Should I use a financial planner?

A common question I receive is whether someone should be using a financial planner.

It's a challenging question to answer, as all clients have different goals, risk tolerances, desires and amounts to invest. Clients also have differing levels of financial intelligence, making it important to determine what role the financial planner will fulfil.

Further, never in the history of the world has so much financial information been available to the public, making an argument for Doing It Yourself. However, DIY is fraught with danger.

The main problem being, you might be making mistakes you aren’t even aware you are making.

There’s really no substitute for receiving advice from a professional, with that advice being tailored to your personal circumstances and goals.

Enter the world of financial planning.

The good, the bad and the ugly of financial planning

Over my career I’ve worked with some fantastic financial planners.

I personally find them to be an excellent source of assistance for many clients, giving their clients clarity across a lot of areas including investments, superannuation, insurances, strategy and tax minimisation.

For people that aren’t technically confident around finance and investments (and that is okay), a financial planner can genuinely help guide you and improve your financial situation.

Imagine someone that received a $2million inheritance and had never managed a personal budget before. The impact a financial planner can make in this case may be immeasurable, not only in terms of investing the money, but also in terms of giving the individual confidence their money is being managed appropriately, and by providing on going financial coaching and education.

Unfortunately, despite the value that a competent financial planner can bring, the financial planning industry as a whole has a reasonably poor reputation. The shortcomings of the industry were outlined in detail during the Royal Commission, where planners received a Royal spanking (not in a good way, either).

As is often the case, the bad seeds ruin it for everyone, but the seeds of change have been planted.

A move away from commission based sales, towards higher education standards and fee for service are all movements in the right direction, though it will likely be painful for those in the middle of change right now.

Should you choose to utilise a financial planner, your goal should be to find someone that was already implementing those changes prior to the Royal Commission.

I believe the public has a misguided view of what financial planners do

I believe the way financial planners help is through strategising, helping people achieve their goals, and by educating clients.

Planners can also help recommend investments you personally may not be aware of, and keep you accountable for achieving your goals.

Of course, making sure that you are appropriately insured for unexpected events in your life is also a key part of their holistic advice offering.

However I think the public believes planners are actually stockbrokers, expecting them to call up whenever an opportunity comes across their desk.

Planners and stockbrokers are different, so be mindful of what you want.

People also misunderstand the limitations on the way advice can be provided by planners.

I’ve often had a client lamenting that their planner didn’t invest them in high growth shares during a bull market, when the same client’s investment profile showed they were extremely conservative.

Of course, the planner recommended a more conservative asset allocation, which protected downside.

Financial planners are also criticised for not investing more aggressively when the market is going up, and for not investing more conservatively when the market is going down.

As one financial planner eloquently put it “Clients wants all the upside of the market with no downside risk”.

It’s just not possible to have both.

It’s easy to criticise in hindsight, because everything looks risk free with the benefit of hindsight.

Considerations for a planner:

If you are considering whether to work with a planner, my advice is as follows:

• Try to meet with several planners to find someone that you feel confident having honest, frank, discussions with. Most planners will offer a complimentary meeting and quote upfront prior to doing any work.
  

• Ask your accountant for recommendations. There’s a good chance your planner and accountant will be working together, and there’s a good chance your accountant has done some due diligence with other planners in the past.
  

• Always receive a quote upfront - financial planning fees are expensive, so beware.
  

• Be sure what you want from your planner. A once off review might be more favourable than an ongoing engagement.
  

• Work with a planner that charges for fee for service instead of commissions.

• Quantify their results and make sure their achievements exceed cost.
  

• Always get an accountant to check their advice prior to executing their recommendations, as tax is now a speciality and requires a specialist to review it. Tax considerations often trip up planners and lawyers.

Financial planners can be extremely beneficial in helping you achieve your goals, but make sure the benefits they bring are more than offset by their costs.

If they are just putting you into managed funds and charging fees for the privilege, it’s unlikely your returns will beat an index fund after the managed fund fees and their fees are deducted.

Financial planners are extremely valuable for their holistic advice - that is, their ability to pull together complexity from a range of areas such as investing, tax considerations, goal achievement, insurance needs, government benefits. Make sure you know how to get the most out of the relationship, and what you want out of the relationship.

For those clients that find a good planner financial planner, I often hear they are happy to have their financial affairs guided by an experienced professional. And that's completely understandable. There's no accounting for the value of a good night sleep.