If your experience with your financial advisor has been that they have focused on investment strategy rather than financial planning, you may want to consider a different approach.
When you think of the advice you receive from your financial advisor, is it financial planning or just investment strategy? This distinction is important in any circumstance, but especially given the extreme market volatility we have experienced this year. So, what is financial planning?
1) How to Invest at Any Age
Financial planning revolves around extensive conversations between you and your financial counsellor, Ideally, it also coordination between your financial counsellor and other financial specialists in your life, such as your CA, insurance professional and estate planner.
Most investors put together various elements of their financial planning, but they tend to do so in silos. Financial professionals aren’t really talking to one another, so you’re on your own to coordinate everything.
It is not only possible to live the life you want when you have an expert adviser who looks at everything to ensure proper coordination, but it also builds your confidence. When the market experiences significant volatility, you’ll be less likely to panic or make unwise decisions.
-> Coordination Among Financial Professionals Is Key
Imagine you’re running a Fortune 500 company. The board (in this case, the client/family) drafts the vision and explains it to the CEO (the consultant), who then must ensure that all the individual departments of the company (silos) work individually and collectively to implement that vision.
If the sales and distribution departments work independently and rarely communicate with each other, there can be major problems. The same is true when an investment strategy works independently of cash flow and expenses. If an advisor doesn’t know that a client has planned a large distribution from their investment account, is it the client’s fault for not telling the advisor, or the advisor’s fault for not asking?
An advisor who focuses only on investments isn’t the CEO in the figurative sense, who makes sure everything is coordinated and who has the expertise to do so. Rather, in this scenario, the client is the CEO, and the advisor is just managing the investment department. Silo coordination by the client is better than no coordination, but that won’t necessarily prevent unwise decisions. A knowledgeable advisor can do this by leveraging extensive knowledge and repeatedly emphasizing the overall financial plan with each client.
-> Power of Planning with a Trusted Financial Planner
I believe that the financial services profession in general is very honorable, and most advisors are good people who have their clients’ best interests at heart. But most of the industry is focused on product placement. If I look back 40 or 50 years, it was all about selling stocks to retail investors who had little access to relevant investment information themselves.
Over time, extensive information about investment opportunities has become available to the general public. Yet, in my opinion, the industry still tends to believe that its value is based on reading the tea leaves of the market and making allocations that help increase returns. In reality, the true value of a top advisor is to align a client’s capital with their vision, values and concerns – not to be reactionary and say because the market has gone up or down, you should underweight this or overweight that.
Planning is powerful, so make sure you have a trusted planner. When an advisory relationship is based on financial planning rather than investment management, your goals are clearly articulated. The associated cash flow and the time and cost required to achieve those goals are outlined, and capital is allocated based on that roadmap.
If the market is down 20% and the only conversations you’ve ever had with an advisor have been about investment management, how can you gain emotional security, so you don’t panic and take losses? It’s the advisor’s job to make sure your relationship gives you confidence and security, even in times of market volatility.
2) How to Use the Legal Cloak of Invisibility to Protect Your Assets
Investing mistakes are usually fear-based and due to short-term thinking. This is because historically, markets are volatile in the short term, and none of us can predict what will happen. In the long term, however, the data clearly show that markets are going up.
-> Cookie-Cutter Questionnaires Are Problematic
Too often in the industry, a client’s asset allocation is determined using a generic questionnaire designed to ask about risk tolerance and time horizon. Aside from the fact that this approach isn’t nearly tailored enough, the flaw is that the same person may answer these questions differently from one week to the next – depending on what is going on in his or her life at the time.
How does she feel about her work? What did they see on the news the night before? Did their neighbor have an accident recently? These and many other factors can easily influence the answers, and such questionnaires aren’t conducive to determining a global assignment that a customer can really relate to and feel confident about.
Asset allocation shouldn’t be determined by emotions. My firm focuses on doing the calculations first, including a financial planning exercise to determine cash flow needs for the rest of your life while avoiding the risk of following returns. After all, if you live a long, happy and healthy life, as we hope all of our clients do, you may spend at least 30 years in retirement. During that time, you’ll experience market downturns and volatility, and it’s important not to overreact to them.
I always ask my clients to tell me how they want to live and what they want to do so we can develop their global allocation. Usually, clients are very happy with this approach because the planning has happened before, and they understand it. The investment recommendations are always linked to the overall plan. So, when a client asks why a particular investment or allocation, I can respond, “We’ve discussed that your goals are A, B, and C, and that’s what led us to implement these strategies to achieve them.”
-> Finding the Right Fit
Decades ago, when individual investors lacked access to so much vital information, it was valuable for the financial industry to offer investment management as a stand-alone product. Now, with changing times, holistic financial planning clearly offers the greater benefit.
3) Is Your Money Really Working for You? A Math Lesson in Rates of Return
However, many investors aren’t familiar enough with the concepts to know the difference between a true financial plan and a simple investment strategy. If you’re not sure, I recommend thinking about the last time your advisor reviewed your tax returns, estate planning documents and insurance policies. If the answer is “never,” then it’s probably just an investment management relationship – and you deserve a better approach.
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