In this week's show we’re going to be talking about the difference between financial planning and financial advice. It’s a topic that at various times has consumed my industry and continues to do so.
I read some articles a couple of weeks ago which got me thinking and led me to choose this topic. But it really isn’t just a financial industry navel-gazing exercise. It affects clients of all shapes and sizes, and I’ve a feeling that if we get this right, it could affect the financial health of the nation.
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If someone asks me what I do, I tend to say that I’m a financial planner. If I’m feeling particularly smug I will add the words Chartered and Certified to the front of that. I worked hard for the designations I have and now and again I like to flaunt them. But there are two reasons I say I’m a planner rather than an adviser:
- It extends the conversation as many people have no idea what a financial planner is or does
- Most people back away from financial advisers in fear that they’re going to be sold an endowment.
But is it just semantics, or is there something more important at stake here?
Everything you need to KNOW
Let's answer that by looking first at everything you need to know, then as usual we’ll cover what practical steps you need to take.
1 – Financial Advice is about fixing problems
When I meet a prospective new client for the first time, I will always ask them if they have ever taken financial advice before. If they have,, I ask them what the experience was like.
I talk about how the regulator requires us to know our clients before making recommendations, so most advisers complete some kind of fact-find, where they ask about insurance, investments, pensions, income and expenditure and everything else. We need to know where you are now, financially speaking.
The problem with traditional financial advice is that this was more of a gap-find than a fact-find. Its purpose was to discover what a client didn’t have, rather than what they did, so that the adviser could fill the gaps with products. It was to spot opportunities for a product sale, that’s all.
The main reason for this of course is that traditionally, advisers were paid for selling products via a commission from the providers of those products. Since 1st January 2013 however, commission has been abolished for the most part, and now advice is to be paid for in the form of a fee agreed between the client and the adviser.
Financial advice, then, has always been transactional. A client will show up with a particular problem or need they want fixing. Where shall I invest this year’s ISA? What should I do with these six pension plans I’ve amassed? I’m increasing my mortgage and need more life insurance.
An adviser can fix that problem, often with a product of some kind, and the client goes away happy that they have their problem solved.
The article I read last week suggests that financial advice is like plumbing, in that if a leak is identified, you need a plumber to fix it. Once it is fixed, job done. The problem may be simple (this year’s ISA) or complex (retirement options) but it’s still a one-off problem which once dealt with, that’s it.
2 – Financial Planning is about helping clients achieve a life well-lived
Prospective clients still turn up with one problem or issue they need fixing, but a competent financial planner knows there is often far more to it than that. He or she knows that the reason most people go trough life picking up odd bits of pension plan here, and life insurance there, is that they have never taken a holistic approach to their finances.
Financial planning treats money as a means to an end, not an end in itself – something you have heard me say here quite a bit.
The same article I read says this (It’s aimed at advisers and planners by the way):
“Financial planning, at its best, is more than this. It requires us to ask a client the question ‘What’s the real problem?’. This is more relevant for those who have amassed some money and can afford to make choices about how to live their life. They might think they just need a solution to a problem, the art is in identifying and questioning whether that problem is the real underlying issue. The problem is, to paraphrase Socrates, ‘What is a life well lived?’ Most people, in financial terms, don’t get the chance to be troubled with this question.”
To this I would add that planning is also for those who have the potential to amass money, even if they’re only just starting to do so; it isn’t only for those who have put a load of money aside.
A life well-lived – that’s a loaded phrase. But it’s clear that the emphasis for financial planning is on life, not money. Money is merely a tool to be wielded in order to help clients to live whatever their definition is of a life well lived.
Financial planning requires a different or more highly developed set of skills in a financial planner than a transactional adviser. Their fact find will be far more detailed and include many more ‘soft’ facts. It will be far more about the person than their money. Yes the ‘hard’ facts of existing financial arrangements will be there, but much more besides.
By definition, financial planning cannot be a one-off process. Plans are laid and then followed, and usually tweaked along the way as life throws things at us which were not in our original blueprint. A planner will meet with their client regularly, and not just to tweak investments, but to talk far more about life and the clients’ changing situation than about the performance of their ISA portfolio. It’s not unusual for me to have an your-long meeting with a client and spend only ten minutes of that talking about money…
In short(!) then, financial planning is about helping clients organise their finances to enable them to life the kind of life they want to live, and then continuing to monitor this as time goes on.
