What does (should) a financial planner do for you?

financial planner

An independent financial advisor does a lot more than just tell you how to invest your money. In fact, a lot of the work they do is ‘behind the scenes’ so I thought it was a good idea to share this information in a blog. This will give you a better idea of what a financial advisor does, and therefore whether you might benefit from having one.

1. Develop a long-term strategy for you

One of the predominant reasons people engage a financial advisor is to help them map out a long-term investment strategy to work out how they will achieve their financial and lifestyles goals. This includes what to invest in, how and how much, also when and similar considerations. I believe that adopting a holistic approach will reveal the most efficient and effective strategy because it considers all facets including super, property and shares, tax minimization and so on.

A long-term strategy must be robust enough to accommodate expected market and situational changes. However, it may be necessary to make small changes to the strategy as time elapses.

Engaging the services of a professional advisor to help you with this will yield numerous benefits including reassuring you that you are taking the right approach, ensuring you don’t waste time and money pursuing the wrong strategy, making sure that you have considered various strategies (e.g. an advisor might recommend an approach you have never thought of).

2. Research investment options and strategies

The financial services industry is very dynamic and always changing. Fund managers are busily working hard to find an edge, a strategy that will help them produces better returns. Also, academic and peer research is published at an increasing rate – again, trying to identify the factors and market forces that will drive future returns.

All advisors must keep on top of these new advances. More importantly, an advisor must work diligently to separate fundamentally sound strategies and products from “marketing”. A fund managers job is to develop products to attract investors’ funds. Sometimes, they pursue this goal at the cost of quality i.e. develop products that sound sexy but lack fundamentals and substance. Such products must be given a wide berth.

I guestimate that I probably only use 1 out of every 50 to 100 products or strategies that I investigate. There’s a lot of rubbish out there so ‘buyer beware’ is a good mantra to live by.

3. Keep up to date with all changes

It’s not news to anyone that tax, super and compliance laws are constantly changing. So, it is very important that an advisor keeps on top of all these changes. For example, every month I spend 2 hours in a classroom learning about all the recent tax changes (I must admit, it’s not the highlight of my month!). In addition, I attend numerous half and full-day events to keep on top of markets, products, strategies, credit policies, superannuation and so on. This is in addition to regular one-on-one meetings with fund managers and reading lots of blogs and listening to podcasts.

If you don’t use the services of an advisor, you must consider the opportunity cost of doing so, what are you missing out on?

4. Make sure you don’t make any mistakes

Often, investing is very simple, but it’s not always easy. The best evidence of this is that most Australians fail to accumulate enough wealth to enjoy a (self-funded) comfortable retirement.

It is easy to get distracted by shiny objects. Or react to fear (tons of negative newspaper articles or hysterical predictions). And it’s often tempting to try and take short cuts.

But none of these actions will produce wealth in the long run. In fact, the best case is that will waste time. Worse case is that you lose both time and money.

Probably the most insidious mistake (in addition to the abovementioned ones) is procrastination. Sometimes, not making a decision is worse than making the wrong decision. That’s because at least if you make the wrong decision you can course-correct as soon as you realise it. However, procrastination can persist for many years and may cost you hundreds of thousands (even millions) of dollars (opportunity cost)!

An advisor’s role is to keep you on the straight and narrow. To make sure you only make smart, fundamentally sound financial decisions on a timely basis.

5. Help you manage your cash flow effectively

It is near on impossible to build wealth if you spend all (or more) of your income. Therefore, astute cash flow management is absolute key, and its often not difficult or painful to achieve.

In the most part, astute cash flow management is really about making conscious decisions. That is, unconscious spending is the enemy of successful wealth accumulation. The good news is that you can typically eliminate unconscious spending without it having a noticeable impact on your standard of living. A good advisor will help you achieve this, and this alone could be an incredibly valuable benefit.

6. Take responsibility for making financial decisions

You don’t have to feel burdened with the full responsibility for making your family’s financial decisions. You can get help. Much like a business will hire a CFO (Chief Financial Officer) and hold them accountable for the results they produce, you can hire your personal CFO.

Of course, it is your money so it’s your responsibility to look after it. You cannot delegate that responsibility to someone else. This means you must take an active interest in how your money is spent, invested and how its performing. However, it doesn’t mean that you have to make all the decisions. Many clients that I work with used to do this and they didn’t enjoy the responsibility. Now they know it’s my job to worry about their money and agonise over their financial decisions. I’m on the hook. All they have to do is ensure that I’m doing a good job and the longer we work together, the easier that is. It gives them a lot of peace of mind and allows them to sleep peacefully at night.

7. Review performance and consider whether changes are required 

A very important task is to review investment performance. You may not expect to beat the market each and every year, for a variety of reasons. However, you definitely want to know if your investments have performed as you have expected them to.

This is important for two reasons. Firstly, if they haven’t performed as expected, then you may need to make some changes. And secondly, you need to hold your advisor accountable for the results they are producing. It is important to benchmark results too. I typically use two benchmarks; Australia’s largest industry super fund, AustralianSuper and the relevant index. This provides a context for assessing performance.

In my firm, we undertake a combination of formal and informal reviews. A formal review will be when we engage with our client and discuss our findings. An informal review involves me reviewing the client’s portfolio to identify if I’m comfortable with everything or whether I want to make some changes.

Remember, longer term returns are the most important. You don’t want to reward ‘return chasing’ as short term profit does not generate long term value.

8. Be on hand to answer questions, navigate any changes and assist with financial decisions

Most clients find great comfort in the fact that they are able to seek counsel from someone that is totally independent that they trust and that understands their personal circumstances and long-term strategy. This helps people navigate the challenges and opportunities that life inevitably throws at us with confidences and with a whole lot less stress.

9. Help you protect you and your family

An advisor doesn’t only help you build wealth but also protect your wealth. There are two situations where this is important.

Firstly, most people need to protect their assets from known and unknown risks. This includes you having the right level of personal insurance cover (including, Life, TPD, income protection and trauma) and if you are self-employed, business insurances (e.g. professional indemnity). You must ensure your estate planning documents are structured correctly (wills, power of attorney, letter of wishes, binding financial agreements and so on). This also includes any expected inherence receipts – so that any money received from an inherence is protected in a tax-effective environment. If asset protection is particularly important then it may be best to use entities such as discretionary trusts and self managed super funds to hold some or all of your wealth.

Secondly, at some point in life (mostly in retirement), capital preservation becomes more important that investment returns. That is, it is more important to avoid losing money than it is to make money. In this instance, it is important the client has the right asset allocation and understands the risks.

Its more than just investment advice…

As you can see from the above, a financial planner’s role involves more than simply telling you where to invest your money. Hopefully, this knowledge will help you assess whether you could benefit from engaging a financial planner. If you already have one, you now know what they should be doing to help you. Of course, if you have any questions, please do not hesitate to reach out to me.