Pensions and investments can be confusing and seeking advice on these might be a daunting task.
Who do you get advice from? Can you do it yourself? What sort of advice are you looking for? Can you trust a financial adviser? What is the difference between financial advice and financial planning? Which do I need? Etc. etc.
There are loads of places you can either get advice, get a fully comprehensive financial plan or simply use technology to allow you to start your investment journey.
I have summarised within this blog what each of the above are and when they might be best for you.
What is Financial Planning?
Financial Planning is essentially an ongoing process of having an experienced and skilled financial planner by your side helping you to make (hopefully, better) decisions about your finances.
This financial planner will take time to understand what your ambitions are, what your plans are for the future (short, medium and long term) and then look to align your finances to the achievement of those ambitions.
It might not necessarily be reliant on the use of products but these can feature in solutions if needed, the important distinction here is that a financial planner will not be reliant on a product to be paid for their advice.
A financial plan will include a financial / cash flow forecast, an example of which is shown below. This is basically an educated guess at what your finances might look like in the future based on a set of assumptions. It is not a crystal ball but is at least a way of highlighting potential shortfalls or gaps in your current financial circumstances.
Blue is good, red is bad and this example shows you that this client unfortunately runs out of money at age 83. If this is the case with your own finances it may be better to know this before you reach that point so that you can do something about it.
A financial planners job is to understand your motivations and priorities, and what you might need to do to avoid a shortfall in your own situation. Whilst balancing the need to live life to the full today. After all, life is not a rehearsal!
A financial planner will also look at other issues, such as how your family might cope if you were unable to work, or if you were to die prematurely, this often broadens the conversation out to ensuring that your wills are in place and up to date, that you have considered what who would look after your affairs if you lost mental capacity.
A good financial planner will be able to discuss with you a broad range of topics in an engaging way that leaves you feeling in control of your financial future, and aware of what is likely to be needed for this to match your aspirations.
The Chartered Institute for Securities and Investments or CISI have listed the following six steps to help you create a financial plan.
- Establish your goals in life – short, medium and long term
- Work out what assets and liabilities you have – write them down
- Evaluate your current financial position – how close are you to achieving your goals?
- Develop your plan – create a “route map” for achieving your different goals
- Implement your plan – make the changes and make it happen
- Monitor and review your plan at least yearly and adjust when needed
You can build a plan on your own using something like Excel, however if your needs are more complex, or you just don’t want to do it yourself, you might want the help of a Financial Planner.
If you want to employ a planner, I would suggest that you look for a Chartered Financial Planner or a Certified Financial Planner, these are amongst the most qualified advisers out there. Doesn’t mean that they are the right person for you but it is at last a start.
Also, I would recommend that you work with a firm that is either Chartered, Accredited or holds the BS8577 kite mark. You can look for these logo’s to help
If you are worried about talking to a financial planner or if you struggle to articulate what it is that you are looking to achieve, don’t worry they will have experience of working with people in your situation.
They will ask questions that will help to get to the core of what you are trying to achieve and they will then be able to suggest changes that will help you to achieve your goals.
Importantly they will become an accountability partner for you and will become the objective third party between you and a bad financial decision. As mentioned above, they may use products to help you but this should not be the primary focus.
They will meet with you on a regular basis to ensure that everything remains on track, the world changes and your aspirations or personal circumstances might too, keeping the plan under review and adapting it when needed will increase its likelihood of success.
What is Financial Advice?
Financial advice forms part of the work that a financial planner will do, however on its own it is not linked to a financial or cash flow forecast and is typically focussed solely on the implementation of a financial product(s).
A typical example would be you walking into a financial advisers office with either existing pensions that you have accumulated over the years or a lump sum you may have inherited and rather than the adviser discuss specific objectives, long term goals etc. you will be asked about your attitude to risk, investment timeframe and then most likely you will end up with a new financial product.
If you have seen an independent adviser you will get the product they feel is most suitable from the whole of the market, if you have seen a restricted adviser (your adviser must tell you which they are) you will be sold whatever product that company can sell you.
