In Australia we have a colloquialism we use when arguing about the blindingly obvious - even "Blind Freddy" can see that.
Freddy, research suggests, was a glaringly incompetent policeman in failed pursuit of one of our more incorrigible highwaymen Ben Hall. In debate “Blind Freddy” is often called on to arbitrate on one side’s ill-conceived opinion. A debate which is currently working its way through financial planning circles here revolves around client decision making and financial planners liability shifting.
One of our primary challenges is to personalise our client planning experience. This can best be done by using lifestyle or goals-based planning to help them better understand how their present and future lifestyle will be influenced by either or both of their spending & saving and the returns they need to earn to achieve that goal.
The objective is to help clients take responsibility for their financial future and to give them the ability to change their financial behaviour in pursuit of their own goals.
For all of its avowed complexity, financial planning is a relatively simple concept. It is predominantly about cash flow management. Generally speaking, the more cash you hold onto the better off financially you become.
Every person does their own financial planning, although in many cases it may be very poor. Some choose to seek the assistance of a third party (a financial planner) to help with (some aspects of) the preparation of their financial plans, and their implementation, management and review.
Personal financial planning is defined by the International Standard ISO 22222 (2005) – Personal Financial Planning as a “process designed to enable a consumer to meet his/her personal financial goals”.
The proposition a planner puts to a prospective client needs to run something like this.
“In the pursuit of your current and future goals that have a financial dimension, you must work in four interrelated areas. I will help you articulate, prioritise and meet those goals.
*In the accumulation phase you can partially guarantee your personal exertion income and protect against (major) personal expenses and losses through life insurances. In addition, you always need to think about protecting your physical assets and third party liabilities through general insurances.
*You need to spend less than you earn to create and maintain a savings pool.
*If invested well, you can expect your savings pool (which for most Australian families must now include the family home) to grow at a rate of between 1% and 6% per annum over inflation in the longer term, depending on the riskiness of the portfolio(s)
*All financial plans have some level of financial risk. If the financial risk needed to achieve your goals is inconsistent with your risk tolerance, you must specifically accept that risk.”
Clearly there are a number of trade-offs in play here, how should they be managed?
Two approaches to decision making - one is clearly wrong
There are two alternative planning process models available to planners to deal with the issue of who makes the financial decisions: paternalistic and collaborative. In paternalistic planning, the planner and their employer take responsibility for client outcomes.
This is the current dominant style of planning where the decision on what portfolio to recommend is more often than not the outcome of a simple ‘portfolio picker’ questionnaire. These tests are usually six to 10 questions designed to pay lip service to the regulatory obligations to assess financial risk tolerance.
There no evidence that this approach has any validity. Truly professional financial planning is sold short by superficial practices such as this. In this case, there is no meaningful match of client needs to the characteristics of the financial products recommended.
Clearly, a reliable risk tolerance test is necessary. Having a solid insight into each partner’s risk tolerance is one of the primary steps in understanding what makes each different. Using the risk tolerance test report as the basis for a detailed questioning of the client’s preferences and aspirations, the planner can develop a coherent logic for linking client needs to recommended product and service characteristics.
In collaborative planning, decision-making is shared between the client and adviser. The plan is the personal contract between the client and the planner designed to meet the client’s needs. Even Blind Freddy must see that.
Paul Resnik was in the UK in late 2006 talking about wrap accounts and
client value propositions. He is also an Australian based financial services industry consultant and commentator. He has interests in a number of tools designed to help financial planning businesses run more successfully.
Caring for children and elderly relatives
Similar to June 2007
Square Mile’s series of informal interviews
Fine reduced to £60,000
Two roles created