16th September 2019
What is Financial Planning?
When it comes to Financial Planning in Ireland it is fair to say that it is a pretty new service to many. It seems many of us are aware of the role of traditional Brokers and Insurance Agents, but perhaps not the same level of awareness or understanding of Financial Planning. In this short piece I hope to convey what Financial Planning is and how it can potentially be of significant value to people.
At a recent Financial Independence meetup event I was chatting to someone over tea. When they heard that I worked in Financial Planning she asked me if she should use her savings to build an extension and to then rent a room to get the tax-free rent-a-room income. I told her how great I felt it was that she was exploring ideas, and then asked her why she wanted to do this. She said so that she’d have more money. I asked her why she wanted more money! She said so that she’d be richer. I asked her why she wanted to be richer! She said so that she’d be able to buy more stuff. I asked her why she wanted to buy more stuff! At that stage she was seeing what I was trying to get at, but she was still looking at me as if I was on something!
In fairness this lady was really keen here to do something that would better her financial future in some way, and I admire that hugely. Here she was taking the time and effort to attend a meet-up from which she hoped to get some ideas that would help her get more money. In my view, this is one instance where an investment in the development of a clear financial plan could potentially help to determine the results she really wanted, and to get clarity on how to go about achieving them. So what is Financial Planning?
In Blog96 and Podcast119 I outlined the different types of advice available in Ireland, and the significant differences in terms of how they are paid, and how they deliver services to their clients. One of the sources of financial advice in Ireland is from bona fide Financial Planners. My definition of bona fide here is an advisor whom you pay a fee to for advice, guidance, planning. You pay them directly for a professional service that benefits you. This type of advice is not something that everyone will be seeking, or indeed keen on actually paying for of course but it is a growing area it seems.
‘Holistic’ Financial Planning:
Personally I think the word ‘holistic’ gets over-used in the financial services industry, particularly by some advisors whose intent is anything but holistic! I previously (Blog95) wrote about an ‘advisor’ who was in the papers touting savings products with fees of 3-7% per year. By coincidence at that same Financial Independence Meet Up last week I got talking to another participant who recalled a meeting with an advisor in recent months. In his advertising he spoke about Holistic advice but when she actually got to the meeting the advisor was trying to push her into all sorts of products straight away. Needless to say she left the meeting bemused and utterly unimpressed with the product-pushing approach she experienced. I didn’t ask but she told me who it was, it was the wolf in sheep’s clothing!
What is Financial Planning? What is isn’t about is products. While you may indeed approach a Financial Planner with a product or specific question about an existing product, the conversation should really not be focused on that. While there is no blue-print for that conversation, in my view at least, the focus of the conversation should be about you, not product.
The real value of Financial Planning is that it forces you, in a positive forward-looking manner, to think about you, your future and the future of your loved-ones. Lets be honest, most of us will never ever think about and develop a strategy to deliver the futures we want unless we have someone to guide us and keep us accountable to follow-thru on these goals and make them a reality! Financial Planning is a verb. It is doing something. It is, in my view a co-active process where everyone is involved and has a role to play. Traditional advice, much like traditional medical guidance was ‘done’ to you! Financial Planning should be something that you are active in, engaged in, aware of what is going on, why you are doing or not doing certain things. The success of Financial Planning that you might pay someone for is not dependant solely on the advisor you hire, you are (or should be!) at least as responsible for the actions and changes as anyone else involved.
There seems a growing number of advice firms have changed their trading names from ‘XYZ Brokers’ or ‘XYZ Financial Services’ to ‘XYZ Financial Planning’. Some of them are genuinely changing how they operate and putting more emphasis on the planning and development of a strategy for the clients, and forgoing huge initial commissions for a more equitable and long term relationship-focused structure. Others are changing their name purely for cosmetic purposes, the product is still the first and last thing on the agenda!
