How financial planning can transform lives

The value of financial advice is often vastly misunderstood. People often assume the value centres around investments; determining the proportion of shares, property, bonds, and cash to hold in a portfolio, and how to manage and potentially reallocate them as markets move. But that's a dramatically simplified view.

It's like saying the value of an elite coach is only in picking the starting team, which is obviously crazy. It completely undervalues the countless hours spent scouting for talent, developing and nurturing skills, mentoring individual players and refining the team strategy. In exactly the same way, focusing only on investment advice means the broader elements of financial planning — helping clients effectively manage their finances, enjoy life events and achieve their goals — is rarely understood or even acknowledged.

While 'investment advice' encompasses the act of investing assets, financial planning is that and so much more. It's about helping people navigate their course through life. If you could achieve your financial goals by simply putting money in the bank, you wouldn't need a financial plan. Unfortunately, life is often much more complex. Buying a house, saving, budgeting, establishing goals, paying for education, weddings, and holidays are all important financial planning considerations. It is as much about early retirement and long-haul holidays to Europe (once the borders open again) as it is the latest movements on the NZX.

Financial planning is also about avoiding bad decision making and managing our worst impulses at critical times. At the onset of the Covid-19 pandemic, a flood of KiwiSaver investors converted their growth funds to cash and conservative funds, crystallising losses and setting back their retirement plans. According to Morningstar, in March alone, $1.4 billion of investor funds were pulled from growth strategies, resulting in losses that could easily have been avoided if more people were accessing financial planning advice.

Engaging a financial planner can bring significant lifetime benefits, through good times, and bad.

An adviser shared with me recently a touching letter from Julie, a client of hers, which perfectly captured the value of financial planning. In her letter, Julie thanked the firm for helping her fund her home, educate her family, travel the world, and prepare her for the "curveballs" in life. She said her financial planner's "continual questioning" helped her avoid making bad decisions and made her family more secure and resilient. Julie, 55, and her husband, 60 have both retired, and are currently travelling around the South Island in their camper van on a month-long break.

Giving people the freedom to pursue the joys of life, without financial concerns, is what financial planning is all about. It's so much more than just the narrow delivery of investment advice. It’s broad-based advice calibrated to each person's hopes, fears, preferences, and dreams. It's measured by much more than a simple portfolio valuation report. Its success lies in enhancing someone's quality of life and accelerating their financial independence.

After all, money is only a means to an end.

Unfortunately for investors, there's always a lot of noise in the media about a broker's 'hot' share tip or the best performing managed fund of the day. There are also some high-profile investment advisers who position themselves as having unique insights; Kiwi Warren Buffetts if you will.

Given that markets are reasonably efficient in generating returns and unlikely to be consistently outguessed, there is little merit in trying to find a guru to attempt to beat the market when a qualified financial planner can help you work with the markets to achieve your goals.

Don't get me wrong, making good investment choices is important, and is often the incentive for someone having their first chat with an adviser. But while that initial conversation may be about an inheritance, KiwiSaver, retirement, pay rise, or significant asset sale, financial planning is never just a discussion about money; it's about what the money is meant to provide, and how and when it's to be used.

A financial planner will help you get your financial house in order and keep it that way — for life.

Simply investing the money doesn't take into account, as Julie put it, the "curveballs" in life. People have cashflow liabilities throughout their lives, whether it's a house, car, children's education, or holidays. Maximising the utility of money throughout someone's entire life is crucial, and it all comes back to goal planning.

The benefits of financial planning are born out in the numbers. According to Financial Advice New Zealand's 2020 Trust in Advice report, more than 90% of financial planning customers said the service met their needs. The report stated that this level of satisfaction in advice and outcomes is difficult to achieve and "underlines the very strong value financial planning advice can and does deliver to clients in all areas".

Meanwhile, research from the Financial Services Council of New Zealand also highlights the importance of sound financial planning. The FSC's 2020 Money & You report revealed long-term tangible and intangible benefits for clients. More than four in five people across all age groups said their financial planner gave them greater peace of mind financially. About 69% of millennials said their financial planner "transformed" their life.

Of course, this depends on securing the best possible advice.

So, how to get started? A good financial planner will always take the time to understand your needs, goals, and preferences before making any recommendations. The process they follow will look something like this:

  • Define the scope of engagement – your financial planner will explain the process they will follow, find out your needs and make sure they can meet them. You can ask about their background, how they work and how they charge.
  • Identify your goals – you will work with your financial planner to identify your short and long-term financial goals. These will serve as a foundation for developing your plan.
  • Assess your financial situation – your financial planner will take time to analyse your current position – your assets, liabilities, insurance coverage and investment or tax strategies.
  • Prepare your financial plan – taking everything they have learned about you, your financial planner will recommend suitable strategies, products and services, and answer any questions you have.
  • Implement the recommendations – once you're ready to proceed, your financial plan will be put into action. Where appropriate, your financial planner may work with other specialist professionals, such as an accountant or solicitor.
  • Review the plan – your circumstances, lifestyle and financial goals are highly likely to evolve over time, so it's important that your financial plan is regularly reviewed to make sure you are keeping on track.

At different times throughout our lives, we inevitably need the support and services of a host of different experts, whether that's an electrician, a lawyer, a dietician or an architect. What each of these experts has in common is that they provide solutions to complex problems. It's exactly the same with a financial planner.

Providing investment advice is a very useful feature, but, on its own, it doesn't solve any of life's great problems. But when you wrap that advice around a comprehensive understanding of someone's unique personal situation and goals, and then tailor and manage a strategy to achieve them; well, that can certainly transform lives.

Scott Alman
Consilium Managing Director