Welcome to the sixth and final part in our series Financial Planning Explained. Financial planning is much misunderstood. It’s hard for those who haven’t experienced it to understand the benefits. One of those benefits is the sense of control that having a financial plan can give you.
When financial planners are asked at parties about what they do for a living, many hesitate to be specific. Why? Because the inevitable follow-up question relates to where they think the stock market, the currency, interest rates or the economy are heading.
It’s a myth that dies hard in the community — the idea that a financial planner is a type of prophet with special powers for foreseeing the next big crisis, boom or bust. And, to be sure, some advisers position themselves as smart forecasters or market timers.
The best planners, however, will tell you that have no more idea than anyone of where the market is headed. They can’t tell you which will be the top and bottom performing stocks this year or what the central bank will do with interest rates.
A plan without forecasts
Of course, everyone will have an opinion on the economy or the efficacy of government policy or what the market might do next. But a good planner knows that that is the sort of conversation best held in the pub, not in the context of planning a client’s future.
In any case, a financial plan should not be shaped in terms of a forecast for the market. It should be shaped according to the needs, goals, risk appetites and life circumstances of each individual client. In this sense, the planner is not an expert in prophecy but in possibility.
He starts by spending time with the client or prospect to learn about them. He doesn’t just need to know about their assets, liabilities, income and expenditure, but also about their aspirations and expectations. From there, goals are set for the short, medium and long term.
Connecting goals to an investment strategy
The adviser then connects those goals to an investment strategy that give the client the best chance of both succeeding with and sticking to. A forecast is not required. If the goal is long-term, the planner knows there will be capital market rates of return.
The keys to earning those returns are not market timing or stock selection but diversification and discipline. The equity market will have more good years than bad, we know that. But there will be bad years, so the plan needs to accommodate for those by including bonds and other defensive assets.
Not every sector of the market will perform well at the same time, so the plan will diversify across and within many sectors and across different types of stocks. That means having exposure to large and small stocks, value and growth stocks, developed and emerging markets.
Cost is another determinant. The fees paid to fund managers can be a significant drag on the returns delivered to the client. So the plan will consider the most efficient solutions. Taxes, too, can make a difference between the advertised returns of various strategies and what ends up in your pocket. A good financial plan takes account of that.
A plan is not a set-and-forget affair
Finally, no plan is ever set in concrete and forgotten about.
That’s for two reasons: First, markets are always changing. This can move a client’s portfolio beyond the bounds of their risk appetites.
Second, people are always changing. We change careers, relationships, build families, move house and face periodic challenges with our health and external circumstances. Plans need to be reassessed, portfolios rebalanced and goals reset, if necessary, to accommodate all of that.
A plan for all possibilities
The point is that none of this requires making bets on the future. It requires a financial plan that accommodates a wide range of possible developments and builds strategies to deal with whatever arises — an economic recession, an industry restructuring, a marriage breakdown, a health crisis. Just life really.
A good planner knows that the investments, once structured and set, will largely look after themselves. They must be monitored and measured, of course. But the most important element is the clients themselves and their lives.
The many variables that make the nightly TV news — geopolitics, rising markets, falling markets, currencies, interest rates, commodities — are all very interesting and we can debate them till the cows come home. But none of any of that is within our control.
Controlling what you can
What a financial plan does is start from what we can control. It starts with understanding each client’s goals and preferences, building strategies that maximise the chance of meeting those goals, managing risk through diversification, controlling costs and taxes, exercising discipline and regularly rebalancing.
The controllable stuff may not be as interesting as the big political or market story of the day. But it’s here where your planner makes the real difference.
Also in this series:
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