Whilst I am trying to be balanced here I think it is important to say that investing in this way is a bit like building a house without using an architect. Not having a plan could lead to you doing the wrong thing, for example investing when you should be paying down debt, but as the adviser will generally be paid as a result of a product sale they may not advise you to pay back the debt.
Whilst commission for most product sales has been banned, financial advisers can, and, do still charge you a percentage of your investment amount as their initial charge. This can be deducted from the amount invested and so a typical investment of £100,000 may be reduced to £97,000 to pay for the advisers 3% fee.
This is not exclusive to financial advice as there are financial planners that charge a percentage based initial and ongoing fee, however, the service offered is not necessarily comparable.
A financial adviser may be right for you if you are simply looking for a home for your pensions or investments. You may not want this linked to a financial forecast or any particular long term aspiration.
The annual meeting you have with a financial adviser will be more ‘backward’ looking, assessing how the fund(s) have performed and any changes in which funds you use for the coming 12 months, importantly it will be focussed more on how the product has performed and the funds versus their benchmark rather than whether you are on course to achieve what you want to.
What is ‘Robo Advice’?
Robo Advice causes a bit of a stir in the financial planning world and most financial advisers or planners will dismiss Robo Advice as a fad that will never take off, whilst this may be the case with some, to dismiss it entirely is short sighted in my mind.
Robo Advice is basically a type of financial advice that removes most, if not all the human intervention. It is effectively digital advice, and probably not advice at all as the outcome is dependent on your input and how the digital adviser, i.e. an algorithm, interprets those.
This ‘advice’ or investment management is based on algorithms and so you answer a load of questions about how much you can afford to invest, what level of risk you are happy with and after a few clicks of a button you can set yourself up a portfolio of funds.
Some of these Robo Advisers have human intervention to check that you are happy with your choices, they may call you if there are inconsistencies in your answers but that tends to be it, you are then on your own with your own thoughts and behaviours guiding you towards your financial future.
I am a financial planner, and so it will come as no surprise that I believe that most, if not all people would benefit from having a financial planner by their side. However, not everyone is able or willing to pay the fees that a financial planner is paid. As such Robo Advice may be a good way to at least start investing for the future.
Over time, your behaviour as an investor is one of, if not the most important factor in determining long-term investment success. At times, you are likely to find that the ‘right’ thing to do seems counter intuitive.
When markets are tanking and the daily papers publish headlines like “Billions wiped off stock markets” and “The end is nigh, sell everything!” it can be very tempting to sell your portfolio and stick it in cash for a while until things settle down and you can reinvest
In order to get this call right you need to not only know when the top of the market is, i.e. the point to sell, but also the bottom of the market is i.e. the best time to get back into the market.
There are huge numbers of economists, fund managers and experts (some of whom call themselves financial planners / advisers) who consistently fail to correctly predict these peaks and troughs, if you feel that you know more than them, good luck to you.
The likelihood is, left to your own behaviour (unless you possess the discipline needed to succeed at investing) you will sell at the wrong time, buy and the wrong time and then feel pretty bad about your investing experiences and give up!
A financial planners role is to ensure you make investment decisions based on logic and your long term objectives – not emotions. This is particularly important when markets are moving rapidly.
If you are using a RoboAdviser you won’t have an objective third party to stop you from making a bad decision, if you are confident that you can avoid this then maybe you don’t need an adviser or a planner.
If so Robo Advice can be a more cost effective way to access investment markets. Be careful though, as some are as, if not more expensive than the same funds through a financial adviser or a financial planner.
If you are still confused by the options available to you and you would like to discuss which is best for you, please give me a call or drop me an email / tweet / Facebook message / Linked In etc. etc.
I will genuinely give you an honest opinion on which is likely to be most suitable for you. Any of the above relationships will only be successful if you are fully engaged with them, there is therefore very little merit in me saying that everyone should have a financial planner if you are not going to be engaged in that process.
Something is usually better than nothing so I am happy to provide some pointers if that would be useful.