3 – The financial advice model is broken, but is being fixed.
I mentioned earlier that major changes were brought in to the financial advice world at the beginning of 2013 in the biggest step towards cleaning up the industry. Let’s fact it, we haven’t exactly covered ourselves in glory over the years. We’ve had pension and endowment mis-selling scandals, PPI, KeyData and ArchCru – all major examples of how advisers have put their own need for the commission drug before the needs of their clients.
Commission is at the root of all problems with financial advice, and the banning of it last year was a great step towards cleaning up the industry. It is not a coincidence that most of the banks have laid off all their branch-based advisers over the last couple of years. Transactional advice is easy to sell when the client doesn’t feel like they’re paying anything because the product they are buying pays the adviser for their time. There were once 300,000 financial advisers (in the broadest sense of that word) in the UK and there are now closer to 20,000.
There is still far too much emphasis by the regulator on product sales, but I do understand why this is the case – this is where the biggest risks are that the client will get a poor outcome. It pains me that the brain work and skill is all in the planning, but all our burden of compliance and regulation falls on the easy bit – recommending and arraying a product for a client.
Products are still important, they are the tools with which we build and maintain a financial plan. But they are not the most important part of the process.
As an industry we are making great strides towards cleaning up the house and getting rid of the dross, but there’s a way to go yet.
4 – Not everyone who calls themselves a financial planner, is a financial planner
As the benefits of financial planning are becoming more widely known, it has become more common for advisers to call themselves financial planners. There is no regulation covering this. I can call myself supreme financial planning mega-genius on my business card and the regulator wouldn’t care, even though it would be slightly misleading. Only slightly.
So it’s important to know that not everyone who says they are a financial planner is one. I’ll talk a bit more about how to tell the two apart in the next section, but for now, just be aware that the guy or girl sitting across the desk from you may not be what they seem. They may be competent and well meaning, but they may be mis-representing themselves.
So we’ve looked at the difference between financial advice (transactional, one-off problem-fixing) and financial planning (long-term, life-focused, holistic). We’ve talked about how the financial advice world is cleaning itself up but that there are people perpetuating the confusion by calling themselves something that they aren’t.
Should you care? I reckon you should because your future wealth could be affected, should you choose to take advice at all…
Everything you need to DO
So let's look at what the is all means in practical terms for you as you seek advice
1 – Decide whether or not you need advice or planning
Many financial planning zealots in my world are convinced that you cannot have financial advice without financial planning. I think this is a self-serving over-simplification. I concede that there are more likely to be errors made, if the emphasis is on the product rather than the client’s future plans, but it isn’t necessarily the case.
Independent advisers, myself included, like to bash the advice given by banks in the past. But if a young family walks into a bank and walks out with life insurance in place, that’s a decent outcome, and certainly better than if they had never walked in there in the first place. Probably no financial planning was done, but a pressing problem was fixed, and that’s a good thing.
What about you? Do you need a single problem fixing, or could you benefit from a wider view being taken of your financial health and future?
Like I said earlier, most people present to an adviser with a single problem, but a good adviser will be able to dig a bit to find root issues. So you may only think you have a problem or need which need an adviser to fix, but you would be well served by talking to a financial planner to make sure you’re not missing anything.
There should be little risk that you’re going to be charged for a service you don’t need. A decent financial adviser or planner will quickly be able to ascertain if you need their services or not and will tell you so. Many times I have spoken with a prospective new client for ten minutes and quickly realised they don’t need me. I could trick them into buying a product off me, but that way lies future complaints and reputation damage. The quick win of a short-term fee isn’t worth it. I’m more interested in long term relationships with clients, often over two or three generations of a family.
So I’d say there is little risk to you in meeting with a financial planner. They’ll tell you if you need their services or not, and will direct you to another adviser if not.
2 – Find the right professional for the job
But you still need to find a financial planner to talk to, and if there are people mis-representing themselves as financial planners, how do you find the right one?
Unfortunately this isn’t easy. I talked in more detail back in Session 8 about all this, but in summary:
- Ask friends and family for recommendations
- If this draws a blank, use tools like Unbiased.co.uk and VouchedFor to search your local area
- Your chances of finding a proper financial planner are immeasurably increased if you look for someone with the Certified Financial Planner or CFP designation. The site of the Institute of Financial Planning is the best place to search for these.
