Financial planning advice is no longer a luxury 25 September 2006
This article first appeared in The Weekender/Business Day on 23–24 September 2006.
There are a number of points to consider in determining whether you require professional financial planning advice:
- Do you have the ability to remove personal emotions such as fear and greed from your long-term-investment decision making?
- Do you have the time and interest to regularly monitor your overall portfolio asset allocation and fund manager selection?
- Are you able to keep pace with tax changes affecting your income tax and estate duty costs?
- Are you able to assess the needs of your family and yourself in the event of your death and/or disability?
- Do you have the discipline to revisit and review your financial plan at least annually?
Financial planners in South Africa are embracing a new regulatory framework to ensure that investors receive better financial planning advice. The regulators, the public and the press are demanding that a qualified professional financial planner provides this advice. Central to this debate is how to value a good financial planning service.
There’s a story I am reminded of frequently when this discussion is raised, particularly referring to professionals whose intellectual capital is their greatest asset. It goes something like this:
Picasso was asked to sketch a lady’s picture. He did so in 15 minutes. The lady was delighted at his work. He asked for a hefty sum of money for the sketch. The lady was most upset at the price she was asked to pay. “But it only took you a few minutes to do the sketch”, she exclaimed. “But it took me 15 years of training to be able to complete it so well,” he replied.
Clients of most professionals are generally happy to pay up once they understand that the ability to provide sound advice is built on years of education and experience. Yet when it comes to financial planning advice, full disclosure of costs sometimes leads a client to walk away. This is puzzling when you consider the vital importance of having an independent competent financial planner on your side.
One must clearly examine the potential consequences of not having a financial planner. Financial planning is one of the few professions that need to take a proactive role in the client relationship. Most professions act reactively. For example, clients generally seek the services of an accountant when they need to file a tax return.
It is easy to put off financial planning as there is no sense of instant gratification. But that may result in you living beneath your means if you are wealthy or worse, living beyond your means if you have insufficient capital. You may also make poor investment decisions and not address estate or disability planning. There is also a greater need for financial planning advice for various reasons, for example the disappearance of lifetime employment, job changes, increased divorce rates and globalisation.
Many individuals embark on the task of managing their own affairs, but there will come a point when they too will need to seek financial planning advice. The responsibility on most individuals has become too onerous due to the complexity of retirement, tax, estate and investment planning issues.
There is also an ever-aging population in increasingly fragile health who are simply too daunted as investors to go it alone.
The choice of financial products and service providers is no longer a simple task.
Financial planners research the various products and providers, and source the best solution for the individual. In the investment arena there is a choice of funds, fund managers, products, platforms, tax vehicles and fee structures. As far as risk solutions are concerned, there are various benefit options, costing structures, guarantee periods and discount options. A one-size-fits-all approach can no longer be adopted.
The cost and risk of providing financial planning advice has increased significantly. Costs include professional indemnity cover, compliance services, risk analysis, IT and skilled staff. Clients have a right to demand a higher level of technical competence than they have received in the past. Advice needs to be clear, objective and appropriate, and importantly, there must be written evidence of a process.
Financial planners are entrusted to take the emotion out of your financial matters.
We are all emotional about our future and our finances. Emotions of fear and greed can be destructive to your financial plans. For example, a couple of years ago, many investors followed the herd and placed their investments in money market accounts. If they had resisted the fear of the equity markets and had kept their balanced portfolios, their returns would have been considerably higher. How do you quantify the loss of return to the investor?
A financial planning practice must be well funded and well managed like any accounting or legal practice. You must be assured that if your financial planner is no longer around, there will be support from a financial planner in the same practice that applies the same consistent process.
The current fuss globally over fees is understandable, but the value of good financial planning advice is priceless. The issue is therefore how the investor, who wants expert professional financial planning advice, should pay for that advice.
Fees may be based on an hourly rate, funds under management, performance based or commission based. It is vital that whatever method of charging fees is applied that it is agreed upon up-front and transparently. The Financial Planning Institute has a code of ethics that requires fees to be disclosed and to be commensurate with the advice rendered.
It is in your best interest to engage a financial planner who is focused on your interests. Select a financial planner that has systems and processes in place in their practice to ensure continuity of advice and that your financial goals and expectations remain on course.
Visit the FPI’s website on www.fpi.co.za to select a CERTIFIED FINANCIAL PLANNER®.
Debbie Netto-Jonker CFP® is the founder of Netto Financial Services and was Financial Planner of the Year in 2001.