The problem with just having “a plan”
To understand the benefits of financial planning it’s first important to understand the process, as that’s where I think the true value lies. We focus initially on understanding your goals – what you actually want to achieve in the future. Then it’s about making sure that your current and future financial resources are managed in a way that will help that plan become a reality.
This isn’t a one-time thing though. Financial planning should be an ongoing and iterative process for you to truly benefit. Life changes significantly over time and a good financial planner will help you reconsider your strategy regularly to take into account all the unexpected twists and turns…
So your plan isn’t set in stone, and nor should it be – after all, as they say, “any financial plan once written, will never come to fruition”.
Choices, choices everywhere…
Now to provide some context. The financial world today gives you far more choice and responsibility over your money than ever before. With more control now placed in your hands about retirement, the choices you make are critical in determining your financial future. That’s a big responsibility, especially as these choices have significant, long-term implications.
Part of the problem is understanding what choices you actually have to make. Knowing what you can afford to invest is fairly straightforward but understanding how much you can afford to lose is much more complex. A skillful financial planner can help you assess your capacity for loss and the impact of this on your long-term goals.
However, I do believe that increased choice is fundamentally a good thing. It’s just that in practice it doesn’t exactly make financial decisions any easier. More often than not, it’s not a lack of options that upsets humans; it’s our compulsion to always make the right choice. This is true in everyday situations as well – think about how hard it is to pick a film on Netflix from the thousands that are available. If you’re anything like me you may have lost an evening or two just browsing through the options.
We want to make the best possible decision every time, and as illogical as it sounds we can sometimes feel worse about a sub-optimal outcome than about an actual loss. This is where it’s useful to have the support of a financial planner. They help you make informed decisions and plans, just as much as they help with the actual implementation.
Making the right decision
Generally speaking though, it’s the implementation that people tend to place the most emphasis on; it’s more tangible and easier to see what’s actually being done. But the decision-making aspect is arguably just as valuable.
Research by Morningstar1 used economic modelling to measure the additional value achieved from making more intelligent financial planning decisions, aided by a financial planner. I found the study an interesting read, but to save time I’ll skip to the results which indicate that people receiving advice aimed at improving their financial choices experience outperformance of 1.59% per year. Therefore it would seem that improving decision-making is the primary way in which financial planners can improve their clients’ lives.
The research also investigated what the most important decisions are, and found that the areas that can most benefit from financial planning are:
• your withdrawal strategy in retirement
• your total wealth asset allocation approach
• making tax-efficient allocation decisions
Finance is an emotional game
It is sometimes perceived that money and finance are devoid of emotion. But don’t be fooled, personal finance is probably one of the most emotive subjects there is. And despite all the advances in technology that enable you to do more of your own investing, it hasn’t helped us become any more detached. A financial planner can understand your emotions but help you maintain a level head.
This is never more useful than in times of difficulty. The benefits of having a financial planner are disproportionately experienced during times when rational decision-making becomes harder. This could be during a period of market volatility or when things aren’t going as planned in your personal life.
Financial planning can help give you increased peace of mind during these tougher times. Research by the Financial Planning Standards Council found that majority (60%) of those with a plan felt prepared in the event of an emergency versus only 28% of those without a plan. Furthermore, 73% of people with a plan were confident that their loved ones would be financially looked after if something should happen to them, compared with 41% of people who don’t have a financial plan.
That’s because part of what a financial planner does is to firstly help you chose a path, and then give you the confidence and on-going reassurance required to remain calm and stick with it.
Most people know in principle that it’s best to “keep calm and carry on” when the market is jittery, but it’s very hard to do that on your own. It’s similar to having a headache and self-diagnosing your symptoms on the internet – more often than not you can convince yourself things are worse than they are and you won’t feel comforted until you talk to a doctor.
Trusting the experts
That doctor analogy brings me nicely on to my final point – expertise. We hire professionals to help us with virtually every aspect of our lives, so why should our financial affairs be any different?
Of course we can draw similarities with other professionals like doctors or lawyers that we know instinctively when to call. But some people would argue that while they wouldn’t attempt surgery on themselves they do feel competent to handle their own finances. There are other quality of life benefits to consider though. After all, many of us are capable of cleaning our houses, doing the garden or putting up wallpaper yet still choose to outsource it. While you may have the skills to do it yourself, you can still enjoy peace of mind or time-savings as a result of using an expert.
So is financial planning worth it?
Hopefully by now you’ll agree that it is. Just to make sure though, I’ll quote one last piece of research:
In addition to the financial rewards that may come from working with a financial planner, they can also bring you increases in confidence and security that are no less valuable. Part of that is down to the protection if things go wrong – if you haven’t had regulated financial advice, who would you complain to if you make a bad choice?
And of course, a financial planner can stop you making those bad choices in the first place.
And if you’d like to know more about how an 1825 Financial Planner could help you, get in touch. Remember that you usually need to pay for financial advice, but your planner will always discuss this with you ahead of charging you.
The information in this blog should not be regarded as financial advice.
1 Blanchett, David M. and Paul Kaplan. 2013. “Alpha, Beta, and Now… Gamma.” Journal of Retirement, vol. 1, no. 2 (Fall): 29-45. View.