- Meet with two or three prospective advisers. They will usually provide an initial meeting for free so you can get to know each other and see if working together will work for both parties.
- At these meetings, ask these ten questions and make notes on the answers.
- Go with your gut feeling
Follow these steps and you should be able to find a financial planner. Don’t rush the process, it could literally make or break your financial future.
3 – When you have found your adviser – fully engage
Whether you end up working with a financial planner or getting one-off financial advice, either is a valid outcome. What you must do to get the most out of the experience is fully engage with the adviser or planner. Answer all their questions and ask lots of your own. If you get any hint that your adviser is floundering or out of their depth or steering you towards a product too quickly, you can just walk away.
Try and not to be too guarded. Yes many people have fallen foul of unscrupulous advisers in the past. But I’m not asking you to leave your common sense at the door. Keep it in place but don’t be afraid to engage in the processor financial advice or financial planning. You will get the most out of it if you put the most into it. I sound like a school teacher there…
I absolutely believe that everyone can benefit from financial planning, but not everyone is willing or able to pay for it. I also believe that good financial planning will pay for it many times over, though it may take time for that to bear out. Not everyone has a tax problem I can fix overnight with an EIS. For some clients, the gain will be in not making stupid decisions when investing, which a good financial planner can counsel you through – see Session 43 for more details there.
So it may be that you can’t benefit from financial planning right now because you don’t see the need or you don’t have the funds to pay the fees. But you will benefit in the future.
And if you want me to help you personally, I have a couple of new client positions available. Just click the Work With Pete button at the top of this page.
This week’s reviews
[This is where I read the reviews from iTunes, if there have been any]
If you like what you hear on this podcast, please leave a rating or review on iTunes by going to meaningfulmoney.tv/iTunes just like Nigel1962 and Pat Capobianco did this last week. This helps others to hear about the show and to subscribe, because it keeps me near the top of the rankings.
MoneyMeaning – Glossary
Term: Income Drawdown
Last week I defined what an annuity is. Income Drawdown, or to give it its proper name, Unsecured Pension is an alternative to an annuity whereby instead of handing over your fund to an insurance company or annuity provider in return for an income for life, you keep you fund invested within your pension and then draw down an income from it each month or year.
Keeping control of your fund is an attractive option for many people, particularly those with large funds as there is then an opportunity to pass the fund on to relatives on death, at least in part.
But there are costs involved which are explicit. The pension wrapper will have admin costs; the underlying investment will have costs.; ongoing advice will cost. The drawdown plan has to cover these costs and also the income your are drawing in order to maintain its value. Depending on how much you draw from it and the rate at which the underlying investments grow, you may run out of money.
Drawdown is a complex area which definitely needs specialist advice. There’s more information in Session 14 to keep you going in the meantime
Predictably I have put on a couple of pounds ove rthe last couple of weeks of partying in London at the awards ceremonies and also last weekend when it was my birthday. Noticable lack of envelopes from podcast listeners, but there’s always next year which is, ahem, a big birthday. It’s February 23rd – put it in your diaries now!
Today I hit a record point of number 3 in the business section of the UK iTunes store which is very pleasing. Tank you all for your support and for the reviews which help keep me there.
I did an interview with the excellent Rob Dix of Property Geek and Property Podcast fame it was released on Monday and there’s a link in the notes, or go to meaningfulmoney.tv/propertygeek. I really enjoyed doing the podcast and want to thank Rob and the other Rob Bence for their support of what I am doing here. If you’re interested in property investing, there’s no finer resource than the Property Hub, a membership site set up by Rob and Rob. Just go to ThePropertyHub.net
Next Session Announcement
Next time we'll be talking about Exchange Traded Products which are becoming an increasingly important constituent of many portfolios. If you have a question on this subject, or any other financial query that you want answering here on the show, then the best way to do that is to leave me a voicemail at meaningfulmoney.tv/feedback
That's it for this session of the MM podcast, I hope it was helpful. Did I miss anything? Do you have any questions? If so, please leave them in the comments section below
I hope you enjoyed this session. Thanks for listening – I'll talk to you next time.