic capitalist economy by taking what they don’t deserve. They may for a while, but as the Bernie Madolf story shows, sooner or later they pay the price. Look for long term and consistent advice – from a trusted and qualified adviser.
Financial Literacy
Most people confuse money with currency. Currency is the stuff you hold in your hand and pay across the counter.
Money is the purchasing power you have from the amount of income you earn from investment or earnings.
The two are inextricably entwined but totally different. Unfortunately the confusion is common and costly and the singularly most important factor determining why most people run out of money (or purchasing power)
Most retirees focus to the retention of capital when they should be focusing to the retention of purchasing power.
They confuse conservative with reduced risk and high risk with potential loss of capital. They are wrong on both counts
Risk from our perspective is the loss of purchasing power (The capability for our retirees to live a thirty year lifestyle sustainable income. To which they were accustomed. Knowing that some expenses are likely to decline, such as travel on extended holidays abroad or expenditure on fashion accessories or entertainment – and some expenses are likely to increase, such as health and homecare)
A conservative investment is therefore going to have have a greater risk whilst a growth investment is likely to have less risk. The facts are unchallenged.
A conservative investment will guarantee the loss of purchasing power. A term deposit or bond earning 6% or thereabouts can not provide ongoing purchasing power, even with inflation at only 3%. Most retirees realise that their big ticket items of expenditure, health, housing and heating, 3% increases are laughable. More likely to be double that. A growth investment whilst it can not guarantee retention of purchasing power, evidence abounds as to its maintenance of capital. It is however, volatile (it fluctuates) and people confuse fluctuating markets with loss of capital. Wrong again.
Historical Events
For most New Zealanders the opportunity to participate in the earnings of international companies only commenced with the introduction of unit trusts and investment products through insurance companies. That occurred in the 1980’s. Coincidentally as investors became more ‘equities’ aware the markets in New Zealand and globally suffered a dramatic correction. Nothing unusual with this – corrections are common (about 1 in every 5 years) – 13 since the second world war. A correction is described as a bear market and is measured by a 20% or greater decline in the market valuation. Human Behaviour however has investors fearing loss of capital. They confuse loss with volatility. The 1987 share market correction in New Zealand accompanied by the equally traumatic commercial property correction was serious enough to disaffect investors for the next 20 years. Investors fear and trepidation however meant they missed out on 10 years of the greatest valuation increase in company price rises in the history of mankind. (Markets are people voting with their money). Similar attitudes prevail at each correction. From the depression in the 1930’s to the global crisis in the 2000’s people fear loss more than they are ecstatic about gains. And of course each market correction is accompanied by talking heads from the North Cape to Bluff with their own negative slant on the failure of capitalism to the dishonesty and corruption of the captains of industry. And still the markets (companies) do what they have always done. Inexorably increase. The favoured measure is the SP 500. The index of the leading 500 companies in the US. After the second world war (the baby boom era of 1946 to 1964) The index was around 18. The index is now 1160. The rise in the capitalisation values of the top 500 companies. In the same way we measure the increasing value of our home. The capital gain. The growth of the valuation of the great companies of the world. The companies that make things, service things, employ people. The average of the index since inception - without the reinvestment of dividends is / 0.8%. The New Zealand and Australian markets have performed similarly over the same period of time.
How can people fear a ‘market’ that has increased around 70 times over a lifetime and has never lost capital over any 30 year time frame in history – and increased on average four years out of five – and had its dividends alone increase more that the rate of consumer prices – the media.
Summary
Retirees in our experience
- Underestimate their potential to outlive their money (30+ years in retirement)
- Overestimate their capability to manage their income and budget for their expenditure
- Underestimate the effects of a 3-5% inflation rate on purchasing power
- Overestimate expected long term investment returns from ‘conservative’ investments
- Underestimate the rising costs of health, long term care, housing and energy
- Overestimate government, local body and personal family assistance
- Underestimate 10-20-30 year real returns on growth investments (10%+)
- Overestimate capital security and interest rate returns of fixed interest investing
- Underestimate growth returns from dividends and rents in conjunction with capital gain
- Overestimate their capability to live unassisted in current housing
- Underestimate the need to consider alternative; accommodation, transport and health needs
- Overestimate their ability to remain physically active and mentally astute
- Underestimate their need to continue to learn about new technologies
- Overestimate their expectation of relevance (friends, family, service providers)
- Underestimate the likelihood of family living in other countries and cities
- Overestimate the longevity of modern; motor cars, whiteware, technology
- Underestimate the impact of spending so much time together
- Overestimate the capability for old estate planning (Wills, Trusts, Powers of Attorney) to suffice
- Underestimate the impact upon family of the transfer of assets (negative)
- Overestimate the likely support for a single remaining retiree
- Underestimate the cost of poor health
- Overestimate the ability to sell down (house) and repurchase (unit) and gain a surplus
- Underestimate the need to plan – goals – (lifestyle, income, travel, budget)
- Overestimate their ability to manage large; gardens, house, business
- Underestimate the peace of mind gained from a ‘team’ of trusted advisers
- Overestimate the cost of paying for good advice