I have recently worked with some advisors, helping them to do actual planning. When they go off and do it they sometimes find that the structures and systems of the firm they are working in does not allow them to do so meaningfully. I recently got a mail from one such advisor who told me that she loved putting into practice the approach we had worked on, it felt like really client-focused way of doing advice. Her firm however was not interested in Financial Planning (they are entitled be of course!) and so she left them and went somewhere she would be given the room and the space to help clients to do financial planning. I’m not saying it is better or worse, but for me at least, that was yet another example of how Financial Planning is not the same as Financial Advice.
How Might Financial Planning Help?
You may very well be able to do these things for yourself, but if not Financial Planning can help you determine a lot about your financial future. It can help you answer some of your biggest financial questions:
There are no right or wrong answers to these questions if asked in isolation or in general terms. However, there definitely are right or wrong answers when asked in the context of your life and financial goals. If you engage someone to help you do some detailed Financial Planning, the development of your plan based on your goals will help answer these questions as accurately as is possible for your situation.
I have been working on a plan for a couple over the past week. The analysis and report I created for them was the culmination of approximately 20 hours of thought and analysis on my behalf, and a further 5 hours of their valuable time. The 35 pages of the report I created for them contained lots of detailed analysis and a prudent calculation of their optimum financial strategies going forward. Despite the 35 pages, there were essentially 2 really BIG questions that these clients wanted answered. We helped them answer those questions, questions which will have a dramatic impact on their lives. To be involved in some small way with these aspects of their lives is a privilege, and to me at least summarises what Financial Planning really is all about; Your Life! And given it is your future and your financial future it seems to make sense to give it a fair amount of deliberation and consideration if you want to give yourself as good a one as you can!
Yes there may be products needed in order to help you achieve the outcomes you seek, absolutely. But my point is that these are only the tools to help you achieve the plan, they are not the start-point. What is Financial Planning? The plan determines the product, not the other way around. If you are being offered product without having first been encouraged to develop the plan, I suggest taking your time to consider if it really is the right fit for you or not.
A UK Perspective:
While some might think it a funny time (politically at least) to be comparing ourselves to the UK, in regards to Financial Planning they are more developed than us! Rory Percival explained how FP developed far better than I can in Podcast 118. It was due to regulation introduced there that essentially banned commissions on selling financial products. Needless to say a huge swathe of advisors left the profession (I think the average age of advisors is still in the early to mid 50s!). The ban on commissions meant that any of the advisors that wanted to stay in the profession had to move to a fee-based model, and therefore had to actually offer something that clients would value enough to pay for, and that is how Financial Planning emerged quite quickly in the UK. If you want to engage a Financial Planner in the UK now you will expect to pay anywhere from £1,500 to £5,000 for the creation of a Financial Plan. That is purely for the advice and planning at the initial stage. That does not include any implementation or restructuring of anything. Here in Ireland, probably because it is at an earlier stage you can engage a Financial Planner for approx €1,000 to €3,000. If it’s anything like the UK however that will only increase, so maybe now is better than later!
Ireland has not introduced legislation like they did in UK. In fairness there are pros and cons to doing so from a client perspective. As a result the move to a fee-based financial planning model is quite slow here in comparison. As I say, it is not the perfect solution for everyone but for those that do want it there are now some feasible professionals providing the service.
I am fortunate enough to have been invited to a UK Financial Planners conference in the near future. My plan is to conduct some short interviews over there with some of the Planners, to learn of their experiences and ideas since the profession changed there. I will then try package them up and share as a Podcast with you, and hope that there might be some useful nuggets for you in it!
Despite my best efforts you may still be wondering, what is Financial Planning? For someone that works with other Financial Planners and that actively does Financial Planning for clients I’m not sure that I have really nailed the explanation of it here today. Rather than go into technicalities and screen shots of the various (very costly ) software I use I hope that a couple of simple stories that are fresh in my mind will convey the intent and purpose behind Financial Planning.
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